The Department of Health in England has been quick to point that that the transfer of NHS pensions to a 'Health-care providing Social Enterprise' does not set a new precedent for a uniform transfer of NHS pensions.
Over 1,000 employees have moved from the NHS to Anglican Community Enterprise and importantly, their NHS pensions have moved too. Many NHS employees have in the past been very reluctant to make the switch due to the fear that they would lose their pensions if they took up employment with such Government backed social enterprise initiatives.
The Government however finds itself in an awkward position. Giving a blanket assurance that all pensions will be protected would certainly give re-newed impetus to its "Right to Request" policy but would be an expensive measure. The approach at present appears to advocate pension transfer if certain criteria are met. Whilst the Anglican Community Enterprise was successful there is no guarantee that future NHS spin-out social enterprises would enjoy a similar result.
Whilst such uncertainty remains, considerable opposition will continue to be voiced, and social enterprise involvement in health and social care provision will be curtailed. Many NHS employees have yet to buy into the social enterprise concept in its present form. The onus is now on the Government to allay those fears.
Showing posts with label social enterprise. Show all posts
Showing posts with label social enterprise. Show all posts
Sunday, 23 January 2011
Monday, 23 August 2010
Protecting the Social Mission through your legal structure
The social mission is the common strand which runs through every social enterprise yet it can quickly become subservient to commercial pressures as organisations become increasingly fixated on the financial bottom line. This may occur despite the best intentions of those who run such enterprises, but to avoid such potential dilemmas it is perhaps prudent to build in safeguards which will protect the social theme.
One way of acheiving this is to articulate the social mission in the enterprise's Memorandum and Articles of Association (the governing documents/constitution). Through clearly stipulating the social objectives of the enterprise such documents can help focus those in charge and maintain standards. The governing documents can also be drafted in such a way as to ensure that profits are retained to fund the social mission. Assets can also be 'locked in' to the enterprise so that their benefit will be retained for the community in the event of a sale/dissolution of the company.
Such safeguards are useful but have their limitations in a traditional company structure as it is possible for the board to remove such clauses from the constitution if a majority agree.
As such it may be beneficial for a social enterprise to employ the Community Interest Company structure as a security blanket with which to enfold the normal company arrangement. The Community Interest Company structure contains an asset lock which is legally enshrined and cannot be removed. There are also caps on the ways in which profits may be distributed and any social enterprise that wishes to adopt this structure must pass a community interest test which ensures that the company will carry out activities which benefit the community.This reporting obligation is on-going and must be prepared at the end of each financial year, thus ensuring that the enterprise does not take its 'eyes of the ball' regarding the social mission.
Another way in which the social mission can be protected is by ensuring democratic control of the enterprise. To this end a co-operative type structure (Community Benefit Society)may be employed which encompasses the concept of "one member, one vote". By allowing each member an equal vote regardless of their share capital it would be hoped that vested interests could not reduce the 'social scope'. The Community Benefit Society structure also prevents the distribution of profits to the members; they must be retained for the benefit of the community. Upon dissolution or winding up of such a society only the amount invested by members may be re-claimed. Any other assets must pass for the benefit of the community.
The social mission can be protected in different ways through the effective implemenation of varying legal structures. Which one suits your enterprise best will often depend on the your particular circumstances and goals.
One way of acheiving this is to articulate the social mission in the enterprise's Memorandum and Articles of Association (the governing documents/constitution). Through clearly stipulating the social objectives of the enterprise such documents can help focus those in charge and maintain standards. The governing documents can also be drafted in such a way as to ensure that profits are retained to fund the social mission. Assets can also be 'locked in' to the enterprise so that their benefit will be retained for the community in the event of a sale/dissolution of the company.
Such safeguards are useful but have their limitations in a traditional company structure as it is possible for the board to remove such clauses from the constitution if a majority agree.
As such it may be beneficial for a social enterprise to employ the Community Interest Company structure as a security blanket with which to enfold the normal company arrangement. The Community Interest Company structure contains an asset lock which is legally enshrined and cannot be removed. There are also caps on the ways in which profits may be distributed and any social enterprise that wishes to adopt this structure must pass a community interest test which ensures that the company will carry out activities which benefit the community.This reporting obligation is on-going and must be prepared at the end of each financial year, thus ensuring that the enterprise does not take its 'eyes of the ball' regarding the social mission.
Another way in which the social mission can be protected is by ensuring democratic control of the enterprise. To this end a co-operative type structure (Community Benefit Society)may be employed which encompasses the concept of "one member, one vote". By allowing each member an equal vote regardless of their share capital it would be hoped that vested interests could not reduce the 'social scope'. The Community Benefit Society structure also prevents the distribution of profits to the members; they must be retained for the benefit of the community. Upon dissolution or winding up of such a society only the amount invested by members may be re-claimed. Any other assets must pass for the benefit of the community.
The social mission can be protected in different ways through the effective implemenation of varying legal structures. Which one suits your enterprise best will often depend on the your particular circumstances and goals.
Friday, 23 July 2010
Renewable Energy Co-Operatives
Barely a day goes by without renewable or green energy being highlighed in the media and as the world frantically seeks to exploit these forms of energy to satisfy its insatiable appetite the question as to who should own the natural resources and the financial benefits of their exploitation come increasingly to the fore.
Many community organisations have successfully engaged in renewal projects across the UK and Ireland with one of the most obvious examples being that of Baywind Energy Co-Operative Ltd
The likes of Baywind have looked to the co-operative (Industrial & Provident Society) model when deciding upon a suitable legal structure which will deliver their stated ojectives.
A co-operative structure offers democratic control (one member/one vote) of the decision making process and involves the local community on a wider scale, putting them at the heart of the management of the enterprise. Doing this helps the local community buy into the concept from the outset which is important given the contentious nature of some renewable energy projects. Some people may argue for example against the erection of wind turbines but if those people are successfuly integrated into the project and see the economic, social and enviromental benefits produced for their community then they are less likely to oppose the enterprise before it has even become established.
The democratic control offered by the co-operative structure is further strengthened by the ability to raise much needed finances from the community by issuing shares. Those persons with shares may then see a financial return when profits are distributed, thus supporting the local economy and rural regeneration.
