Setting up a Social Enterprise is an exciting venture. When doing so, it is important to consider associated legal issues and then choose which business structure is best suited to your Social Enterprise. It is advisable to contact a business lawyer at this stage as the structure can affect your funding entitlements, eligibility for tax concessions and ongoing reporting requirements dependent on whether your Social Enterprise is for-profit, not-for-profit or a hybrid of both.
If you have decided to run your Social Enterprise for-profit, we would usually suggest using a private company structure. This structure has shareholders and investors with shares that are privately held and traded as opposed to holding shares in a public company where they can be traded on the stock exchange. These shareholders will receive a distribution of the profit, and the remaining profit will be reinvested into the Social Enterprise.
If you have decided to run your Social Enterprise not-for-profit, we would usually suggest using one of the following structures:
- Incorporated Association:
This structure has a group of members and a governing body which is a separate legal entity. These members do not have the right to receive a distribution of the profits because all profits must be reinvested into the activities which are designed to achieve the purpose of the Social Enterprise. This purpose must be clearly set out along with the rules or the Constitution of the Social Enterprise.
- Company limited by guarantee:
This structure works differently to an Incorporated Association and other companies formed under the Corporations Act. It has a group of members who “guarantee” that they will pay the debt of the Social Enterprise if it can no longer be paid. These members are not shareholders and do not have the right to receive any profits.
This structure is an organisation that is owned and controlled by the members that make up the Social Enterprise. These members will need to decide whether the profits will be distributed to the members or used to develop the Social Enterprise. This decision will determine whether the Social Enterprise will have a for-profit or not-for-profit status. For example, a Social Enterprise cannot be not-for-profit if it operates to make a profit for the members. However, it can operate to make a profit generally and still have a not-for-profit status so long as the profits are not distributed to the members. Irrespective of the status, the Social Enterprise must be run to benefit the community in some way.
- Indigenous Association:
This structure is established under the Corporations (Aboriginal and Torres Strait Islanders) Act 2006 (Cth) and registered/regulated by the Federal Office of the Registrar for Indigenous Corporations. It has a group of at least five members who own the association who, depending on their rule book, are usually Aboriginal or Torres Strait Islander or living in a particular Indigenous community. This rule book will also set out how profits are to be shared.
Adding your Social Enterprise to an existing not-for-profit organisation
You can add a Social Enterprise to an existing not-for-profit organisation as a trading activity. This has many benefits including funding and financial sustainability. However, there are also many considerations which include:
- Consistency with the purpose of the existing organisation;
- Charitable tax concessions;
- Financial and reputational risk;
- Member skills and/or recruitment; and
- Advancement of your mission.
Hybrid Social Enterprise
It is possible to create a Hybrid Social Enterprise combining for-profit and not-for-profit structures to match your business plan, funding entitlements and eligibility for tax concerns but it is best to speak with a lawyer to discuss this option further.
A Case Study: Fair Trade Coffee Company
The Fair Trade Coffee Company is a subsidiary company of Palms Australia, which is structured as a Company limited by guarantee operating on a not-for-profit basis. It has nine directors with their members serving three-year terms.
Do you want know more about the practical steps in setting up a Social Enterprise? Learn more in Part 4 of our Social Enterprise series or contact our team of business lawyers on 1300 544 755.
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