Starting Up: Introduction to Legal Structures
Do you have an idea about how to create a positive change in your community? Could your idea become a social enterprise? In this blog series, we will talk about the most important things to think about if you want to start a social enterprise.
There are lots of things to think about when starting up a social enterprise, and depending on your previous experience and skill set, some areas can be more challenging than others. For some people, deciding what legal structure is the right fit for their social enterprise can be a daunting decision. The good thing is that there is lots of support available to help you make an informed choice.
This blog post intends to break down some key subject areas and make legal structures seem less daunting but is not a substitute for seeking professional advice. If you are based in Scotland, you can register for free one-to-one business support with Just Enterprise.
What is a legal structure?
A legal structure is a registered entity and structure for an organisation, which determines how the organisation will operate, including how much tax you must pay and how exposed you are to risk. In the case of social enterprises, it can also affect what grants or investment you may be eligible for.
For these reasons, choosing a structure can feel like an important decision that is difficult to make without the right information.
Where do I start?
Think through what the goal for your enterprise is. Because deciding on your legal structure has long term implications for your enterprise, it is important that you have a plan. Ask yourself questions like: Do I want to lease any property or equipment? Do I intend to employ anyone? Will I need to raise funds to support my enterprise?
To be or not be incorporated?
Incorporation is the process by which a business registers as a limited company, meaning it has a separate identity from the person/people who own it.
An example of an organisation that might operate with an unincorporated structure is a sports club that is run informally. It might operate a membership system and have a management committee, but it is defined by its own rules. Because it is not incorporated, it is not legally bound to a regulatory body.
One of the benefits of incorporating is that it limits the risk to you as the social enterprise founder. If you are not incorporated, you as an individual may be personally responsible for any debts. Therefore, it is important to know what your plan for your social enterprise is, so you can assess the risk. Being incorporated is also likely to give you a better chance of accessing funding.
To incorporate and become a limited company you must register with Companies House and/or the Office of the Scottish Charity Regulator (depending on what legal structure you choose). These are both regulatory bodies that have certain requirements that must be adhered to.
Common social enterprise legal structures
Common legal structures for social enterprises are Community Interest Companies (CIC), Scottish Charitable Incorporated Organisations (SCIO), and Companies Limited by Guarantee (CLG).
It is also possible to operate as a co-operative, sole trader, or business partnership, depending on your intention. To make an informed decision it is important to weigh up the pros and cons of each legal structure, to find the best fit for you and your idea. Key considerations may include flexibility, employment, governance, and the option for social investment.
Business Gateway provides a good list breaking down various legal structures for businesses in the post Legal structures: the basics. The government website is another good source of information, particularly the Setting up a Social Enterprise page. These websites will help you find the information you need to consider the advantages and disadvantages of the structures you are considering.
There are lots of common myths and misunderstandings about legal structures for third sector organisations, so it’s worth checking out SenScot Legal’s Third Sector Legal Structures – Mythbusters blog post.
When considering your legal structure, it is good to seek professional advice and get support that is tailored to you and your idea.
Register now to get advice and support from a Just Enterprise business advisor: one-to-one support.
To find out more, attend the Just Enterprise Legal Structures webinar. Register via the Learning Calendar.