An asset lock may also be put in place to protect the assets and ensure that they are retained for the benefit of the community, although importantly it would be the choice of the community as to whether they wished to ensure this.
The co-operative model offers the best legal vehicle through which a community may engage in a renewable energy project.
Friday, 9 July 2010
Company Name Disputes
Social enterprises, despite their often altruistic motives, are still firmly immersed in the commercial world and all the business related themes that entails. Consequently, social enterprises (and for that matter any commercial enterprise) should view the protection of their intellectual property as an integral part of the business process.
The ownership of ideas, products and services will often form part of the goodwill enjoyed by a company. That goodwill generates business which in turn helps enterprises to create profit and/or meet their social objectives.
The ownership of ideas, products and services will often form part of the goodwill enjoyed by a company. That goodwill generates business which in turn helps enterprises to create profit and/or meet their social objectives.
One of the most important and obvious examples of the way in which intellectual property can generate goodwill is through the company name. The name affords the company a highly visible means of identification through which the enterprise can build a reputation and brand; vital components for any successful commercial entity.
Thus it is understandable given the importance of the name that disputes can, and often do arise between companies over ownership. The Company Act 2006 offers some legislative remedy to those disputes under the guise of section 69.
Under S69 (1) A person ("the applicant") may object to a company name on the ground that:
(a) the name is the same as a name associated with the applicant in which he has goodwill.
(b) that the name is sufficiently similar to such a name that its use within the UK would be likely to mislead by suggesting a connection between the company and the applicant.
If the applicant can satisfy one of the above then it is up to the other party ("the respondent") to put forward one of the accepted grounds of defence as laid out in S69(4) of the Act.
1. The first defence that may be relied on is if the name was registered by the respondent before the commencement of the activities on which the applicant relies to show goodwill. Therefore it would be prudent for any enterprise contemplating an objection of a company name to check when the other party first registered the name with Company House. (Sub-section 4(a))
This defence does not apply where the company name was registered in anticipation of goodwill or reputation being established by another company. An example would be where someone knows that a merger is about to take place between two companies and so registers one or more variations of the name that the newly formed commercial entity is likely to require. The registration(s) would be opportunistic in that the registration holder’s purpose in obtaining the registration was to cash in on the other entity’s fame. This is known as an opportunistic registration.
2. The second defence arises if the (respondent) company is operating under the name, or is proposing to do so and has incurred substantial start-up costs in preparation; or was formerly operating under that name and is now dormant (subsection 4(b))
Thus it is understandable given the importance of the name that disputes can, and often do arise between companies over ownership. The Company Act 2006 offers some legislative remedy to those disputes under the guise of section 69.
Under S69 (1) A person ("the applicant") may object to a company name on the ground that:
(a) the name is the same as a name associated with the applicant in which he has goodwill.
(b) that the name is sufficiently similar to such a name that its use within the UK would be likely to mislead by suggesting a connection between the company and the applicant.
If the applicant can satisfy one of the above then it is up to the other party ("the respondent") to put forward one of the accepted grounds of defence as laid out in S69(4) of the Act.
1. The first defence that may be relied on is if the name was registered by the respondent before the commencement of the activities on which the applicant relies to show goodwill. Therefore it would be prudent for any enterprise contemplating an objection of a company name to check when the other party first registered the name with Company House. (Sub-section 4(a))
This defence does not apply where the company name was registered in anticipation of goodwill or reputation being established by another company. An example would be where someone knows that a merger is about to take place between two companies and so registers one or more variations of the name that the newly formed commercial entity is likely to require. The registration(s) would be opportunistic in that the registration holder’s purpose in obtaining the registration was to cash in on the other entity’s fame. This is known as an opportunistic registration.
2. The second defence arises if the (respondent) company is operating under the name, or is proposing to do so and has incurred substantial start-up costs in preparation; or was formerly operating under that name and is now dormant (subsection 4(b))
This defence would not be available if the name was registered but the company never conducted business under that company title.
Like in the first defence if the applicant can prove that it was a opportunistic registration this will trump a successful defence under 4(b)
3. The respondent could also argue that the name was registered in the ordinary course of a company formation business and the company name is available for sale to the applicant on the standard terms of that business. (sub-section 4(c))
Again an opportunistic registration will defeat this defence whatever its merits.
4. The respondent can state that the name was adopted in good faith; that it was not carried out with some conspiracy in mind but that the similarities are mere coincidence and that the respondent's motivation and knowledge are beyond reproach. (sub-section 4 (d))
5. The last potential defence under S69 is where the interests of the applicant are not adversely affected to any significant extent by the fact that that the name is the same or is similar. (sub-section 4 (e))
Consequently a goodwill or reputation of little or no commercial significance would not be sufficient and would allow the respondent to mount a successful defence under this subsection.
In effect section 69 only afford protection to the applicant if (s)he can prove that the registration of another company name was opportunistic in nature and/or that it adversely affected the applicant's business.
The first port of call if you do feel aggrieved over another company name should be Company House. If you believe that an opportunistic registration has taken place then you should contact the Company Name Adjudicator.
Both organisations should be able to offer initial guidance and support.
Thursday, 8 July 2010
Public Procurement Action Plan (Northern Ireland)
Wednesday, 7 July 2010
New Legal Tool (Get Legal)
The NCVO has introduced a new on-line tool which helps prospective charities, social enterprises and co-operatives to sift through the host of different legal structures available and to pick the one that best suits their respective needs and objectives.
Many organisation face the issue of choosing a legal structure with some trepidation so this tool will hopefully be of considerable benefit.
Many organisation face the issue of choosing a legal structure with some trepidation so this tool will hopefully be of considerable benefit.
Thursday, 10 June 2010
Industrial & Provident Society Forms (Bona Fide & BenComm)
An Industrial & Provident Society (IPS) can take one of two distinct forms, namely that of a Bona Fide Co-operative or a Society for the Benefit of the Community (BenComm).
A Society may register as an IPS if it:
(1) carries on any industry, business or trade, whether retail or wholesale AND
(2) is either one of the two aforementioned forms.
But what is the difference between a Bona Fide Co-operative and the BenComm?
Bona Fide Co-operative
A Bona Fide Co-operative is an incorporated society which acts for the mutual benefit of all of its members.
