Setting Up A Social Enterprise

Social enterprises can be set up and constituted in different ways.

Company limited by guarantee:

A company limited by guarantee is an alternative type of corporation used primarily for non-profit organisations that require legal personality. A guarantee company does not have a share capital, but has members who are guarantors instead of shareholders. The guarantors give an undertaking to contribute a nominal amount (typically £1) towards the winding up of the company in the event of a shortfall upon cessation of business. It cannot distribute its profits to its members, and is therefore eligible to apply for charitable status if necessary.

Industrial and provident society

An Industrial and Provident Society (IPS) is a legal form for trading businesses in the United Kingdom. IPSs are regulated by the Financial Services Authority, which took the job over from the Registrar of Friendly Societies (both being supervised by the Treasury).

IPSs fall into two categories:

• bona fide co-operatives - these trade for the mutual benefit of their members, and the Registrar will judge the legality of their action by reference to co-operative principles (case law is very thin on the ground compared with that for companies);
  
• societies for the benefit of the community - these trade to benefit the broader community, and the Registrar will refer to charity law. Societies for the benefit of the community are granted charitable status by the taxation authority, the Inland Revenue, rather than the Charity Commission (in England and Wales).

IPSs may in general conduct any legal business except that of investment for profit.

Consumer, agricultural and housing co-operatives, working mens' clubs, Women's Institute, markets, allotment societies, mutual investment companies, friendly societies and housing associations usually incorporate as IPSs, as do some social enterprises. This process is facilitated by the existence of "model rules" developed by various federal bodies, which reduce the legal costs. Credit unions and building societies, which sprang from the same roots, are now governed by specific legislation.

Both types of IPS have a share capital, but it is usually not made up of equity shares like those in a company limited by shares, which appreciate or fall in value with the success of the enterprise that issues them. Rather they are par value shares, which can only be redeemed (if at all) at face value. The profits and losses of an IPS are thus the common property of the members. The share typically acts as a "membership ticket", and voting is on a "one member one vote" basis. The maximum individual shareholding is currently set at £20,000 (although other IPSs may hold more shares than this).

If you are thinking of setting up a social enterprise, it is wise to seek advice from an appropriate support agency. View key contacts list.

Well known social enterprises include Cafedirect, The Big Issue, The Co-operative Group, Welsh Water (Glas Cymru), the Eden Project and Jamie Oliver's Fifteen, but there are many other social enterprises operating in a wide range of industries from farmers markets and recycling companies to transport providers and childcare.

The social enterprise sector is incredibly diverse, encompassing co-operatives, development trusts, community enterprises, housing associations, football supporter's trusts, Social Firms and leisure trusts, among others. As a result social enterprises use a wide variety of legal forms; some incorporate as companies while others take the form of industrial and provident societies. From July 2005 social enterprises have also been able to register as Community Interest Companies.

Recent data published by the Small Business Service suggests that there are more than 15'000 social enterprises in the UK, employing nearly half a million people with a combined turnover of £18bn.

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