CVO (E.A.) supporting Social Enterprise in East Ayrshire

CVO (E.A.) are committed to empowering Third Sector groups who, having identified a market, see creating a social enterprise as an alternative or an additional source of income.

Before you even start to think about trading you should have identified your market and prepared a business plan which should include a marketing strategy.  You also need to make sure your organisation has the training, skills and experience to start trading.

We have tried to offer a guide to the key considerations that groups must be aware of when thinking about a social enterprise. We are here to support and signpost, and through the provision of a variety of practical initiatives CVO (E.A.) hope to encourage the growth of this sector.

If you are a Third Sector organisation thinking about social enterprise as a route to a sustainable future, then contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it to find out how we can help.

What Is A Social Enterprise

Is Social Enterprise Right for You?

Before embracing Social Enterprise consider the following questions:

Are You Part of an Organisation?

Social Enterprise is an organisational definition rather than being a term directed at an individual.  However individual Social Entrepreneurs will found Social Enterprises

Does your board support the move to Social Enterprise?

If your Board does not understand or support the Social Enterprise concept then it will be difficult to become a successful Social Enterprise.

Are you prepared to run a business?

The organisation must be prepared to run its activity like a business.

Is the organisation risk averse?

Adopting a business approach has associated risks. If the organisation is opposed to risk then the Social Enterprise model may not be suitable.

Is the organisation open to change in focus and / or working practices?

Adopting the business model required to support a social enterprise may require changes to working practices. If the organisation is not open to these changes then Social Enterprise is unlikely to succeed.

Is the organisation prepared to invest in training and staff development?

Staff will need to develop the skills necessary to support Social Enterprise. If the organisation is not willing to invest in developing staff skills, then becoming a Social Enterprise is not an option.

Do you have a product or service that someone is willing to pay for?

Being a Social Enterprise is only a viable option if the organisation has a product or service that is sustainable and that people are willing to pay for.

Do you know whether you can cover all your existing costs and generate surplus in

A Social Enterprise is commonly defined as a voluntary organisation that derives at least 50% of its income from trading activity.

Do you have clear social aims and objectives?

Your organisation must have clearly defined social aims and objectives.

Selecting the correct legal structure for a social enterprise is just as important as obtaining finance, preparing a business plan and finding the correct staff. 

A legal structure provides the framework to which the organisation will adhere to. To avoid later issues it is vital that the correct legal structure is selected when establishing a new organisation.

The organisations legal structure is contained in two documents

The Memorandum of Association.

This document details the relationship between the organisation and the outside world and is required when creating and incorporated organisation. This is a public document and it contains the following information

• the legal name of the organisation
• statement of intention/objectives of the organisation
• location of registered office of the organisation
• list of subscribers (stakeholders)
• details on distribution of profits

The Articles of Association. 

Contains details about how the company will be run, including:

• management structure and procedures
• roles of the members and directors
• procedures for their appointment and removal of members and directors
• AGM procedures

These documents are legal documents and together form the constitution of the organisation and you must get the appropriate professional advice when writing or amending them.

A legal structure is either unincorporated or incorporated and for most Social Enterprise organisations the recommendation is to be incorporate and to take one the following structure.

• Company Limited by Shares (CLS)
• Company Limited by Guarantee  (CLSG)
• Company limited by Guarantee  with Charity status (CLSGC)
• Community Interest Company limited by shares (CICLS)
• Community Interest Company limited by Guarantee (CICLG)

IMPORTANT:  Before deciding on a legal structure it is vital that you obtain professional advice.

Note: Social Enterprise is not a legal status for an organisation

UNINCORPORATED ORGANISATION

INCORPORATED

Being incorporated means that the organisation has its own separate legal identity. This means that it is the organisation that enters into contracts, employs staff, purchase property rather than individuals.

Benefits of being incorporated

• Limitation of risk
• Clear ownership structure
• Developing a sense of ownership
• Public accountability
• Recognition by financial institutions and investors
• Availability of equity finance

Disadvantage of being incorporated

The main disadvantage of being incorporated is the administration that is required e.g.

• Registering the business with companies house
• Memorandum of  association and  Articles of Associations
• Submission of annual accounts
• Stakeholders

Social Enterprise organisations are strongly recommended to adopted an incorporated structure particularly if they are considering

• taking on a lease
• buying  property
• taking on employees
• raising finance
• entering into large contracts
• charity status

The types of legal structures that can be incorporated are

• Company limited by shares
• Community Interest company limited by shares
• Company Limited by guarantee
• Company limited by guarantee with charitable status
• Community interest company limited by guarantee

COMPANY LIMITED BY SHARES

A company that is limited by shares means that the company has Shareholders, who own the company and who can:

• Elect and dismiss the board
• Appoint or dismiss auditors
• Approve payments of dividends
• Change the Memorandum and Articles of Association
  • must publish an annual report, annual audited accounts and any details of changes to the board or amendments to the constitution.
  • may seek funding by selling equity, grants, and loans (secured and unsecured)

• is Registered with Companies House
• has a board of directors
• has a Company constitution as defined in the two documents Memorandum of Association and Articles of Association
• has limited shareholder liability In the event of the company becoming insolvent a shareholder will lose the money they invested in the company.

There are two types of companies limited by shares

Private (Ltd) - Shares are not offered to the general public and are therefore not traded on the stock market. Shareholders have limited reporting requirements over public companies.

Public (Plc) – Shares are offered to the general public and can be traded on the stock market and have tighter reporting requirements over private companies

It is not common for Social Enterprises or Charities to adopt a Company Limited by Shares approach. 
It is important that if adopting this structure the companys’ constitution clearly states its aims and objects and how any profits are to be distributed.

In general Company Limited by Shares is not recommended for Charities.

COMPANY LIMITED BY GUARANTEE

A company that is limited by guarantee means that the company

• has no shareholders
• is a private company
• has  members who own the company who can
  • Elect and dismiss the board
  • Appoint or dismiss auditors
  • Change the Memorandum and Articles of Association
• has Members who give a guarantee to cover the companys’ liability. Normally this is a nominal amount typically being limited to £1
• has Members who have no rights to company profits
• profits cannot be distributed
• is Registered with Companies House
• has a board of directors
• Constitution is defined in the two documents Memorandum of Association and Articles of  Association
• must publish an Annual Report, Annual Audited accounts and any details of changes to the board or amendments to the constitution
• may Seek funding by grants

Company Limited by Guarantee is the normal structure used for non-profit organisations and can be used by Charities

COMMUNITY INTEREST COMPANY

A Community Interest Company (CIC) is legal structure that is designed for businesses that benefit the community rather than solely to make money.  

A CIC can be a company limited by shares or a company limited by guarantee and have the same benefits and other companies of this type. 

Every CIC must

• Be approved by the CIC Regulator and pass the Community Interest Test
• File an annual CIC report with its accounts
• Be registered with Companies House in the same way as a normal company with the same incorporation documents plus a Community Interest Statement
• Only use its assets and profits for the community specified, or  pass them on to another body with a similar interest (Asset Lock)
• Keep the community aware of its activities

A CIC cannot be a charity but a charity can own a CIC to run its trading activities. This would allow the CIC to pass its assets to the charity

Advantages of being a CIC

• Freedom to trade
• Able to pay directors
• Do not have to comply with charity law
• Retain benefits within the community
• Seek investments, with tax benefits for investors
• Ability to pay dividends to shareholders (subject to a cap)

Disadvantages of being a CIC

• No tax benefits
• Some Charitable Trusts will not fund
• Additional registration costs
• New legal structure and not widely known so might not attract investors