Whilst there is no statutory definition of a Bona Fide Co-operative certain criteria has been laid down defining this form:
(1) Members' benefits in the main stem from their participation in the business of the society
(2) Control of the society is vested in members equally, through the principle of 'one person, one vote'
(3) return on capital does not exceed a rate necessary to retain sufficient capital to carry out the society's objectives
(4) Any profits after payment of interest will, if distributable amongst the members, be distributed in proportion to the extent to which members have traded with or taken part in the society's business
(5) Membership will not be restricted artificially with the object of increasing the value of proprietary rights and interests.
The criteria is designed to ensure that members interest in the society is not based solely on the amount of capital they have put into the organisation.
Example: members of a social club serving current and former transport workers. The members interest in the club is a genuine community one shared with fellow and former work colleagues. A person does not join with the sole aim of obtaining some financial return, although that may occur in some circumstances.
Indeed, the legislation governing IPS states that a Co-operative society does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person. Such co-operative entities would likely incorporate as a company instead.
Society for the Benefit of the Community (BenComm)
Unlike the Bona Fide form, a BenComm will act for the benefit of the community rather than just its members.
Profits will not be distributed among members but will be returned to the community. A BenComm is one of the many legal structures employed by Social Enterprises. A BenComm may also be a charity although this will depend on its constitution and objectives.
Special reasons must be given as to why the society should not be registered as a company. Its rules should also prohibit the distribution of assets among members.
Example: Housing Associations are often registered as BenComms as they serve the interests of the wider community rather than the narrow spectrum of their membership.
Both forms must adhere to the general conditions relating to societies as governed by the Industrial & Provident Societies Act (NI) 1969 (The Co-Operative and Community Benefit Societies Act 1965 in England & Wales - formerly referred to as Industrial & Provident Societies Act 1965)
A Society may register as an IPS if it:
(1) carries on any industry, business or trade, whether retail or wholesale AND
(2) is either one of the two aforementioned forms.
But what is the difference between a Bona Fide Co-operative and the BenComm?
Bona Fide Co-operative
A Bona Fide Co-operative is an incorporated society which acts for the mutual benefit of all of its members.
Whilst there is no statutory definition of a Bona Fide Co-operative certain criteria has been laid down defining this form:
(1) Members' benefits in the main stem from their participation in the business of the society
(2) Control of the society is vested in members equally, through the principle of 'one person, one vote'
(3) return on capital does not exceed a rate necessary to retain sufficient capital to carry out the society's objectives
(4) Any profits after payment of interest will, if distributable amongst the members, be distributed in proportion to the extent to which members have traded with or taken part in the society's business
(5) Membership will not be restricted artificially with the object of increasing the value of proprietary rights and interests.
The criteria is designed to ensure that members interest in the society is not based solely on the amount of capital they have put into the organisation.
Example: members of a social club serving current and former transport workers. The members interest in the club is a genuine community one shared with fellow and former work colleagues. A person does not join with the sole aim of obtaining some financial return, although that may occur in some circumstances.
Indeed, the legislation governing IPS states that a Co-operative society does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person. Such co-operative entities would likely incorporate as a company instead.
Society for the Benefit of the Community (BenComm)
Unlike the Bona Fide form, a BenComm will act for the benefit of the community rather than just its members.
Profits will not be distributed among members but will be returned to the community. A BenComm is one of the many legal structures employed by Social Enterprises. A BenComm may also be a charity although this will depend on its constitution and objectives.
Special reasons must be given as to why the society should not be registered as a company. Its rules should also prohibit the distribution of assets among members.
Example: Housing Associations are often registered as BenComms as they serve the interests of the wider community rather than the narrow spectrum of their membership.
Both forms must adhere to the general conditions relating to societies as governed by the Industrial & Provident Societies Act (NI) 1969 (The Co-Operative and Community Benefit Societies Act 1965 in England & Wales - formerly referred to as Industrial & Provident Societies Act 1965)
Wednesday, 2 June 2010
Intellectual Property and Social Enterprises
Intellectual property is an integral aspect of any business and social enterprises are no different in this regard. Yet this often confusing legal concept can cause headaches for even the most savvy business as they attempt to grapple with the rights of ownership of their ideas, products or services.
So what is 'intellectual property' and how does it impact on social enterprises?
Copyright
Copyright is the protection of an idea which has been expressed in some tangible form. In general terms this can include paintings, music lyrics, novels, photographs architecture etc.
When a social enterprise creates an original piece of work then that work is automatically copyrighted. This work may include a operational manual for the running of the enterprise or an article in a magazine detailing the business model or the photographs found on the enterprises website.
A copyrighted work cannot be reproduced, altered or distributed by another party without the creators permission. To do so creates an infringement of the copyright.
There are important commercial implications for a social enterprise in protecting any copyrighted work. By protecting the integrity of the works, they then can then be licensed transferred or assigned by the social enterprise for a fee which would generate income for the business. An example of this in action would include the allowing of a social franchisee to use/adapt the social franchisors operations manual.
Patents
A patent can be defined as a Government licence giving an individual or body the sole right to make, use or sell an invention for a set period.
Whilst not giving automatic rights like that found in copyright it does provide protection against any other parties copying, manufacturing or selling your invention without your permission as long as the patent is registered with the relevant authorities.
Again the commercial opportunities enjoyed by any enterprise which holds a patented invention are significant. The patent could be sold or licensed for a fee or the enterprise could even use the invention as part of its business activities to increase profits.
Trademarks
A trademark can be defined as a distinctive symbol or word(s), legally registered or established by use, as representing a company, product or person.
Many of the most common examples of trademarks can be found in the logos of major companies: the Nike tick or the Adidas stripes.
The protection of trademarks are vitally important as they represent the very essence of an enterprise. If another party was to set up a business using your company name, logo and other trademarks it could pass itself off as another part of the original business. It would in effect be exploiting the goodwill which that business has built up over the years and which might otherwise be directed towards the original enterprise.
So what is 'intellectual property' and how does it impact on social enterprises?
Copyright
Copyright is the protection of an idea which has been expressed in some tangible form. In general terms this can include paintings, music lyrics, novels, photographs architecture etc.
