Last night I was at a Social Enterprise network event at Southampton Solent University. It was organised by Social Enterprise Link Wessex but I threw myself into spreading the word. After all, a network is only as strong as its members are active and is really owned by those who participate.
We did a quick count up and there were at least 16 social enterprises from across the south of Hampshire (Romsey over to Waterlooville). There was a good mix of established and start-up enterprises with sectors representing including design, care, catering, training and consultancy (we get every where!)
Having agreed some priorities to enable growth of the sector, we all committed to sign up to create Solent Social Enterprise Place. Social Enterprise Place is a scheme promoted by Social Enterprise UK and denotes our commitment to promoting social enterprise in the local economy. Watch this space
Wednesday, 4 February 2015
I often find myself delivering training or advising social enterprises around the issue of legal structures. Everyone wants to get registered as soon as possible, even if they have no plans to trade immediately.
Choosing the right structure is not just about understanding the way you are going to be organised (in terms of governance and ownership) but also about how finance is going to work in the business. Today I am only talking about finance.
All businesses need finance. Social enterprises and co-operatives are no different. Start-up finance for businesses typically comes from investors with a stake or share of ownership in the business, loans and grants. Once the business is up and running this will be supplemented by reinvested profits. Social enterprises tend to avoid investor ownership but there are ways of involving investors in the business without fundamentally altering the purpose of the business.
If you decide on your legal and organisational form before you understand your financing requirements, you may soon regret it. So get the finances sorted early. Even if it is not accurate, having snapshot of how much investment you need and the likely sources is really useful when deciding on a legal structure.
Here's an example: Let's say a community enterprise decides to establish themselves as a Community Interest Company limited by guarantee thinking they will be able to access grant funding to help them raise a deposit to buy a local community building. They also liked the idea of having an asset lock but they didn't want to be constrained from trading or barred from having employees on the Board which could have happened if they registered as a charity. Once they have written their business plan it shows they can generate sufficient profit to pay the cost of a mortgage, but they have been unable to find funding to raise the deposit. Based on comments from local people who would be willing to lend money if they had a say in the business, they realise that their preferred method of raising the deposit would be through a Community Share issue. A Community Interest Company limited by guarantee is unable to issue shares. Even a CIC limted by share would not be able to offer a public Community Share issue as it would have to meet highly expensive regulatory requirements to make a public offer. The facility they require, combined with an asset lock that they want, is only available to a Community Benefit Society. They decide to wind up the CIC because it is quicker and easier to register a new Community Benefit Society than convert the CIC into one. If they had thought through their financing before registering the legal structure they could have saved themselves unnecessary complications and time delays.
Another example: People involved in the business are willing to work as volunteers on the understanding they have a right to a share of the profits. The only problem is, your chosen legal structure does not allow profit distribution so that avenue is closed unless you change the legal structure.
Key questions regarding finance you need to be able to answer before choosing a legal structure include:
- How much investment do we need for start-up costs and cashflow?
- What sources have we identified already, and how much?
- How reliable are these sources?
- What other sources might be available to make up the remainder?
- Are there any restrictions on those sources?
Until you understand how you will finance the business it may be difficult to answer questions suchas these, which you need to consider before deciding on your legal structure:
- Will you distribute profits, and if so to whom and how?
- Do you need a facility to offer shares? Who can own these shares? Should they be withdrawable or transferable shares?
- Who can become a member or Director?
- Is there any relationship between investment and decision making, and what is it?
- Do you want an asset lock of some kind and does it need to be statutory so it cannot be removed?
There is no stock answer to the question "What legal form should we register with?" so to give yourselves an improved chance of having the right structure, do yourself a favour - work out your finance needs first!