By Robin Fallas
Partner, MacRoberts LLP
As the Social Enterprise World Forum (SEWF) in Edinburgh in September draws ever closer, we continue our journey exploring the options available to social entrepreneurs and those looking to advance social outcomes through enterprise.
So far, globally, social enterprise has evolved a lot over the last 10 years and operates across a wide spectrum of structures and forms [hyperlink] and when you look at the UK alone, at the charity end of the spectrum, it is regulated by “full asset lock” excluding sharing in profit by individuals / private entities.
There will be plenty of delegates at SEWF who have deliberately chosen to carry on their social enterprise activities without taking on charitable status in their respective countries. The principal drivers for this tend to flow from a desire to operate out of a more entrepreneurial structure. Social entrepreneurs may wish to avoid the “risk aversion” encouraged of the regulated charity sector or they might want to share in profits generated, alongside supporting a particular social objective.
With this in mind, let’s look at the more ‘entrepreneurial’ structures that people are adopting, that can be said to have a form of asset lock or structural focus on social objectives as well as profit.
In this “middle ground” of the social enterprise spectrum in the UK, we see social enterprises adopting a number of different forms, including Community Interest Companies, mutuals and cooperatives, registered societies (encompassing cooperatives and also community benefit societies) and “straight-forward” companies limited by guarantee.
Scotland has had a long term pedigree in some of these middle ground structures, including “mutuals” and “cooperatives”. However, in 2018 readers dipping into social enterprise may have stumbled more readily across the “Community Interest Company” or “CIC”.
The CIC structure was introduced in 2005 to be a specifically designed vehicle for non-charitable social enterprises across the UK. CICs are essentially limited liability companies – limited by shares or guarantee – with a stated social mission, to support a “community of interest”.
There are some 14,000 or so CICs across the UK (CIC Regulator’s 2017/18 Annual Report). It would seem that uptake is on the increase with some 2,800 new CICs established in the most recent year covered by the report. For comparison – and focusing on Scotland here, if you take the Office of the Scottish Charity Regulator figures, there were 24,391 charities in Scotland with 1184 new applications made (annual report).
So what is special about a CIC? First, it is regulated by the CIC Regulator. When a CIC is established, it needs to set out the “Community of Interest” for which it is being formed and how its activities will support that particular community.
Perhaps the standout feature of the CIC structure is that it encompasses the option of a “partial asset lock” in which both private profit and social objectives can, broadly speaking, sit alongside one another. The “partial asset lock” works by allowing up to a maximum of 35% of distributable profits to be paid out to shareholders or members who are not themselves “asset locked”. In plain English this means 65% of gains are, effectively, locked in for social purposes and up to 35% are available for private gain.
I’ve mentioned the rate of change over the last 10 years in social enterprise and it is interesting to note that prior to 2014, the approach to a CIC’s distributable profits under the partial asset lock option was more restrictive. Since 2014 the balance between social and private gain has shifted giving a greater incentive to potential entrepreneurs and private investors getting involved in CICs.
It should also be said that the CIC structure also encompasses options that operate with a full asset lock – under which all gains are locked in for social purposes.
Compared to a charity, a CIC is generally far freer to trade in the way it sees fit to support its Community of Interest. This is largely because HMRC does not apply special tax exemptions to CIC status itself and because the level of regulation is lower than as applied to a charity. Also, the CIC is often a better fit for an entrepreneur who seeks to “drive the ship” forward.
In addition to the CIC structure, I noted briefly above that you’ll also find social enterprises adopting various “middle ground” options, including:
- The “asset locked” Company limited by guarantee remains popular. There is no regulator specifically to regulate the “not for profit” lock – but the articles of the company reflects a social objective and tie use of assets and profits to that objective.
- Registered Societies, which continue on, re-energised by a consolidation and updating of law in 2014, a bedrock of use in housing and evolving use in areas such as community-focused investment in energy.
- Charity trading subsidiaries, that operate without the same extent of regulation as their parent charity but which effectively “lock in” gains to support the objectives of that parent.
- Joint venture vehicles used by and between charities/social enterprises and the private sector to take forward entrepreneurial business activity.
This middle ground of regulated and unregulated, fully and partially asset locked businesses are where exciting developments are taking place at national and international levels and where we see different badging/coding principles emerging. For example here in Scotland we have the Social Enterprise Code.
With greater awareness and understanding and as entrepreneurship evolves, there has been increasing realisation that these businesses and enterprise structures can bridge the gap between out and out charity and out and out profit-driven structures.
Yes, they are not always perfect for fusing social mission and business, but then again neither are the national and international legal and tax structures regulating the spectrum. In my next blog we will be looking at the out and out business end of the spectrum and what developments have occurred there over the last 10 years. They’ll be at SEWF too!
MacRoberts is a sponsor of SEWF 2018