When a social enterprise creates an original piece of work then that work is automatically copyrighted. This work may include a operational manual for the running of the enterprise or an article in a magazine detailing the business model or the photographs found on the enterprises website.
A copyrighted work cannot be reproduced, altered or distributed by another party without the creators permission. To do so creates an infringement of the copyright.
There are important commercial implications for a social enterprise in protecting any copyrighted work. By protecting the integrity of the works, they then can then be licensed transferred or assigned by the social enterprise for a fee which would generate income for the business. An example of this in action would include the allowing of a social franchisee to use/adapt the social franchisors operations manual.
Patents
A patent can be defined as a Government licence giving an individual or body the sole right to make, use or sell an invention for a set period.
Whilst not giving automatic rights like that found in copyright it does provide protection against any other parties copying, manufacturing or selling your invention without your permission as long as the patent is registered with the relevant authorities.
Again the commercial opportunities enjoyed by any enterprise which holds a patented invention are significant. The patent could be sold or licensed for a fee or the enterprise could even use the invention as part of its business activities to increase profits.
Trademarks
A trademark can be defined as a distinctive symbol or word(s), legally registered or established by use, as representing a company, product or person.
Many of the most common examples of trademarks can be found in the logos of major companies: the Nike tick or the Adidas stripes.
The protection of trademarks are vitally important as they represent the very essence of an enterprise. If another party was to set up a business using your company name, logo and other trademarks it could pass itself off as another part of the original business. It would in effect be exploiting the goodwill which that business has built up over the years and which might otherwise be directed towards the original enterprise.
Tuesday, 1 June 2010
Legal Issues facing the social economy sector
If there are any general legal issues facing the social enterprise sector which you would like me to post on please fell free to make a comment below, or alternatievely, you can email at the address provided.
Regards
Conor
Regards
Conor
Monday, 17 May 2010
Social Franchise Agreements- key issues
Social Franchise Agreements
Key Points:
A Franchise is only as good as the agreement underpinning it. It is essential that the franchise agreement be drafted in a thorough and robust way. It must cover all of the relevant issues and perhaps, even more importantly, all the possible eventualities.
What Should the Agreement Include?
The number of issues that must be covered is quite exhaustive but some of the key points can be summarised as follows:
1. The Grant: Will be found at the beginning of the agreement and in effect allows the franchisee to operate the business and use the intellectual property of the franchisor in a specific area. From the grant everything else flows.
1. Fees: The fees will likely include an initial set fee as payment for support during the start-up phase and also an ongoing fee which may be fixed or based on a % of revenue/profits. There may also be an annual fee to cover any advertising done by the franchisor on behalf of the franchise at large.
2.The Term: How long will the franchise last? Generally the agreement will be for a 5 or 10 year period. At the end of term the agreement should contain rights of renewal which will allow the franchise to continue unless a major breach of the agreement has occurred.
3. Exclusivity: A franchisee will want to know that they have exclusive rights to the franchise in a particular geographical area. If you set up a fast food franchise the last thing you want to see is another franchisee setting up just down the street.
4. Franchisors obligations: Can be divided up into the initial obligations such as start-up advice and training and the on-going obligations which will include the parting of general know how, advising on on advertising and the continued training of staff as and when required etc.
5. Franchisees obligations: The franchisee will be expected to meet its numerous obligations. They will include adhering to the franchise system, protecting the brand and maintaining standards etc.
6. Intellectual property: The intellectual property of the franchise will include:
-the business name
-the goodwill generated by the franchise
-the copyright of all manuals, websites, promotional materials, software and all other confidential information.
-the trademarks of the business
The franchisor should ensure that the agreement ensures the protection of all of the above.
7. Right to sell: The franchisee will of course want the right to sell on the franchise. From the franchisors perspective, they will want any agreement to give them a veto over any sale if they do not feel that the buyer meets the required standards.
8. Right to Intervene/Terminate: The franchisor may wish to intervene in a more direct fashion if the franchisee is not meeting required operational standards or they may simply wish to terminate the agreement due to major breaches of the agreement.
Useful Resources
For a number of interesting articles on social franchising/replication see the work carried out by UnltdVentures on the Unltd website
Key Points:
A Franchise is only as good as the agreement underpinning it. It is essential that the franchise agreement be drafted in a thorough and robust way. It must cover all of the relevant issues and perhaps, even more importantly, all the possible eventualities.
What Should the Agreement Include?
The number of issues that must be covered is quite exhaustive but some of the key points can be summarised as follows:
1. The Grant: Will be found at the beginning of the agreement and in effect allows the franchisee to operate the business and use the intellectual property of the franchisor in a specific area. From the grant everything else flows.
1. Fees: The fees will likely include an initial set fee as payment for support during the start-up phase and also an ongoing fee which may be fixed or based on a % of revenue/profits. There may also be an annual fee to cover any advertising done by the franchisor on behalf of the franchise at large.
2.The Term: How long will the franchise last? Generally the agreement will be for a 5 or 10 year period. At the end of term the agreement should contain rights of renewal which will allow the franchise to continue unless a major breach of the agreement has occurred.
3. Exclusivity: A franchisee will want to know that they have exclusive rights to the franchise in a particular geographical area. If you set up a fast food franchise the last thing you want to see is another franchisee setting up just down the street.
4. Franchisors obligations: Can be divided up into the initial obligations such as start-up advice and training and the on-going obligations which will include the parting of general know how, advising on on advertising and the continued training of staff as and when required etc.
5. Franchisees obligations: The franchisee will be expected to meet its numerous obligations. They will include adhering to the franchise system, protecting the brand and maintaining standards etc.
6. Intellectual property: The intellectual property of the franchise will include:
-the business name
-the goodwill generated by the franchise
-the copyright of all manuals, websites, promotional materials, software and all other confidential information.
-the trademarks of the business
The franchisor should ensure that the agreement ensures the protection of all of the above.
7. Right to sell: The franchisee will of course want the right to sell on the franchise. From the franchisors perspective, they will want any agreement to give them a veto over any sale if they do not feel that the buyer meets the required standards.
8. Right to Intervene/Terminate: The franchisor may wish to intervene in a more direct fashion if the franchisee is not meeting required operational standards or they may simply wish to terminate the agreement due to major breaches of the agreement.
