Legal entities for social enterprise

Last blog post we explained how the definition of social enterprise varies greatly, and the rules in each country usually also change. Therefore we thought we would go a bit further and show you an example of two legal forms of social enterprise.

In the U.K.

The first is the “Community Interest Company”, a legal form of business that has existed in the United Kingdom since 2005. As of March 2017 there were more than 13,000 CICs on the register (CIC Association), quite a small number in our opinion when you consider it has existed for 12 years. That said the idea of being able to set up a legal social enterprise is fairly unknown, and something we hope to share.

As a CIC you can set up in a number of different ways – such as limited by shares or by guarantee, just like a ‘normal’ company. However, there are three additional rules. Please note we’re giving a basic overview, so for more information you can head to the Government website about social enterprise.

Firstly, you need to make a community interest statement. This sets out what activities you will carry out as well as who your beneficiaries are. You also have to state how your company will make a surplus.

Next, you have to ensure there is an asset lock, so that 65% of your profits are reinvested in your social or environment goal.

Finally, you have file a community interest report to demonstrate that you are meeting what you set out in the statement.

As you can see, the rules aren’t too detailed, making things fairly straightforward to understand and set up.

In the U.S.A

The other legal form we are showcasing today is the Benefit Corporation. This legal entity started in the United States (though not all states!) and now exists in Italy and soon in Australia. Please note that a Benefit Corporation in the legal sense is different to BCorp, a certification process we will look at another week.

Benefit Corporations enforce the idea that decisions should be made for the benefit of all stakeholders, not just shareholders, so goals other than profit can be considered. It has made it a key legal element to consider stakeholders. This is written into the constitution into the corporation making it essential that operations produce a public benefit.

Also, there is a large element on reporting around transparency, therefore carrying out an annual public benefit assessment report. This shows both internally and externally what you are doing and can be used as evidence to prove you are a Benefit Corporation, for example to investors or courts. This must be audited by an external independent standard. Most states require this to be publicly and openly shared.

Since legislation can vary from state to state, it’s important you check what applies to your state here.

For both countries, you can choose to start as one or you can convert to one. Please review the websites linked above for more information. Legal forms do not exist in every country yet, but there is definitely a strong movement across the world to create something that will not only promote social entrepreneurship but provide a legal framework for them.

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