A social enterprise is an organisation that trades for social or environmental purposes. That is, the social enterprise’s main aim is to generate profit to further their social and environmental goals.
Social enterprises can be either non for profit, for profit or a hybrid of both. For example, with the pending introduction of NDIS many traditional not for profit disability provider organisations have added a commercial revenue stream. As another example, for profits have added a charity or service program.
When you set up a social enterprise (whether that be setting up a social enterprise or adding a social enterprise to an existing organisation), it is important that you choose an appropriate legal structure for your organisations needs.
Choosing a Legal Structure
The legal structure that you choose when setting up a social enterprise will affect, amongst other things, the way you hold meetings, the minimum number of members, reporting requirements, tax obligations and costs. It is important to understand the statutory requriements that go with the structure that you choose.
An overview of legal structures commonly used by social enterprises is provided below.
Should you incorporate?
For many social enterprises they originate from a group of people who agree to act together as an unincorporated organisation. The advantage of being an informal group there are few legal responsibilities. There is no statutory requirements on they way the group is organised nor does the group have to follow any particular procedures. At its simplest, the group has the obligation to act as a trustee for the association’s purposes.
The disadvantage is that if anything goes wrong, for example, if someone falls over and injures themselves and sues – it’s possible that as the lessee and as a committee member you may be held personally liable. In that case if the association does not have enough money to cover the payout you may have to pay for it yourself. If you stop being a member of the organisation but your name is still on the contracts there may be difficulties transferring your responsibilities.
To overcome these disadvantages, the unincorporated organisation may decide to incorporate. ‘Incorporation’ is the system of Federal and State Governments to register an organisation as a distinct legal entity.
Not for profit or for profit?
The legal structure you choose, whether not for profit or for profit, or a hybrid will affect:
Not for profit legal structures
Example: An incorporated association set up to improve the lives of intellectually disabled young people. The incorporated association is endorsed as a deductible gift recipient, receiving its start up funding from donations. It establishes a coffee shop social enterprise, set to employ intellectually disabled young people, which makes a profit that are reinvested into the incorporated association. This structure is a not for profit social enterprise because all of its profits are reinvested to further the social purposes.
An incorporated association is a legal entity distinct from its individual members that can operate in the State/Territory in which it is registered.
Incorporated associations are incorporated under the relevant State-based incorporated associations legislation and are regulated by the relevant State-based authority.
Suitable for: locally-focused groups with limited capacity to meet reporting obligations and limited funds and resources
Not suitable for: groups with fewer members than prescribed by the relevant State-based associations law or for wholly owned subsidiaries of parent organisations.
Companies limited by guarantee
A company limited by guarantee is a legal entity distinct from its individual members that can operate anywhere in Australia.
In a company limited by guarantee, the members of the company have limited liability. The members agree in writing (‘guarantee’) to pay a nominal amount (usually $10-$100) to the property of the company. If the company is wound up, the liability of the members is limited to the nominal amount that they have guaranteed.
Some of the benefits of this structure include:
it is facilitative of not-for-profit status
as a public company it has the extra scrutiny, transparency and accountability that is required of such companies, giving it a level of credibility and independence that will give confidence to funders and members alike
it can be established as a ‘special purpose’ company
it is a straight forward structure familiar to organisations wish to provide funding or be involved
it provides operational flexibility
the liability of members is limited to a fixed amount, being the sum of the guarantee
it allows for perpetual succession
the company has capacity to enter into and enforce contracts
the company has the capacity to sue and be sued
it has all the benefits of corporate status
the activities of the organisation may be carried out throughout Australia
Companies limited by guarantee are incorporated under the Corporations Act 2001 (Cth) and are regulated by the Australian Securities and Investments Commission.
NOTE: for companies limited by guarantee registered as charities they will also be regulated by the Australian Charities and Not for profit Commission (ACNC). For further information on charities please see our NFP Resources – charities page.
Suitable for: groups wanting to operate nationally, charities registered with the ACNC, wholly owned subsidiaries of parent organisations
Not suitable for: groups with limited capacity to meet reporting obligations and limited funds and resources.
The structure of an indigenous corporations is similar to a company limited by guarantee. Indigenous corporations can, but do not have to be not for profit. However, if an indigenous corporation is a not for profit it must have a rule book which prevents surpluses or profits from being distributed to its individual members.
The benefits of registering as an Indigenous corporation include:
the members can choose, when they register the corporation, not to be liable for the debts of the corporation;
the rule book that governs how the corporation is run can take into account Aboriginal or Torres Strait Islander customs and traditions;
operate nationally—they are not limited to the state or territory in which they are registered;
it is free to register as an Aboriginal and Torres Strait Islander corporation
in some cases corporations may be exempted from annual reports;
profits of the corporation can be distributed to members if the rule book allows for this; and
access client assistance, support, and information and training programs, offered by ORIC.
Indigenous corporations are incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) and are regulated by the Office of the Registrar of Indigenous Corporations (ORIC).
Suitable for: Aboriginal and Torres Strait Island groups or corporations holding or managing native title
Not suitable for: non- Aboriginal and Torres Strait Island groups or Aboriginal and Torres Strait Island groups that prefer to be regulated by a State regulator or ASIC.