Useful Resources
For a number of interesting articles on social franchising/replication see the work carried out by UnltdVentures on the Unltd website
Thursday, 29 April 2010
Charities & Trading Subsidiaries Part 6
The final part of this series takes a look at the role of trustees in the everyday management and running of a trading subsidiary.
Part 6
Role of the Trustees
The trustee must scrutinise numerous funding and general financial/legal matters when a subsidiary is established (see parts 3 & 4). But their role also extends to the running of the subsidiary itself. The extent to which they should interfere in the management of the trading subsidiary is a delicate matter which can have repercussions.
It will be standard practice for the charity as majority/sole shareholder to appoint trustees of the charity to directorship positions within the trading subsidiary. This will allow the charity to monitor the activities of the trading subsidiary. Such persons will have two distinct responsibilities, both to the charity and the trading subsidiary. They will therefore have to be mindful of any conflicts of interest which arise from their dual mandate.
Whilst a monitoring role will be acceptable if undertaken with adequate safeguards the charity should not become actively involved in the management of the charity. The subsidiary board should be independent of the parent charity and the charity should not dictate instructions to the subsidiary. If it does adopt such an active management role then serious liability issues can arise for the charity if the trading subsidiary falls into financial difficulties.
Therefore those with a dual role should be in the minority on the subsidiary board and should heed the advice of non-conflicted board members when any possible conflict arises. Only by engaging such governance procedures will the difficulties associated with a conflict of interest be avoided.
Part 6
Role of the Trustees
The trustee must scrutinise numerous funding and general financial/legal matters when a subsidiary is established (see parts 3 & 4). But their role also extends to the running of the subsidiary itself. The extent to which they should interfere in the management of the trading subsidiary is a delicate matter which can have repercussions.
It will be standard practice for the charity as majority/sole shareholder to appoint trustees of the charity to directorship positions within the trading subsidiary. This will allow the charity to monitor the activities of the trading subsidiary. Such persons will have two distinct responsibilities, both to the charity and the trading subsidiary. They will therefore have to be mindful of any conflicts of interest which arise from their dual mandate.
Whilst a monitoring role will be acceptable if undertaken with adequate safeguards the charity should not become actively involved in the management of the charity. The subsidiary board should be independent of the parent charity and the charity should not dictate instructions to the subsidiary. If it does adopt such an active management role then serious liability issues can arise for the charity if the trading subsidiary falls into financial difficulties.
Therefore those with a dual role should be in the minority on the subsidiary board and should heed the advice of non-conflicted board members when any possible conflict arises. Only by engaging such governance procedures will the difficulties associated with a conflict of interest be avoided.
Sunday, 25 April 2010
Social Franchising
Two scenarios:
1. You are a charity/community organisation which seeks a more sustainable means of funding. You want to establish a business which will generate profits and/or achieve social objectives and reduce dependency on grants. There is one small problem though, you don't have a business idea and even if you did, you wouldn't know where to begin to make that idea a reality.
2. You are an established social enterprise with a proven profit making business and strong brand. You want to grow as a business and maximise the social benefits but you are unsure as to how you can carry this out.
A possible solution?
Social Franchising
Similar in many respects to ordinary commercial franchising, social franchising can deliver the outcomes required in the two scenarios.
But what is it?
In effect franchising is where two parties enter into a contractual agreement in which one party (the franchisor) will give the blue-print (business model) for its successful business to the 2nd party (franchisee) which will set up a copy of that same business with the ultimate aim that both sides make a profit. Social franchising simply follows this formula and throws in the added social dimension.
In conjunction with the blue print comes a substantial support package which the prospective franchisee will utilise. This will include staff training, technical support, help with marketing/promotion of the business and access to the general know how that the franchisor has developed over the years to make their business a success.
Such support may prove particularly appealing to a charitable/community organisation which is entering the commercial world for the first time and which would otherwise be daunted by the complexities of starting a business.
But what does the franchisor get in return?
Generally in any franchise agreement the franchisee will pay an initial fee to the franchisor for the business model. The franchisee will then pay a % of turnover each year to the franchisor in return for its continued support and access. The franchisee will also invest its own money in the initial start-up which reduces the financial risk for the franchisor.
Such an arrangement offers real advantages to both parties but is not without its drawbacks.
Although the franchisee will operate the business on a day to day basis the franchisor will still exercise significant control over operations. It may dictate how services/goods are sold and marketed. It will also be keen to ensure that all activities undertaken by the franchisee do nothing to bring the brand/business into disrepute. Such control may not sit well with some prospective franchisees who would chaff at such restrictions. This will also be labour intensive for the franchisor as they must assiduously work on maintaining quality and standards.
Franchising your business model could soon become a nightmare if the franchisee destroys the painstakingly created brand through mismanagement and your lack of oversight. Therefore the franchisor must be prepared to invest the time and effort into making the franchisees operation a success.
Social franchsing is something we are likely to hear more of in the future.
1. You are a charity/community organisation which seeks a more sustainable means of funding. You want to establish a business which will generate profits and/or achieve social objectives and reduce dependency on grants. There is one small problem though, you don't have a business idea and even if you did, you wouldn't know where to begin to make that idea a reality.
2. You are an established social enterprise with a proven profit making business and strong brand. You want to grow as a business and maximise the social benefits but you are unsure as to how you can carry this out.
A possible solution?
Social Franchising
Similar in many respects to ordinary commercial franchising, social franchising can deliver the outcomes required in the two scenarios.
But what is it?
In effect franchising is where two parties enter into a contractual agreement in which one party (the franchisor) will give the blue-print (business model) for its successful business to the 2nd party (franchisee) which will set up a copy of that same business with the ultimate aim that both sides make a profit. Social franchising simply follows this formula and throws in the added social dimension.
In conjunction with the blue print comes a substantial support package which the prospective franchisee will utilise. This will include staff training, technical support, help with marketing/promotion of the business and access to the general know how that the franchisor has developed over the years to make their business a success.
Such support may prove particularly appealing to a charitable/community organisation which is entering the commercial world for the first time and which would otherwise be daunted by the complexities of starting a business.
But what does the franchisor get in return?
Generally in any franchise agreement the franchisee will pay an initial fee to the franchisor for the business model. The franchisee will then pay a % of turnover each year to the franchisor in return for its continued support and access. The franchisee will also invest its own money in the initial start-up which reduces the financial risk for the franchisor.
Such an arrangement offers real advantages to both parties but is not without its drawbacks.
Although the franchisee will operate the business on a day to day basis the franchisor will still exercise significant control over operations. It may dictate how services/goods are sold and marketed. It will also be keen to ensure that all activities undertaken by the franchisee do nothing to bring the brand/business into disrepute. Such control may not sit well with some prospective franchisees who would chaff at such restrictions. This will also be labour intensive for the franchisor as they must assiduously work on maintaining quality and standards.
Franchising your business model could soon become a nightmare if the franchisee destroys the painstakingly created brand through mismanagement and your lack of oversight. Therefore the franchisor must be prepared to invest the time and effort into making the franchisees operation a success.
Social franchsing is something we are likely to hear more of in the future.
Sunday, 18 April 2010
Charities & Trading Subsidiaries Part 5
Part 5
There are a number of ways in which profits generated by the trading subsidiary may be transferred back to the parent charity. The path taken will have tax implications and this will often be the deciding factor in choosing the appropriate method.
- Funds may paid in the form of a share dividend pursuant to the share capital acquired by the charity.
The payment of a dividend to a Charity, whilst retaining a certain 'prestige' factor will often not be the optimum way of transferring money. Whilst a dividend is not taxable in the hands of the charity, it does not reduce the trading subsidiaries taxable profits. Thus the subsidiary would be liable to corporation tax.
The most common method of paying funds therefore is through the Gift Aid Scheme. Like the dividend, the Gift Aid payment will be exempt from tax in the hands of the charity, so long as the money is used for charitable purposes. However where the Gift Aid scheme differs is that the payments do reduce the subsidiaries taxable profits. n fact it is possible for a subsidiary to mitigate its entire tax liability through paying all of the companies profits to the charity under Gift Aid.
There is nothing underhand with this approach, it is a perfectly acceptable way in which to reduce the amount of tax owed by the trading subsidiary.
However, giving all of the profits to the charity under the Gift Aid scheme can cause some difficulties. A transfer of all the profits may leave the subsidiary with a lack of working capital, with the cash-flow problems that would entail. HMRC do give subsidiaries wholly owned by a charity some lee-way in this regard but it may be prudent in some instances for the subsidiary to retain some of its profits to meet working capital requirements. The charity would have to accept the ensuing tax liability for the amount of profits retained.
Wednesday, 14 April 2010
Charities & Trading Subsidiaries Part 4
As highlighted in part 3 of this series, a charity must adhere to the qualifying investment criteria if it wishes to avoid the potential tax penalties incurred by non-charitable expenditure. It cannot simply give a certain amount of money to a trading subsidiary as a goodwill gesture. Any investment must be commercially sound. This underlying requirement will therefore dictate the type of investment which a charity can make to the trading subsidiary.
TYPES OF INVESTMENT
The two main types of investment are the acquisition of share capital and/or the provision of loans.
It may sometimes be prudent to subscribe only a nominal sum for the issue of share capital so as to satisfy company law. If a parent charity does subscribe a greater sum as a means of investment then that investment will be subject to risk if the trading subsidiary ultimately fails. This is because the repayment of share capital has a lower priority than the repayment of loans in the event of liquidation.
Therefore in this instance where profit margins are likely to be marginal it may be reasonable to pay more than the nominal amount for share capital.
The charity could market the acquisition of shares to wealthy supporters who would be willing to invest and possibly fore go a commercial return.
HMRC guidance stresses the requirement that any loan from the charity to the trading subsidiary must be at arms-length and bear a commercial rate of interest with suitable repayment terms. It is highly unlikely that HMRC would tolerate a loan agreement with no rate of interest and a repayment schedule over a 1000 year time period!
However banks and other lenders may require guarantees/security from the charity itself as part of any loan agreement. This would expose, both the charities assets and the trustees themselves to risk if the subsidiary got into difficulty. Such commercial lenders may also stipulate repayment terms which would be in excess of what the charity would be obliged to charge under any loan agreement with the subsidiary.
Monday, 12 April 2010
Charities & Trading Subsidiaries Part 3
Part 3
FINANCING A SUBSIDIARY
A trading subsidiary like any newly formed business will require starting capital in-order to finance its activities before a profit is ever realised. Given the nature of the relationship between the charity and trading subsidiary it is normal to assume that the charity may wish to invest monies into the subsidiary. There are special rules that apply when a charity wishes to invest funds in a trading subsidiary which must be adhered to.
Firstly any trustees wishing to invest should insure that they have the requisite power to do under the charities constitution.
Any investment made in the trading subsidiary must be deemed a 'qualifying investment' for HMRC purposes. if it does not qualify then HMRC will view the investment as 'non-charitable expenditure@. This can be defined as expenditure on things that are not for the charitable purposes as set out in the charity's governing documents or any investments and loans made by the charity which are not qualifying loans or investments as detailed by HMRC regulations.
Any non-charitable expenditure may result in the charity losing its tax exemption on all or part of its income or gains. the amount is taxable at the same amount of non-charitable expenditure.
For example: A charity receives gross gift aid income of £40,000. the charity would normally be entitled to tax relief of £40,000. If £30,000 was spent on charity grants and administration and £10,000 on a non-charitable loan then the charity would lose tax relief on the same amount of the £10,000 loan.
The list of qualifying investments does not include investments in or loans to subsidiary companies per se. there is provision however that a charity can make a claim to HMRC to treat such investments as qualifying.
To satisfy this provision the charity must show that it was made for charitable purposes and that it is for the benefit of the charity, and not to avoid tax.
In order to achieve this, the investment should be commercially sound and the charity should ensure that the investments are secure, carry a fair rate of return and in the case of loans, provide for recovery of the amount invested in due course.
The trustees must be able to justify financial support for a trading subsidiary as an appropriate investment of the charities resources. The Charity Commission for England & Wales has stipulated the following guidance for trustees when considering the investment of charities resources, both in general and in the particular context of a proposed investment in a trading subsidiary which is used to carry on a non-primary purpose trade.
