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Choosing a Social Enterprise Legal Structure: CLS, CLG, CIC or Cooperative

Friday 5th February 2010, 5:45pm

January is a time for new resolutions. At School for Startups we began the year with an emphasis on Social Enterprise. We kicked off that emphasis with a big bootcamp on how to start and grow a social enterprise on January 19th at the Royal Institution. And though we covered alot of ground, we left a lot of detail behind. Our partners, at www.venturenavigator.co.uk/socialenterprise created a series of online resources to help people who are starting or running a social enterprise. Over the next few days we thought it might be useful to do a bit more ourselves and lead you to their resources.

One of the great things about the Venture Navigator site, besides being free, is that they have created tools, called Assessments that let you figure out complex issues. One of them is figuring out what sort of Social Enterprise you should have. Though I outline some basic principles below, I recommend that you take the assessment to determine, based on your own preferences and requirements, which legal structure will likely work best.

Generally speaking, a social enterprise is a business designed to create a sustainable solution that meets a social objective. Some social enterprises take all the profit generated from their business activities and pour it back into the business in order to scale the operation up. Some social enterprises solicit outside investment, donations or grants and use that funding to create a new product or service that meets a social need. Subsequently the social enterprise sells the solution over and over again just as a normal business would. Still other social enterprises are businesses owned and operated by charities in order to fund their operations.

The kind of legal structure you use to create your social enterprise has everything to do with your objectives.

You can be a sole trader. You make all the decisions. You take all the risk. If your business gets sued, you personally pay the price. This is not usually thought to be a good structure for a business of any appreciable size, but many small business owners do operate as sole traders. A social entrepreneur can do so as well.
You can be a limited company, which means that the amount you have at risk for loss in your business is something less than everything you own. Limited companies often have multiple owners who share in the decision making based upon rules outlined in their constitution. Limited companies come in a couple of forms
- Company Limited by Share (CLS) enterprises use share ownership to determine decision making within the business. Share ownership also limits risk. In general an owner can only lose the amount represented by the number of shares he owns.
- Company Limited by Guarantee (CLG) enterprises use members to determine decision making. So members put up a nominal amount to become an owner of the business. Decisions are taken by vote.
You can be a Community Investment Company (CIC) which is a CLG or a CLS that has special clauses in its constitution which guarantee that the assets of the business will not be used to make a profit for the owners. Usually CIC businesses are Companies Limited by Guarantee. A CIC is often used to create a “trading arm” for a non-profit or charity that needs to buy and sell in order to generate revenue.
You can start a Cooperative, which is a group of equal members from a community that come together in order to achieve a common objective. For example, a group of artists may form a cooperative in order to undertake marketing operations. Members of a community may form a cooperative in order to sell products and services in order to fund arts education in a local school through trade.

Generally speaking, most social enterprises are Companies Limited by Guarantee or Companies Limited by Share. CLG companies are thought to be preferable, in some cases, because the money a partner has invested in the enterprise does not determine how much control they have over the business. Generally CLG companies are organized to give all members a single vote and decisions are made by majority. CLS companies are thought to be somewhat better for investment purposes because philanthropic investors can purchase ownership and control of the business by buying shares. Most investors find this important. Many social enterprises elect to become Community Interest Companies as well. A CIC has a constitution with very strict rules on how investment and assets will be managed.

All of these legal structures are suitable for social enterprises. Which you choose has to do with what kind of operations you plan to undertake, how you want decisions to be made and how your business will be funded. For more help and guidance on which structure will work best for you, we recommend using the assessment designed to help Social Entrepreneurs select a Business Model at VentureNavigator.co.uk.

Tags: doug richard, how to start a business, Social Enterprise, starting a business