Read the transcript
Welcome to “Then One Day”, the podcast that explores the special moment when communities come together to transform the places in which they live. I’m Veronica Gordon. In the last episode, we headed to Brixton Windmill in South London to learn about its incredible transformation from being classified as an at-risk building to becoming a community hub, milling and supplying flour in lockdown.
Abigail Holsborough, Brixton Windmill
Welcome to Brixton Windmill. You can very faintly hear the machine from outside, and it gets a lot noisier as we go in.
In the episode, Jean Kerrigan, one of the key volunteers at the windmill, described how they’d recently decided to take on charity status and all of the admin that comes with that decision. I find that side of community businesses quite complicated, and I know it’s something some people might struggle with too. So, I called up Steve Buckley, who has worked in community businesses and social enterprises for the past 30 years. I asked him to give us a gentle introduction into the world of legal structures.
When someone sets up a community business, there’s a point at which they have to decide that they’re now a functioning entity and wanting to trade. At that point, they need at least a set of rules that describes their name, their address, who the members of the business are, and who the board or committee of it is that takes decisions on a day-to-day and week-to-week basis. And also, some arrangements as to what would happen if the business gets into difficulty and has to be closed down, and provisions for changing those rules.
So, all community businesses start off with a set of rules that defines their existence as a community business. When you get started as a community business, when you adopt your rules, you’ve got some things to think about. You need to think about whether it’s sufficient just to have a set of rules that you’ve agreed amongst yourselves informally, that, you know, might be one side of a page. It still would be sufficient for you to open a bank account and that’s called an unincorporated association. It’s like a club, an association, a collective. But provided you’ve got a set of rules, you can normally open a bank account in the name of your community business.
But for many community businesses, they will want to think about incorporation. An incorporation means getting a formal legal status, as recognised in law. There are various ways of getting incorporated and I talk a little bit more about that. But the decision itself to get incorporated is a pretty fundamental one. There are some reasons for doing so – it can give you limited liability for the people that are responsible for the business if things go wrong; makes it easier to enter into contracts and agreements. For example, if you wanted to take rent on a premises or you wanted to employ people. And, many grantmaking organisations prefer or require you to be a registered legal entity, an incorporated body of some sort. And so, it opens up grant opportunities that can help you get started, and also can help you keep going. So, it’s a significant decision that a community business takes, at some point in its life, to become incorporated.
Incorporating a community business, it’s a challenging thing. There are a number of different options. There are some really good websites that you can go to that can help you make your choice. Co-ops UK, for example, has a selector structure tool where you can kind of go through various stages, and then it’ll tell you what possible models might be available to you. So, you know, it’s worth exploring and getting some professional advice on it. It’s likely you will need to spend some money on it – possibly hundreds of pounds, possibly a couple of thousand pounds; it depends what route you go down. There are some very quick routes to incorporating. You can, you know, more or less register a company overnight, but it’s not necessarily the smartest thing to do. And I’ve come across quite a lot of community businesses that have kind of registered quickly and then realised that they’d registered with something that actually wasn’t very appropriate and then they wanted to kind of convert it into something else later. So, it’s definitely worth having a careful look at all of the options, including companies limited by guarantee that are registered under the Companies Act, community benefit societies that are registered under the Cooperative and Community Benefit Societies Act, and some other variations on those like Community Interest Companies, which is a type of company that has a statutory asset lock.
Charitable status is one of the things that community businesses should look at at the time that they’re incorporating or perhaps shortly afterwards. Most types of legal structure that community businesses adopt can also be converted into charities, either by registering a company with the Charities Commission, or by approaching HMRC with your proposal and request to be recognised as a charity after you’ve set up a Community Benefit Society. There are some advantages of being a charity, including not paying corporation tax, not paying stamp duty on the purchase of buildings, and being eligible for statutory rate relief. So, that’s quite significant for some organisations and really well worth having a close look at before you decide not to be a charity. On the other hand, if you become a charity, you are quite constrained in what you can do, because everything you do has to be charitable and there are a limited set of charitable objects, which are set out in law and are interpreted by the charity regulator, the Charities Commission. And if you stray from those objects, you may lose your charitable status. So, you have to be quite careful if you go down that route to make sure that either everything, you’re going to do is indeed charitable, or those bits that are not charitable are separated out into a separate trading company.
Successful community businesses often start small and grow. You know, their most important asset is the community support they have, the people involved and so on. It’s not the legal structure or the money; it’s about people. And you can get started without incorporating at all. As I said, you can adopt a set of rules on one side of A4 that says, “This is our name”; “This is our address”; “This is how you become a member”; “This is how we elect our board”; “This is what we will do if we run out of money and have to close the business down”; and “This is how we change our rules”. And that’s kind of all you need at the beginning. You can go along to a bank and say, “Look, these are our rules, can we have a bank account?” and you can get started. So, you know, you don’t need to get bogged down in all this complicated legal stuff. If you’re going to do something that is going to grow quite quickly or if you’re looking to scale up your community business into something that is going to take on perhaps a few staff, buy a building, enter into large grant contracts and so on, you know, then you do need to look at incorporation. But by the time you get to that point, you’ve probably raised some resources that can help you get the professional advice you need. So, you know, it’s important not to be intimidated by it all. It’s a bit complicated, but there are lots of books and manuals and experts out there that can help you get it done. And, you know, if you get it right at an early stage, it will stand you in good stead.
Thank you to Steve Buckley there. It certainly is a subject that we could talk about in great depth, but I hope this bonus episode has given you a helpful introduction. As Steve said, if you would like more guidance on legal structures, do get in touch with us or check out the handy resources available on our website, www.powertochange.org.uk. “Then One Day” is a Pixiu production and thanks to independent trust, Power to Change, who brought you this podcast. Join me in a couple of weeks’ time to learn about a Manchester-based sustainable clothing hub, who are taking on a global industry. Until then, I’m Veronica Gordon. Goodbye.