A co-operative is a form of social enterprise which is member-owned. A co-operative must have at least five members. The fact that they are member-owned means that co-operatives allow for a more democratic style of work, pooling of resources to be more competitive, and sharing of skills. Co-operatives supply goods and services to their members or to the general public.
Cooperatives are regulated by the relevant state or territory office of fair trading or consumer affairs. A non-trading cooperative does not give returns to members, and may or may not have share capital, whereas, a trading cooperative has a share capital and gives returns to its members.
Some of the benefits of this structure include:
all shareholders have an equal vote at general meetings regardless of their shareholding or involvement in the cooperative
Shareholders, directors, managers and employees have no responsibility for debts of the cooperative unless those debts are caused recklessly, negligently or fraudulently
members, other than directors, can be under 18
a cooperative is member owned and controlled, rather than controlled by investors
all members and shareholders have to be active in the cooperative.
Suitable for: groups providing services to its members
Not suitable for: larger organisations or organisations wanting to have non-voting members
There are other structures available, for example charitable trusts, public ancillary funds, and private ancillary funds however these are not organisations.
If you need any further assistance, we can provide advice on which structure is most appropriate for you.
For profit legal structures
There are five different business structures.
A person may carry on business in Australia as a sole trader, a partnership, a joint venture, a trust or a company.
Sole trader / sole proprietorship
An individual may carry on a business on his or her own behalf as a sole trader, also commonly called a sole proprietorship. A sole trader is relatively simple to establish; there is no separate legal entity other than the individual. A sole trader is therefore personally liable for all obligations incurred in the course of the business and income from the business is taxed at the personal rate of the sole trader.
Unlike other business structures, there is no specific legislation regulating sole traders, however they may be liable to comply with other legislation specific to their business.
Two or more individuals or companies may carry on a business as a partnership. Partnerships (other than certain professional partnerships) are limited in size to 20 partners. Most partnerships are established by a partnership agreement, which defines the rights and obligations of the partners between themselves, subject to applicable legislation. A partnership is not a separate legal entity and, as such, the assets of the partnership are owned by the partners jointly or in such proportions as set out in the partnership agreement.
Partners share profits and are jointly and separately severally liable for the obligations of the partnership. However, in some Australian States, a limited partnership may be established under which some (but not all) partners have liability limited to the extent of their capital contribution. However, limited liability partners must take no part in the management of the partnership.
Partnerships are largely governed by Australian State laws, common law and contract law.
Two or more individuals or companies may also carry on a business as a joint venture. A joint venture describes the relationship between multiple parties entering into an agreement to work towards the same strategic goals while remaining separate entities. A joint venture differs from a partnership in that it is often formed for a particular project or business goal, or where the contributions of the venturers are different in type, amount or timing. Joint ventures usually have a defined end. Joint ventures may be incorporated (as a separate legal entity) or unincorporated (a purely contractual arrangement). The rights and liabilities of the respective venturers will depend upon the terms of the joint venture. Joint ventures are governed by the common law, contract law and, in the case of incorporated joint ventures, the Corporations Act.
A business may be carried on by a trust. The trustee owns the trust property and carries on the business on behalf of the beneficiaries of the trust. The trustee will be liable for the obligations of the trust, but will typically have rights of recourse against the trust property in respect of those obligations. The rights of beneficiaries will depend upon the terms of trust. The beneficiaries’ entitlements may be in a fixed proportion or variable at the discretion of the trustee. Trusts are governed by common law and contract law.
Proprietary limited company
A business may be conducted through a proprietary limited company. A company is a separate legal entity capable of holding assets in its own name and is liable for its own obligations. The two main types of company in Australia are proprietary and public companies (discussed above). A proprietary company is limited to 50 non-employee shareholders and cannot engage in fundraising activities in Australia. A proprietary company can, however, be simpler and cheaper to administer from an Australian regulatory point of view. Companies are governed by the corporations law.
Example of a hybrid structure: A local for profit business (proprietary limited company) has decided that it wants to get more involved in assisting animals in need. The directors of the company have decided they want to set up a social enterprise to offer marketing and business expertise to small animal welfare associations to generate more funding. The company wants the enterprise to be separate from its other business because they are not expected to make any profit and the directors want to be sure the social enterprise is able to be set up as a charity and receive the benefits of charity registration. Because the bank is a for profit company, the social enterprise became part of a hybrid structure.
Establishing your Social Enterprise
Once you have decided on the appropriate legal structure, then you can now establish your social enterprise. There are three main steps:
register (or incorporate) – the process is different for each type of legal structure and is determined by the requirements of the relevant legislation;
apply for an Australian Business Number (ABN) – this is a unique number which identifies your not for profit organisation to the Australian Taxation Office and other government department and agencies. It is not compulsory unless the organisation has has a goods and services tax turnover of $150,000 or more. However, if your social enterprise wishes to register as a charity with the ACNC or register a business name, it must have an ABN;
register a business name – you will only need to register your business name with ASIC if it is not your organisations name;
The following checklists can assist in establishing your social enterprise: