Social enterprises can take a variety of forms and legal structures. Some social enterprises have group structures comprised of several legal forms, with different subsidiaries or affiliates set up to serve different strategic, operational or financial purposes. The legal status of your organisation may affect how you can use different types of finance. It is therefore useful to briefly review the limitations that different legal structures impose on the use of debt or equity finance.
Many social enterprises are structured as companies limited by guarantee, as this is the most widely used structure for a registered charity. The main financial drawback of this legal form is the inability to raise equity through issuing shares. Fewer social enterprises are structured as companies limited by shares, and there are only a handful of social enterprises that have raised equity through a public ‘ethical’ share issue. These include Traidcraft and Cafédirect. Their shares are not publicly traded on a stock exchange, but are instead traded on a matched bargaining basis, where periodically willing buyers are matched with willing sellers.
Many social enterprises have registered as Industrial and Provident Societies (IPS). There are two types of IPS: community benefit societies and co-operatives. An IPS has borrowing powers and can also raise equity by issuing shares. In addition, an IPS community benefit society can be recognised as a charity and be exempt from registration with the Charity Commission. However, a co-operative usually will find it difficult to gain charitable status, which limits its access to grants.
A new company form, the Community Interest Company (CIC), now exists. CICs are able to borrow, and CICs limited by shares are able to raise equity (with a capped return). Regardless of legal structure, the constitution of your social enterprise may limit its ability to borrow or raise equity. Often a social enterprise will need a board or shareholder resolution in order to borrow or issue shares. It may also be restricted from borrowing or raising equity without approval, or from using assets as collateral for a loan by the terms of its existing financial arrangements.
At this point, you should review your current legal status and decide whether it has an impact on the type of finance you think is appropriate. If you are just starting income generating activities, you may have some flexibility in determining your legal structure.
An established social enterprise can also change its legal structure or set up subsidiaries, affiliates or holding company structures with different legal forms. This allows the organisation to match the most appropriate structure with the current and long-term needs of the enterprise. For example, the Phone Co-op changed its legal structure from a company limited by guarantee to an IPS to enable members to invest share capital in the co-operative.
