Developing a Trading Arm

Developing a Trading Arm A social enterprise is a business which has primarily social objectives and which reinvests any surpluses for that purpose. ...
Author: Ronald Cannon
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Developing a Trading Arm

A social enterprise is a business which has primarily social objectives and which reinvests any surpluses for that purpose. There are many different types of social enterprise of a wide range of shapes and sizes. It is a means of meeting social outcomes through carrying business and is potentially the business model of the 21st century.

There are many different ways to operate as a social enterprise including as a co-operative, a community interest company, from within a housing association, as a community development trusts or as a social firm. All of these, and all other types of social enterprise, share the same characteristics: A social enterprise



Is a business.



Has a social purpose or purposes.



Seeks to achieve its social purpose by carrying out trade in the marketplace.



Does not distribute any profit it makes to individuals.



Will hold its assets and wealth in trust for community benefit – asset locked



Seeks to democratically involve members in its organisational governance.



Is an independent organisation accountable to the wider community

There are also a wide range of reasons to create a social enterprise, convert to a social enterprise or to seek to trade as a social enterprise.

Social enterprise is a great way to do business, as it enables social and environmental needs to be met through business or trade.

What is a Trading Arm? Many charities carry out trade. This can be either as a fundamental part of their charitable activities or it can be done in order to raise funds.

An increasing number of charitable organisations have created subsidiary organisations - or "trading arm" - as a means of generating extra income for the organisation on a more substantial or permanent basis. These are often set up as a social enterprise or community business.

Trading is normally defined as involving the provision of goods or services to customers or clients in order to create profit. For charities any profits that are generated through trade are generally exempt from tax provided that certain conditions are met.

The current annual turnover limit for charities to trade is £5,000 or if the turnover is greater than £5,000, 25% of the total incoming resources. This is subject to an overall upper limit of £50,000.

Developing a Trading Arm

Professional advice should be sought before setting up a trading subsidiary in order to ensure that the activity is both legal and achievable.

Any charity looking to create or develop a trading subsidiary should ensure that it has the powers to do this written into its current constitution (or rules). If it does not have these powers it will have to amend its constitution and will have to get the consent, permission or approval of the Charity Commission.

Trading subsidiaries can take any legal form that might be appropriate for the trade being undertaken. This structure could take the form of a company, including a Community Interest Company, or can be an Industrial and Provident Society such as co-operative or Community Benefit Society.

Financing the Trading Arm

The charity can finance the trading arm if it is considered right and prudent for the charity to do so. If this is the case then the charity should carefully consider what form this finance should take. Equity investment: Share capital is fully at risk and although this is the best form of finance for a business it is more at risk than loan finance and therefore less preferable from the point of view of the parent charity Loans: Loans are usually preferred by the parent charity because a loan can be secured against the assets of the subsidiary. Another attraction of loans for the parent charity is that it can look forward to a time when the loans will be repaid, and the subsidiary will no longer be financially dependent on it Guarantees: Rather than lending money to a trading subsidiary, a parent charity might consider acting as a guarantor to a commercial loan taken out by the trading subsidiary. However, the same prudent approach to investment is required when providing guarantees

Donations: A charity cannot make a donation to a trading subsidiary unless such a donation would meet the primary purpose of the charity.

It is important to establish and maintain a clear boundary between the parent charity and its trading subsidiary to avoid any possibility that charitable resources are used for non-charitable purposes.

Financial management: Separate accounts should be established for the parent charity and its subsidiary, and any transfer of funds between the two should be recorded as transactions. The rules governing investment by charities in subsidiaries applies not only to start-up finance but also to ongoing finance and support.

Sharing resources: If the trading subsidiary uses the charity’s premises it must pay an open market rent. Employees that work both for the charity and for the subsidiary must have their employment costs correctly apportioned. The same applies to equipment, services, consumables or resources that are used by both the charity and the subsidiary. Trading profits and Gift Aid: One of the main reasons for setting up a trading subsidiary is to generate funds for the charity. A trading subsidiary can donate its profits to its parent charity and claim Gift Aid tax relief on the donation, if it is liable for corporation tax. Caution should be taken when deciding how much of the profit should be donated, because the subsidiary will need to retain and reinvest some profit to ensure its sustainability.

Charities should reduce potential conflicts of interest by ensuring that the directors of the trading subsidiary are not all trustees of the charity.

Useful Social Enterprise information

Volunteer Impact Northamptonshire

http://www.voluntaryimpact.org.uk/

Enterprise Solutions Northamptonshire http://www.enterprise-solutions.org.uk/ Social Enterprise UK

http://www.socialenterprise.org.uk

Social Enterprise Mark

http://www.socialenterprisemark.org.uk/

Social Enterprise Europe

http://www.socialenterpriseeurope.co.uk/

Social Enterprise International

http://www.socialenterpriseinternational.org/

Co-operatives UK

http://www.uk.coop/

The Co-operative Group

http://www.co-operative.coop/