Charities and Social Enterprise Accounting
Accounting For Charities and Social Enterprises
Thinking about setting up your own charity or social enterprise?
There are many different business structures, and each is suited to a different type of business and way of working. So, the very first step is always to consider if starting a charity or social enterprise is the most appropriate business structure for your business plans.
As one of the UK’s premier online accountants, we can discuss your requirements with you in greater detail to help you decide which may be the most appropriate structure for your business. So please give us a call!
Experience & Expertise
Our team at QAccounting has been supporting charities and social enterprises with their accounts and bookkeeping for over 20 years. Become a client today and benefit from a wealth of experience and expertise.
Why Choose QAccounting for Charity and Social Enterprise Accountancy Services?
QAccounting provides accounting services for Charities and Social Enterprises throughout the UK. With more than two decades of experience in assisting specialists and professionals, we take pride in our 5-star rating received from numerous satisfied clients. Below are a few reasons why selecting QAccounting as your accounting partner is a wise choice:
Transparent Monthly Fees
We promise to provide our clients with high-quality accounting solutions at extremely competitive monthly rates. Our approach sets us apart from many other accounting providers, as we maintain complete transparency with our fees. This means, before you choose QAccounting as your accountant, you’ll have a clear understanding of your monthly payments throughout the year. Rest assured, there will be no hidden charges or unpleasant surprises!
History & Experience
QAccounting has been operating for over 20 years. We haven’t always been called QAccounting, but our business, our owners, and accountants have been working together supporting companies for 2 decades. The experience we have in a wide range of industries gives us vast knowledge of limited company accounts and taxation.
5 Star Rating
Our customers love us, and we think that you will too! We are very proud that we have been given a 5-star service rating by hundreds of happy customers across Google and Reviews.co.uk. Reputation is so important when choosing an accountant, and we feel that our 5-star rating speaks for itself.
Hassle Free Accounting
The best effect an accountant can have on the running of your business is making your life easier and taking away the stress and hassle of your company finances. We believe that anyone operating a charity or social enterprise should have the time available to concentrate on what they do best, working hard and enjoying their spare time. We offer hassle free accounting that allows clients to enjoy their work lives in the knowledge that their accounting is being taken care of.
What is a Charity or Social Enterprise?
The definition and scope of social ventures is very large. Charities are entities that provide help or raise money on behalf of those that need it. And social enterprises are entities which have social objectives and generate revenue for the purposes of funding these objectives.
The differences in definition highlight that the purpose of social enterprises is to “generate revenues” similar in many respects to other types of business whereas with charities this is not necessarily the case. Often therefore where charities require to “trade” it can be more beneficial to setup a separate structure specifically for these purposes.
One of the most important areas you must consider before you can start out as a charity or social enterprise is the structure that will best suit your objectives both now and in the future, and how this structure will impact key areas such as:
- Personal Liability – Where the risk of personal liability is a significant consideration for management then an incorporated legal structure is generally preferred.
- Governance & Management Structure – Each of the different types of venture outlined below have different governance and management structures.
- Funding – Where the primary source of funding will be grants from funding bodies then a charity structure is generally preferred. Likewise, where the primary source of funding will be from external investors then a share ownership structure is generally preferred. In other circumstances a structure limited by guarantee is often preferred.
But ultimately all of these areas should be considered together before making any final decisions. And the most essential aspect is to consider this at the outset, as changing structure in the future can often be complex and expensive.
In the UK the following main types of structure exist:
Whether this relates to individual sole traders who operate on a self-employed basis, or members of community and voluntary organisations the main difference when compared to other types of venture is that these “unincorporated” structures are not legal entities which are separate and distinct from their members.
The business owners or members therefore cannot enter into contracts with third parties in the name of the organisation, and they are personally liable for the debts and obligations of the organisation, which effectively means that their own private assets are at risk.
Despite this risk a huge volume of social enterprises operate as unincorporated associations, and this is because the level of compliance required in respect of these types of bodies is relatively small, normally governed by a “constitution”, and they are typically simpler than other legal structures to setup and administer.
Registered Charity Unincorporated Associations
Additionally, unincorporated associations can, but are not required to, operate as registered charities. Those that choose to operate as registered charities must adhere to additional compliance requirements, such as registering with the Charity Commission (in England and Wales) or the Office of the Scottish Charity Regulator (OSCR) (the equivalent in Scotland), creating a Board of unpaid Trustees (instead of Members) to oversee operations and safeguard the assets and funds, and make annual disclosures to these regulatory bodies.
In some respects, therefore registering as a charity diminishes some of the reduced compliance benefits of using an unincorporated body. And as explained above there are restrictions on the types of trading activities that can be undertaken by charities.
Nevertheless, registering as a charity does have some very significant advantages. Charities are eligible for certain tax reliefs such as gift aid and reduced rates of VAT on the purchase of certain goods and service. Furthermore, being registered as a charity makes the association more eligible to receive grants from funding bodies. Indeed, some funding bodies will not provide grant funding to organisations unless they are registered charities. In contrast though it is often harder to raise other forms of external finance. So it is important to consider what the primary sources of funding for the organisation will be at the outset.
Company Limited by Shares
A company limited by shares is the most typical legal structure used by businesses and trading organisations, but it is not normally used by charities (due to the restrictions on trade) or many other social enterprises (due to restrictions on grant funding).
Limited companies are managed by “Director(s)” and owned by the “Shareholder(s)” although in practice for smaller companies these can be the same person, or people. The shareholders’ liability is limited to the value they invest in the shares of the company, and as owners of the business they can often receive dividends as a method of extracting profits from the company.
All UK companies must be registered at Companies House, submit annual accounts and confirmation statements, and advise Companies House of any changes in membership as they occur. They must also submit annual tax returns to HMRC and pay Corporation Tax, unless this is exempt because the profits are used for charitable purposes.
Due to the lack of restrictions on: trade, profit distribution, and payments made to staff and directors, it is rarely used as a vehicle for social ventures. There is also a perceived conflict of interest as the objective of shareholder owned companies is normally to maximise shareholder wealth and value, as opposed to providing not-for-profit activities. Nevertheless, it is still a useful structure to consider where funding will be provided by external investors that require share capital ownership and potentially dividends in exchange for their investment.
Company Limited by Guarantee
A company limited by guarantee is very similar in most respects to a company limited by shares, and it is subject to the same governance and regulatory requirements of Companies House and HMRC.
The key difference between the two is that there are no shares and the company is therefore not owned by shareholders. The “guarantee” is the amount that the owners agree to invest into the business, which can be any amount, and their liability is limited to this value. Likewise, because there are no shares it is not possible to distribute the profits of the business as dividends.
It is therefore more commonly used for social ventures than companies limited by shares, but there is still a lack of restrictions on: trade, and payments made to staff and Directors, and is not as attractive for external investors.
Registered Charity Company Limited by Guarantee
Similar to unincorporated associations a company limited by guarantee can, but is not required to, operate as a registered charity.
The same Governance requirements outlined above for unincorporated associations and companies limited by shares apply equally to this type of structure. So these types of organisations have to register with and report to BOTH Companies House and the Charities Commission.
But providing that the activities of organisation (i.e. restrictions on trade) are not impacted by charitable status, this does grant owners the benefit of limited liability and all the additional benefits previously outlined for charities, including the ability to raise grant funding. It is therefore a very attractive structure.
Community Interest Company (CIC)
A community interest company can be a company limited by shares or a company limited by guarantee. But fundamentally these are “not-for-profit” organisations that exist for the benefit of the community rather than the shareholders, and as such there are a number of additional obligations that a community interest company must comply with in addition to those required by other limited companies.
- Registering with the Office of the Regulator of Community Interest Companies.
- Satisfying a Community Interest Test which considers for instance: the motivations of the company, who it will help, what it will do to help these people, and what will be done with any profits that are made.
- Additional clauses in their Articles of Association (AOA) are required to implement “Asset Lock” provisions to ensure that profits are either retained in the business or used for community purposes. Dividend payments while allowed are therefore also restricted.
- Including a ‘Community Interest Company Report’ in their annual financial statements outlining the benefits provided in the year.
Therefore, similar to charities community interest companies are required to be registered with two different organisations. Nevertheless, the Office of the Regulator of Community Interest Companies operates more seamlessly with Companies House when compared to the Charity Commission. And due to the asset lock provisions CICs can often raise grant funding similar to charities, which is hugely attractive.
Charitable Incorporated Organisation (CIO, or SCIO in Scotland)
A charitable incorporated organisation is a comparatively new (2013) type of legal business structure that does not first require the creation of a limited company at Companies House. Instead it can be created by submitting an application directly to the Charity Commission. Alternatively, existing charities of other business structures can apply to convert into a CIO.
Nevertheless, as a separate legal entity a CIO can enter into contracts and conduct business like any other company, and the members similarly have limited liability. In many ways it can therefore achieve the benefits of being a company limited by guarantee without the additional administrative burden of registering with and submit annual disclosures to Companies House.
It can also apply to use the cash basis of accounting which is not normally available for limited companies.
A disadvantage when compared to normal limited companies is that because it is not registered at Companies House, there is no register of charges over the company’s assets, so it is harder to arrange loan finance.
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Charity & Social Enterprise Accounts for One Low Monthly Fee
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