Guidance

The 'formula' below summarises the best organisational structure development methodology.

 

Understanding of the planned social enterprise ownership model is brought together with understanding of the business model, and this combined information is fitted into the most appropriate legal/financial structure available.  (Click here for a decision-tree-style presentation of available legal structures)

Only by bringing these three elements together in the right way can the optimal organisational structure be developed.

This process is informed by the ongoing business planning, but it is not just a case of 'form following function'.  It is quite possible, for example, that the business can be done in a different way – the business model adapted – to fit a preferred ownership structure, and this will in turn obviously alter the business planning.  Therefore, discussion of the organisational structure should start fairly early in the business planning process – but not get 'set in stone' until late in the process.

1.    Clarify aims and values

Before exploring the organisational structure formula, it is essential that you (whether you are an advisor or the initiator(s) of the social enterprise) are clear about the initiator(s) aims and values.  Obviously, this is a normal part of social enterprise planning – but with this extra dimension: if there are contradictions or tensions between aims, or between the values of individuals, these can get 'structured in' - and will emerge later as dissatisfaction with the constraints of the structure you have helped design.

The extent to which the initiator(s) and other key people want to participate in the financial success of the social enterprise will probably be the most important aspect here – but this can emerge in quite unexpected ways.  For example, a disability charity setting up a trading company might have mixed motives: some might see it as a way of creating a route into employment and social inclusion for beneficiaries, others as a way for the charity to earn money for it's mission.  These aims are in tension - if the charity doesn't take the profit the trading company could create more jobs; if the charity gives up control to the disabled staff it will enhance social inclusion, but lose the profit.  You need to explore such tensions, which can otherwise be swept under the carpet in the busy early stages of development.

This tried and tested discussion exercise will help clarify aims and values - and the different priorities individuals may place on them.

2.    Explore the ownership model

This means finding out what the initiators have in mind, especially bottoming out the question of who will own and control the organisation.
More often than not, they will fit into one of the following rough categories:

  1. Co-operative: they are a group and want equal participation in ownership and management, or are committed to a very flat management structure
  2. Charitable: ownership and control should be exercised by financially disinterested people (trustees) on behalf of beneficiaries
  3. Membership: usually a community-based social enterprise like a Development Trust; ownership is spread across a large membership but control exercised by financially disinterested people as in a charity
  4. Social entrepreneurial: an individual or small group (or founding organisation) wants to keep ownership and control
  5. Stakeholder: they want some level of participation by staff, users, sponsoring organisations, etc, but not equal participation

  Note the best fit rough category plus any further explanation that might be relevant 

 

The stakeholder model is of course the most difficult to pin down, because you need to answer the complex question of which stakeholders have what level of participation.  To answer this, you should undertake a stakeholder analysis with the group (see Discussion Exercise here).  You will find this kind of stakeholder analysis useful for other groups too – even if issues like who will own the organisation and who will be on the board seem cut-and-dried, it is always useful to think about wider relationships – with customers, the local community, etc.

In any case you should ask if they have any people in mind – or types of people – for director positions.  It's worth making the point that grant funders and some other investors will want to see some strength in depth on the board, though they will probably not look into the actual ownership or membership structure too closely.

A slightly separate question from who will own and control the organisation is what kind of financial participation they have in mind.  The main possibilities here are:

  1. They don't want any financial benefit for themselves
  2. They would be happy with a decent wage
  3. They want a higher level of financial participation (returns on investment of time and/or money)

 Note what kind of financial participation they have in mind plus any further explanation that might be relevant 

 Note results of stakeholder analysis, or if they have people in mind for board places  

 

3.    Explore the business model

The key questions with regard to the business model are about the scale of start-up finance required and possible scale of future investment – might the social enterprise grow or replicate quickly? - and the extent to which the ongoing activity of the organisation might require grant funding.  However, the better your overall understanding of the business model, and how it might be adapted, the better you will be able to advise on organisational structure.

Where you are heading with questions on the business model can be summarised as follows

  1. If the social enterprise might need big financial investment now or in the future, a share structure will be needed (probably company; possibly society)
  2. If the most likely source of investment is a community share issue, a society structure will be needed
  3. If the initiator(s) are to invest their own money, a share structure or limited liability partnership will usually be best, though investment could be in the form of loans to a guarantee company
  4. If grant funding is available or essential – and especially if on-going access to grants and donations is necessary, a guarantee company structure will be needed

Note also that for grant funding and sometimes also for other business reasons, an asset-locked structure might be best (a Charity, Community Interest Company or Community Benefit Society) – more on this below.

