Social enterprise, charities trading, trading arms and subsidiaries

Recently i have been researching how charities can trade by starting social enterprises. There has been a lot of press recently regarding social enterprise, with hundreds of MP’s signing the social enterprise charter, the Coalition Government talking about the “Big Society” and how social enterprise will help people get into work who are furthest away from the labour market.

On the back of this hype, there has been many workshops, seminars, courses and conferences on how Charities can start social enterprises. Social enterprise has been touted as being a way, to move away from traditional income streams, such as, donations and grants. The idea of a charity trading to the private/public sector seams a very appealing way to generate profits and help achieve its charitable objectives.

So with all this support, where are all the trading arms? Where are the charities that trade? Where is all this commerce in the third sector? And I’m not talking about trading, where charities conduct;

•        'Primary Purpose Trading – where the charities' trading activities directly linked to its main charitable objective

•        Trading activities mainly carried out by the charity's beneficiaries or service users

•        Charitable fundraising events

•        Charity lotteries

I’m talking about trading arms and subsidiary trading. Charities who have started an entirely separate trading entity, which channels profits back to fulfil its charitable objectives.

Well if you know of any please let me know, because I have looked and have manage to find three on the internet. I was initially shocked at this, I know my internet skills are not the greatest, but I thought I would have found at least 10 examples of charities trading in this manner, fairly easily. Then I did some research on how charities can start a social enterprise trading arm and was shocked that I found one at all.

For an individual or company who wants to start a social enterprise the process is fairly straight forward. You get an idea, set your social objectives, find some funding, start the business and trade. With social enterprise itself not being a legal structure, any business with the slightest social objective can call them selves a social enterprise (although it would probably be devastating for the business if they were found out). But, for charities who wish to start a social enterprise, it’s a whole different ball game.

Charities can trade and benefit from tax exemption, but to get these “tax perks” they are regulated by Charity Law. After looking at the law and the guidelines from the Charity Commission I have highlighted several issues which i feel may arise if a charity decides on creating a social enterprise via a trading arm or trading subsidiary.

1.      Charitable objectives

A charity should first have something written into its governing documents that states it is allowed to trade. Some charities may have something written at the end of their governing document, like “or any other activity which benefits our Service Users”. These ambiguous statements can be a bit of a grey area, so I would seek advice from the HR Revenue and Customs and the Charities Commission to see if you can legally trade. Otherwise you may need to amend the document to allow you to trade.

2.      Trustees

Trustees need to be fully aware off their responsibilities when it comes to trading and may be called to intervene to protect the charity (see http://www.charitycommission.gov.uk/Publications/cc35d.aspx)

As you can see from the link there are a lot of regulations trustees need to be aware of.

3.      Control

For a charity to have control over the trading arm they may need an employee in a position of control. From my research the most popular way to start a social enterprise is via a Limited Company. To start a Limited company the charity will need to appoint directors, either employ an external candidate or appoint an internal employee or trustees.

Who ever is appointed needs to be fully aware of there responsibilities as a director and ensure they do not breach any company or charity law.

4.      Failure

With all businesses there is a chance of failure. The advantage of using a trading subsidiary is that you can limit the financial impact on the charity. However this does not limit the impact on the charities reputation. A failed business could leave service users or beneficiaries unemployed which could bring some negative press. This negative press could have detrimental effects when a charity applies for other contract funding as funders may feel they are in capable of running a project.

Conclusion

There’s no doubt in my mind that a profitable trading arm could bring massive benefits to a charity, especially if it’s employing service users to run the enterprise. Though these benefits are big the negative side is equally as daunting. With charity and company law to contend with and conflicting against each other, charities that are not fully aware of all the issues involved could be opening them selves up to a lot of trouble. Then there is the issue of who you appoint directors and if they would want to be directors after being informed of there responsibilities.

For these reasons I am not surprise that more charities are not involved in social enterprise. If the government wants charities to be involve in their “Big Society” and create social enterprises or social firms to address problems in society in a sustainable way, then I feel they need to address the points I have raised in this article.

I freely admit I’m no expert and would love to hear your opinions on this subject in the comments below. If you are a charity who is running a social enterprise, please let me know of your experiences with these issues.

2 Responses to “Social enterprise, charities trading, trading arms and subsidiaries”

  • DeeGee:

    I believe that Torfaen Mind have recently followed the model of establishing a seperate trading arm as a Limited Company and Social Enterprise. It is a model I am reviewing for a charity that I support.

  • Mike:

    Thanks Deegee, i’ll have a look.

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