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Posted by Sarah Brown on 04 Mar '22

Ten potential reasons to set up a separate trading subsidiary

I have been encouraging charities to think more entrepreneurially for over 30 years. If you generate income rather than rely on grants or donations, you have control of your destiny.

You are not in the horrible situation of having to stop a brilliant project when the funding ends. But if you are going to start earning income, a separate legal entity can have benefits:

1 To ensure you comply with Charity law

You can find the full details of the Charity Commission's view on trading here here but they state

Charities may carry on trading activities which contribute directly to the furtherance of their charitable objects, or (where the purpose is to raise funds for the charity) which do not involve significant risk

Charity Commission

As a charity, you are required to pursue your mission by law, but while trading should generate income to help you fulfil your mission, how you do it may be unrelated to how you operate in the charity, your primary purpose. Then a subsidiary may be legally required or make sense from a tax point of view.

2 Saving Tax

As a charity if you undertake the trading within the charity primary purpose trading can be tax-free, but you may pay corporation tax on trading profits that you cannot reclaim. A separate trading subsidiary is liable to corporation tax in the same way as all other companies, except it can donate its profits to its parent charity. The profit must be Gift Aided to the charity within nine months of the company’s accounting period so, for example, a trading subsidiary with a 31 December year end must Gift Aid the profit by 30 September of the following year. The charity will not pay tax on these profits as long as it uses the money for its charitable purposes. NB, the subsidiary, needs to keep enough money to stay viable.

3 Organisational accountability

If you start trading as a charity, it may impact or appear to affect the resources available for your charitable work. Donors and volunteers may feel you are straying away from the reason that they support you. A trading arm removes that confusion.

4 Reduced confusion in planning and goals

A charity should plan for and measure how it changes the world. A trading arm can focus on how it will maximise its earnings to give more to the charity. Staff don't get confused about what they are employed to achieve.

5 Allocation of resources

Setting up a successful commercial can divert critical resources from a charity's main activities at a management and operational level. A clear split between the organisations reduces this tension.

6 The right people in the right jobs

A trading subsidiary allows a charity to create commercial roles and recruit people with appropriate skills, such as sales staff. Similarly, you can look for non-executive directors of the trading arm who have commercial skills.

A separate training arm also means you can pay for the skills you need. A commercial subsidiary allows a charity to pay bonuses and commission, which would not be appropriate in a charity.

7 Risk and liability

Not all business ventures succeed. By separating the trading arm, you minimise the risks to the charity, particularly in terms of its assets.

8 Attracting investment and funding

A trading arm with a separate legal identity and business plan is easier to explain to a social investor. It also indicates that the charity's commercial activity is being taken seriously and provides a clear audit trail for both the charity and the subsidiary.

As a charity, you can also invest in your commercial subsidiary, provided the charity trustees ensure they are acting in the interests of the charity.

For example, with a loan, that there are terms and conditions showing how the company will pay the charity back. Such terms should include a rate of interest and the date when repayment is due.

Considering how low rates on investments have been this could be a good use of a charity's reserves.

9 The potential for joint ventures

A separate legal entity such as a CIC can have different shareholders. For example, you could partner with a commercial organisation to improve the chances of success.

10 Clearer branding and promotional opportunities

Depending on the income-generating activity, the charity brand may not be appropriate, or it can be part of a commercial name, e.g. Oxfam trading.

A separate trading arm is different from the charity and can be differentiated in marketing. People searching for help from the charity do not end up on a website trying to sell to them.

Conclusion

If you are doing some trading or thinking about it, I would recommend considering a trading subsidiary company. It can be a company limited by shares, a company limited by guarantee or a Community Interest Company, limited by shares or by guarantee.

Find out more read

Starting on the journey to income generation

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