Choosing the best legal structure if you want to create positive change in the world

I have included both answers at the end of the blog for you to read. The difference in emphasis is fascinating, particularly the AI's assumption that legal structures are primarily business-oriented rather than focused on doing good.

I am writing this blog because of a recent discussion with someone who wanted to set up a CIC. Until recently, my default setting for someone wanting to create positive change but with a clear income generation strategy would have been social enterprise for a variety of reasons, including:

• Registering as a CIC is easier and quicker than applying to be a CIO - still true.
• You can be in control of strategy and be a director/trustee and get paid, which you can't in a CIO - no longer valid - you can now be employed and on board of a CIO now subject to some restrictions (see below)
• Less reporting as a CIC - not so sure now CIO reporting is now relatively easy if you are small, under £250k, you do not need an audit

Why charities have always been attractive

Generally, I would also mention the advantages of being a charity over a CIC, including:

Gift Aid: Charities can claim back tax on donations through Gift Aid, increasing the value of donations by 25% if the donor is a UK taxpayer. CICS can't.

Tax Exemptions: Charities are generally exempt from paying income tax, corporation tax, and capital gains tax on most types of income, provided the income is used for charitable purposes. CICs must pay corporation tax on their profits, like any other company.

Business Rates Relief: Charities can receive up to 80% relief on business rates for properties used for charitable purposes. CICs do not automatically qualify for relief from business rates, although they may apply for discretionary relief from local authorities.

VAT Relief: Charities may be eligible for VAT relief on certain goods and services.

Funding: Charities can access certain types of funding, such as grants and public funding, that may not be available to CICs.

Awareness and Trust: Charities have a long history, dating back over a thousand years. The earliest known almshouse in the UK is the Hospital of St. Oswald in Worcester, founded around 990 AD, and it still exists today. Almshouses are charitable institutions originally established to provide shelter and care for the poor, sick, and elderly. Although it has not been continuously operational, King's School Canterbury—a charity founded by St. Augustine in 597—is still active today.

The legal framework for charities began to take shape with the Statute of Charitable Uses in 1601, introduced by Elizabeth I. This law aimed to make charitable trusts more accountable and outlined examples of what would be considered legitimate charitable purposes. This framework became the foundation for UK charity law, which has also influenced charity law in many other countries, including the US. Significant changes to this framework occurred in 1888, and the Charities Act of 2011 continues to be influenced by it. In summary, charities are well known and understood due to their long-established history.

In contrast, Community Interest Companies (CICs) were introduced in the UK in 2005 under Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004. CICs provide a legal structure for social enterprises that aim to use their profits and assets for the public good. At just 20 years old, they are still relatively new, with over 30,000 registered and 650 more added just last month in January 2025. In comparison, there are more than 170,000 charities, which have nearly a million trustees, 6.7 million volunteers, and a gross income exceeding £100 billion.

People understand charities but many people have never heard of CICs.

CIC or Charity - some things have changed

On top of the issues considered above the financial and governance issues have changed and now I think for many there is a strong argument that charitable status may help you to do more good particularly because of the finanicial benefits, and reduced downsides.

Employment costs

The person who came to me about wanting to set up a CIC wants to work with schools and to grow and hire staff so the changes in the budget (see my blog for full detail) mean suddenly a CIC structure for an organisation looking to earn money potentially funded/contracting with the government or local authority has significant financial impact for a small growing organisation so I had to recommend to think about being a charity despite the focus on income generation. In brief, in the budget, Employers' NI payments increased to 15% from this April on wages above £5,000; however, for small organisations, this was offset by changes in Employment Allowance. It has been increased from £5,000 to £10,500 for all employers – with the £100,000 limit above which the Employment Allowance would no longer be available for an employer being removed. This change may bring the smallest employers out of the requirement to pay National Insurance despite the increases. However, you cannot claim if you're a public body or business doing more than half your work in the public sector (such as local councils and NHS services) - unless you're a charity.

Getting paid as a trustee

Over the years, I have talked to hundreds of people who have thought about founding a charity but wanted to also work in it and needed to get paid. Choosing to set up a charity always meant that they could not be a trustee, and so had to trust their idea to other people for the strategy and governance or not become a charity. However since the Charities Act 2022 trustees can now be paid and even employed provided the governing document allows for payment, there is a written agreement specifying the exact or maximum amount to be paid and the number of trustees receiving any payment or benefit is in the minority. (see here for the government guidance)

Payment for Services: "A trustee may receive reasonable payment for services provided to the charity, provided that the payment is in the best interests of the charity and is authorised by the trustees who are not receiving the payment."

Reimbursement of Expenses: "Trustees are entitled to be reimbursed for reasonable out-of-pocket expenses incurred in the course of their duties."

Conflict of Interest: "Any trustee receiving payment must not be involved in the decision-making process regarding their own payment."

Written Agreement: "There must be a written agreement specifying the exact or maximum amount to be paid for the services provided."

Majority of Unpaid Trustees: "The number of trustees receiving payment must be in the minority compared to those who are unpaid."

Why reviewing your legal structure might be a good idea

I have for a long time used the analogy that a legal structure is a just a vehicle to get you to your vision or goal along the route you choose.

If your destination changes or the route has problems then the vehicle might need to change, trade that old car in for a new one or get the train. But just putting the car on the train and not really changing and taking advantage of the new structure is not the solution.