- be certain that the investment is within the charities investment powers;
- exercise such care and skill in the investment process as is reasonable in the circumstances;
- have regard to the suitability to the charity of investments of the same kind as the particular investment which it is proposed to make;
- have regard to the suitability of the particular investment in question, as an investment of the kind which it seems appropriate to make;
- ordinarily obtain and consider advice about the investment from a person reasonably believed by the trustees to be qualified to give it by his or her ability in and practical experience of financial and other matters; the advice needs to have regard to the suitability and diversification points mentioned above;
- the trustees must be satisfied as to the financial viability of the trading subsidiary, based on its business plan, cash flow forecasts, profit projections, risk analysis and other available information; and
- the trustees must ordinarily take appropriate advice on the investment, and the financial viability of the trading subsidiary. What is appropriate will depend on the circumstances: the cost of taking the advice is a relevant factor, and the cost should be commensurate to the size of the proposed investment.
- pay attention to the length of time over which funds may be tied up in an investment in a trading subsidiary, since funds needed in the short to medium term may not be easily realised when invested in this way;
Sunday, 11 April 2010
Public Procurement & Social enterprises
The NI Assembly recently published a Report on its Inquiry into Public Procurement in Northern Ireland:
http://www.niassembly.gov.uk/finance/2007mandate/reports/Report_19_08_09R.htm
The Committee for Finance & Personnel have made a number of recommendations which will be of interest to social enterprises engaged in the public procurement process.
http://www.niassembly.gov.uk/finance/2007mandate/reports/Report_19_08_09R.htm
The Committee for Finance & Personnel have made a number of recommendations which will be of interest to social enterprises engaged in the public procurement process.
Indeed the Committee states that implementation of the recommendations will achieve the objective of developing the social economy in Northern Ireland.
One of the more interesting recommendations is the support for the establishment of a public procurement brokerage service for social enterprises as advocated by the Ulster Community Investment Trust (Para 174).
As most social enterprises are small in scale it can be extremely difficult to break into the complex area of public procurement. The brokerage service seeks to address the key resource and knowledge limitations by offering professional support for the tendering of contracts. It is certainly a service that social enterprises should be watching out for in the year ahead.
Thursday, 8 April 2010
Charities & Trading Subsidiaries Part 2
Part 2
WHAT IS A TRADING SUBSIDIARY?
It is an independent commercial body, quite distinct from the charity. Its legal structure will usually take the form of a non-charitable company limited by shares or a non-charitable company limited by guarantee.
Although the trading subsidiary does not enjoy the advantages of charitable status, it is not burdened with the stringent trading restrictions that a charity must comply with. It will therefore be able to undertake trading activities which the charity cannot.
WHY USE A TRADING SUBSIDIARY?
WHAT IS A TRADING SUBSIDIARY?
It is an independent commercial body, quite distinct from the charity. Its legal structure will usually take the form of a non-charitable company limited by shares or a non-charitable company limited by guarantee.
Although the trading subsidiary does not enjoy the advantages of charitable status, it is not burdened with the stringent trading restrictions that a charity must comply with. It will therefore be able to undertake trading activities which the charity cannot.
WHY USE A TRADING SUBSIDIARY?
- trading subsidiaries offer greater flexibility and fashion the opportunity to generate greater sums of money for the charity.
- The trading subsidiary will be able to carry out non-primary purpose trading on a larger scale and obtain tax relief through the gift aid scheme. If a trading subsidiary gives all or part of its profits to the parent charity then it will not have to pay any tax on those profits. This can result in very significant savings for the charity through the reduction or elimination of tax liabilities. Where the non-primary purpose trading does involve a significant risk the Charity would have to establish a trading subsidiary if it wished to continue that form of trading.
- To protect the charities assets from the risk of trading. If the trading is carried out within the trading subsidiary then the risks associated with any losses will be ring-fenced within the subsidiary itself.
- To protect the trustees of a charity from personal risks & liabilities.
- The directors of a trading subsidiary may be paid for their work unlike their trustee counterparts. Therefore a more commercially savvy person may be attracted to run the business. It must be noted though that the establishment of a trading subsidiary should not be used as a backdoor method of paying charity trustees.
It is important to remember that it is not only where non-primary purpose trading is undertaken that a subsidiary may be established. A charity may set up a trading subsidiary for the purpose of primary purpose trading if it so wishes.
DISADVANTAGES OF SETTING UP A TRADING SUBSIDIARY
Where the establishment of a trading subsidiary is not essential the benefits enjoyed must be balanced with the drawbacks that such a move would entail.
The disadvantages may include:
- The tax benefits may not outweigh all the extra costs associated with setting up and running a subsidiary.
- The additional administrative burden of a legal entity, quite separate from the charity.
- Difficulties that can emerge concerning the financing of a subsidiary.
- Possible cash flow problems for the subsidiary if all of the profits are donated back to the parent charity.
- The possible conflicts of interest arising where trustees of charities sit on the board of the subsidiary as directors.
These potential drawbacks will not be relevant in every case but trustees must be careful to avoid having their positions compromised.
In Parts 3/4 I will take a look at the financing of a subsidiary. This is often a difficult proposition given the numerous constraints placed on charities but it is essential that trustees are alert to the potential pitfalls.Wednesday, 7 April 2010
Charities & Trading Subsidiaries Part 1
Today sees the start of a 6-part series which considers the trading activities of charities and the role of non-charitable subsidiaries. This is a pertinent issue in today's climate as charities move towards sustainable funding models. In Northern Ireland where the various Grant monies have begun begin to dry up there will be an increased onus on local community and charity groups to utilise trading opportunities as a means of funding, as failure to do so could result in their very survival coming into doubt.
PART 1
TYPES OF TRADING CARRIED OUT WITHIN A CHARITY
Charities are allowed to trade by law provided that the trading falls within one of the following categories:
Primary Purpose Trading- covers trading which contributes directly to one or more of the objects of a charity as set out in its governing document. Also includes trading where the work is mainly carried out by beneficiaries of the charity (beneficial trading).
This form of trading is not subject to tax and is therefore an effective way of funding the charity.
Examples include: provision of education services by an educational charity or the charging by a hospital for health care services.