So the key things to ask are:

  1. What level of start-up funding is required and how will it be raised?
  2. Is a community share issue a definite possibility?  Is there an identified constituency of supporters interested in this?
  3. Is there a plan for a 'domestic share issue'? (this means a small issue of shares to known people closely connected with the social enterprise, such as staff, business associates, or members of a support group)
  4. Is on-going access to grants/donations essential?

Because the key ownership model issues are around who participates in ownership and control, and the key business model issues are to do with the likely sources of start-up and on-going funding, it can be useful to ask groups to discuss where their social enterprise should be placed on a chart like this...

4.    Think a bit about taxation

Occasionally the tax treatment of different trades or types of organisation needs to be taken into account.  It is not necessary, or advisable, for you to discuss tax in any detail, but if you feel there might be any issues please ask the following questions:

  1. Are there likely to be very big profits in any of the trading activities? (unlikely in social enterprise!)
  2. Do the key people have or want to have self-employed status? or is the social enterprise to provide a second as opposed to main income? (this is unusual unless they already have other contractual commitments that will continue)
  3. Are the key people UK tax residents? (again unusual – only ask if you have gathered from general discussion there might be an issue)
  4. Is the social enterprise a succession body? (eg. a buyout of an existing business or service)
  5. Is one of the activities of the social enterprise in a trade that might have special VAT or other tax or subsidy status? (eg. health, social care, education, farming)

 Ask any relevant tax questions and note the answers 

 

5.    Legal/financial structure

The use of the term 'legal/financial structure' rather than the more familiar 'legal structure' is important because it emphasises the key role of the financial and tax structuring of the social enterprise alongside other factors such as ownership and control.

The choice of optimal legal/financial structure is the most difficult area because it requires a knowledge of the whole range of structures available under UK law (see Diagram) – as well as the ways in which they might be combined to solve particular structural problems.  However, you do not have to recommend a structure at the first meeting.  Sometimes it might be obvious, but in most cases you will need to forward your notes from the first meeting and discuss the choice of legal/financial structure with other members of socentstructures or Geof Cox Associates.

It is possible that the initiator(s) will already have a structure in mind; most commonly nowadays this will be a Community Interest Company (CIC) – either because they've heard about CICs or a local authority etc has specified this structure.  Occasionally there will be a stated preference for a Society structure, either because this has been suggested by co-op bodies (many of whom still prefer societies even though most UK co-ops are in fact companies), or because there is a definite plan for a community share issue, for which society structures are still best.

 Note any structure the initiator(s) are already keen on 

 

You need to remember that any of the structures are blunt instruments until they are modified to reflect the initiator(s)' precise requirements (most importantly the exact membership and board structures).  However, most such details can be easily corrected once the structure is set up, so getting the basic form right (share or guarantee company, co-operative or community benefit society, or limited liability partnership) is in fact the most important thing.

Also worth bearing in mind is that a Guarantee or Share Company can easily be converted into a Guarantee or Share CIC later; that a Guarantee Company can also easily be converted into a Charity later; and that any Company can be converted into a Society later.

For these reasons, exploring the following questions should give you all the detail we need to know at this stage:

  1. Is there a clear need for 'an asset locked body'?  If so, our choices are narrowed to a Charitable Guarantee Company or Charitable Incorporated Organisation (CIO), a CIC, or a Community Benefit Society.
  2. If on-going grant funding is required, are the grant-giving bodies to be approached likely to have a strong preference for registered charities?
  3. If a group is to share ownership and want to participate financially too (share some of the profits), will they need to finely and frequently adjust levels of ownership?  (Only a Limited Liability Partnership can do this – but it can't be formally asset-locked and therefore is always viewed as a 'for profit' structure).

 Note  any asset-lock or other legal/financial structure issues 

 

Finally, you might get the feeling – or the initiators might suggest – that it won't all fit into one box: that some kind of dual company structure is required.  The model of a charitable company with a trading subsidiary company is common, but in fact all of the structures set out here can be linked in a variety of ways, which can sometimes achieve 'the best of both worlds' - for example access to both share investment and grant funding.  These possible combinations are too complex and various to set out here, and again you won't be expected to advise on them at the first meeting – but do bear in mind that this extra dimension of organisational solutions is always available to us.

 Note any feeling you have that it might not all fit into one box! 

 

Advanced: Go to Dual & Multiple Company Structures Guidance