There are three principal options if you want to incorporate your venture as a limited company: company limited by shares (CLS); company limited by guarantee (CLG); and either of these forms can also be incorporated as a community interest company (CIC). Limited companies exist in their own right. This means the company’s finances are separate from the personal finances of their owners. Also consider Co-operative & Community Benefit Societies.
Organisational and legal structures for social enterprise
Please note this is an outline only and therefore not a comprehensive guide and should not be taken as advising on any particular form. A social enterprise is not a legal form in itself and can take on a number of different legal forms.
Source: The Community Shares Company
The company limited by shares (CLS)
The company limited by shares is the most common legal form for all business. When incorporating a CLS, share capital is divided into shares of fixed amounts and these are issued to shareholders. The shareholders become the owners of the company. A CLS is not specifically designed for social enterprises but it can be adapted for this purpose. Social Enterprises that choose the CLS structure ensure that their social mission is written in their governing documents along with what they intend to do with their profits.
The company limited by guarantee (CLG)
Companies limited by guarantee do not have shareholders, they have members instead. These members are the company’s guarantors rather than shareholders. Because the members do not own shares in the company they cannot personally profit from any increased value in the company. The CLG is common for social enterprises. Social Enterprise UK Start Your Social Enterprise 28 29.
The community interest company (CIC)
The CIC is a legal structure designed specifically for social enterprises. It is based on the standard company structure and can therefore be limited by share or by guarantee.
Co-operative & Community Benefit Societies
Societies do not have shareholders, they have members instead. These members are the company’s shareholders. Societies can pay interest to investors but that must be no more than what it costs to attract the capital (in other words, the interest should compensate people for what they could get elsewhere, rater than being an incentive itself).
Societies are especially good where the business works best when owned by the community of users (such as an asset, like a community centre or a pub), where you want to involve your customers in sharing the rewards of their trade together, or where a group of founders want to preserve equal ownership between themselves and any future employees or investors.
However it has some additional protections in place when it comes to the organisation’s social mission. Both forms of CIC must serve a community interest and be able to report on how it is serving this interest each year. Both have a statutory asset lock which ensures that the assets are retained within the CIC for community purposes. When it comes to the distribution of profit only CICs limited by share are able to distribute profits. There are however, considerable restrictions on how much profit can be taken out of a CIC in any year. More information on the various legal structures of can be found on the Companies House website and www.cicregulator.gov.uk.