Work carried out be beneficiaries (beneficial trading) might include sale of furniture produced by those with learning difficulties.
Ancillary Trading- is not on its own primary purpose trading but is carried out as part (ancillary) of a primary purpose trade.
Examples include: a theatre charity established for the promotion of arts running a cafe bar which sells refreshments to those attending the performance or the provision of accommodation to the students by a University.
Again this form of trading is not subject to tax liabilities.
Non-Primary Purpose Trading- is a form of trading which does not contribute directly to one or more of the objects of a charity as set out in its governing document. A charity will be allowed to raise funds through the carrying on of a trade which is not primary purpose, but only if the trading involves 'no significant risk' to the resources of the charity.
There is however no tax exemption for non-primary purpose trading, subject to a small trading exemption.
Exemption for Small Trades
The exemption to tax is applied where total turnover from all non-primary purpose trading does not exceed the annual limit.
The annual limit is as follows: £5,000 or if turnover is greater than £5,000, 25% of charity's gross income, subject to an overall limit of £50,000
In Part 2 I will condsider the use of trading subsidiaries and their respective advantages and disadvantages.
PART 1
TYPES OF TRADING CARRIED OUT WITHIN A CHARITY
Charities are allowed to trade by law provided that the trading falls within one of the following categories:
Primary Purpose Trading- covers trading which contributes directly to one or more of the objects of a charity as set out in its governing document. Also includes trading where the work is mainly carried out by beneficiaries of the charity (beneficial trading).
This form of trading is not subject to tax and is therefore an effective way of funding the charity.
Examples include: provision of education services by an educational charity or the charging by a hospital for health care services.
Work carried out be beneficiaries (beneficial trading) might include sale of furniture produced by those with learning difficulties.
Ancillary Trading- is not on its own primary purpose trading but is carried out as part (ancillary) of a primary purpose trade.
Examples include: a theatre charity established for the promotion of arts running a cafe bar which sells refreshments to those attending the performance or the provision of accommodation to the students by a University.
Again this form of trading is not subject to tax liabilities.
Non-Primary Purpose Trading- is a form of trading which does not contribute directly to one or more of the objects of a charity as set out in its governing document. A charity will be allowed to raise funds through the carrying on of a trade which is not primary purpose, but only if the trading involves 'no significant risk' to the resources of the charity.
There is however no tax exemption for non-primary purpose trading, subject to a small trading exemption.
Exemption for Small Trades
The exemption to tax is applied where total turnover from all non-primary purpose trading does not exceed the annual limit.
The annual limit is as follows: £5,000 or if turnover is greater than £5,000, 25% of charity's gross income, subject to an overall limit of £50,000
In Part 2 I will condsider the use of trading subsidiaries and their respective advantages and disadvantages.
Tuesday, 6 April 2010
Credit Union reform in Northern Ireland
The joint HM Treasury & DETI consultation document on the reform of credit unions has recently been published:
http://www.hm-treasury.gov.uk/d/consult_ni_credit_unions.pdf
The proposals for regulatory reform follow the review of the legislative framework which was published in July 2009:
http://www.hm-treasury.gov.uk/d/review_legislativeframework_creditunions080709.pdf
The Treasury has put forward the following preferred option for reform of the sector in Northern Ireland:
The regulatory functions would transfer from DETI to the Financial Services Authority (FSA) whilst the registration of credit unions would remain within the remit of the DETI. The legislative functions would remain with the Northern Ireland Assembly.
The transfer to the FSA would enable credit unions to access both the Financial Services Compenstion Scheme (FSCS) and the Financial Ombudsmen Service (FOS). This would offer greater protection to credit union members in the event of a collapse of their credit union.
The FSCS currently provides up to £50,000 protection of savings per member in the event of a collapse.
Regulation by the FSA would also enable access to U.K Government initiatives such as the Growth Fund and Child Trust Fund.
Whilst much of the discussion has rightly focused on the FSA debate another interesting aspect of the consultation process is the scrutiny of credit unions investing their assets in their local communities.
Question 4 of the consultation document queries whether credit unions in Northern Ireland should be given powers to re-invest assets into community development and community enterprises. Such a power would go beyond that envisaged for credit unions in Britain and offer the kind of community investment powers currently enjoyed by credit unions in the ROI.
The ability to re-invest credit union assets into community enterprises could prove to be a big boost for the social economy sector in general with increased investment the result. There are numerous examples of this already occuring in the ROI to good effect and there will undoubtedly be calls for credit unions in Northern ireland to be able to wield such investment powers.
The consultation period will end on the 24 May 2010.
http://www.hm-treasury.gov.uk/d/consult_ni_credit_unions.pdf
The proposals for regulatory reform follow the review of the legislative framework which was published in July 2009:
http://www.hm-treasury.gov.uk/d/review_legislativeframework_creditunions080709.pdf
The Treasury has put forward the following preferred option for reform of the sector in Northern Ireland:
The regulatory functions would transfer from DETI to the Financial Services Authority (FSA) whilst the registration of credit unions would remain within the remit of the DETI. The legislative functions would remain with the Northern Ireland Assembly.
The transfer to the FSA would enable credit unions to access both the Financial Services Compenstion Scheme (FSCS) and the Financial Ombudsmen Service (FOS). This would offer greater protection to credit union members in the event of a collapse of their credit union.
The FSCS currently provides up to £50,000 protection of savings per member in the event of a collapse.
Regulation by the FSA would also enable access to U.K Government initiatives such as the Growth Fund and Child Trust Fund.
Whilst much of the discussion has rightly focused on the FSA debate another interesting aspect of the consultation process is the scrutiny of credit unions investing their assets in their local communities.
Question 4 of the consultation document queries whether credit unions in Northern Ireland should be given powers to re-invest assets into community development and community enterprises. Such a power would go beyond that envisaged for credit unions in Britain and offer the kind of community investment powers currently enjoyed by credit unions in the ROI.
The ability to re-invest credit union assets into community enterprises could prove to be a big boost for the social economy sector in general with increased investment the result. There are numerous examples of this already occuring in the ROI to good effect and there will undoubtedly be calls for credit unions in Northern ireland to be able to wield such investment powers.
The consultation period will end on the 24 May 2010.
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