The NI change is like a pothole which will be a problem for a small car with small wheels like mine but for a larger organisation it is not significant enough on its own to force a change.

However each year it is important to consider all the potential 'potholes' usually in a risk register and review if your structure is a benefit or a handicap and might need to change.

Of course you can have a dual structure a CIC and charity and I have worked with several organisations set up like this.

Want to read more

The three ways to grow your organisation

When you grow up do you want to be a business, a social enterprise or a charity?

Want a change? Should you become a charity or social enterprise?

THE AI RESPONSES

What AI suggested in answer to "Choosing the best legal structure if you want to create positive change in the world"

When you're aiming to create positive change in the world, it's important to choose a legal structure that aligns with your mission and values. Here are some options you might consider:

Legal Structures for Social Enterprises

1. Nonprofit Organization (NPO) / Charity:
   • Mission-Driven: Primarily focused on social, educational, or charitable goals.
   • Tax-Exempt Status: May qualify for tax-exempt status, allowing donors to make tax-deductible contributions.
   • Grants and Donations: Can receive funding from grants, donations, and sponsorships.
2. Benefit Corporation (B Corp):
   • Hybrid Model: Combines the benefits of a traditional corporation with a commitment to social and environmental goals.
   • Legal Accountability: Legally required to consider the impact of decisions on employees, community, and the environment.
   • Transparency: Must publish an annual benefit report assessing social and environmental performance.
3. Community Interest Company (CIC) (Specific to the UK):
   • Social Mission: Established specifically to benefit the community.
   • Asset Lock: Assets and profits are used for the public good, with limitations on profit distribution to shareholders.
   • Regulation: Subject to oversight by the regulator to ensure adherence to community interest objectives.
4. Social Enterprise:
   • Business with a Purpose: Operates as a for-profit business but prioritises social, environmental, and community goals.
   • Reinvestment: Profits are often reinvested to further social objectives.
5. Cooperative (Co-op):
   • Member-Owned: Owned and operated by members who use its services.
   • Democratic Control: Members have a say in decision-making, often one member, one vote.
   • Shared Profits: Profits are distributed among members or reinvested in the cooperative.

Key Considerations

1. Mission Alignment:
   • Ensure the legal structure supports and enhances your mission and values.
2. Funding Sources:
   • Consider how the structure will impact your ability to attract funding (e.g., donations, grants, investments).
3. Liability Protection:
   • Assess the level of personal liability protection you require.
4. Governance and Control:
   • Determine how you want the organisation to be governed and who will have decision-making authority.
5. Tax Implications:
   • Evaluate the tax benefits and obligations associated with each structure.
6. Flexibility and Scalability:
   • Consider how easy it will be to adapt and grow the organisation within the chosen structure.

AI's answer to "what are the issues you need to consider when choosing a legal structure?"

When choosing a legal structure for your business, there are several important issues to consider. Here's a checklist to help guide your decision:

Legal Structure Checklist

1. Liability:
   • Personal Liability: Determine if you want to be personally liable for the business's debts and obligations.
   • Limited Liability: Consider structures like Limited Liability Companies (LLCs) or Corporations that offer protection from personal liability.
2. Taxes:
   • Tax Rates: Different structures have different tax implications (e.g., sole proprietorships vs. corporations).
   • Double Taxation: Be aware of the potential for double taxation in certain structures, like C Corporations.
   • Pass-Through Taxation: Structures like S Corporations and LLCs may allow profits and losses to pass through to your personal tax return.
3. Control:
   • Decision-Making Authority: Decide how much control you want over the business.
   • Board of Directors: Understand the requirement for a board of directors in structures like corporations.
4. Cost and Complexity:
   • Formation Costs: Consider the costs involved in forming and maintaining the legal structure.
   • Regulatory Requirements: Be aware of the ongoing regulatory requirements and paperwork.
5. Fundraising:
   • Access to Capital: Certain structures may make it easier to raise capital from investors (e.g., corporations can issue stock).
   • Venture Capital: Some investors may prefer specific legal structures.
6. Future Needs:
   • Growth Plans: Think about how easy it will be to expand or change the business structure as the business grows.
   • Exit Strategy: Consider your long-term goals and how the legal structure impacts your ability to sell the business or transfer ownership.
7. Location and Jurisdiction:
   • State and Local Laws: Different regions may have different laws and regulations impacting your choice.
   • International Considerations: If operating internationally, consider the legal implications in different countries.
8. Industry-Specific Issues:
   • Regulatory Environment: Certain industries have specific legal requirements that may influence your choice.

Common Legal Structures

1. Sole Proprietorship:
   • Simple and inexpensive to establish.
   • The owner has complete control.
   • Personal liability for business debts.
2. Partnership:
   • General Partnership (GP): Shared control and liability among partners.
   • Limited Partnership (LP): Includes both general and limited partners (limited liability for limited partners).
3. Limited Liability Company (LLC):
   • Combines limited liability with pass-through taxation.
   • Flexible management structure.
4. Corporation:
   • C Corporation: Offers limited liability, but subject to double taxation.
   • S Corporation: Limited liability with pass-through taxation, subject to eligibility requirements.
5. Cooperative:
   • Owned and operated by a group of individuals for their mutual benefit.
   • Members share in profits and decision-making.