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How to Kick Start a Social Enterprise

Learn about legal structures, compliance, financial sourcing, and operational strategies for effective social enterprises. Contact us for expert advice and insights.

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How to Kick Start a Social Enterprise

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  1. How to Kick Start a Social Enterprise Joanne O’Brien Carne Reidy Herd Lawyers Level 10, 193 North Quay Brisbane Qld 4000 P: 07 3236 2900 E:jobrien@crhlaw.com.au

  2. CONTEXT • Sourcing finance • Delivery of products & services • Marketing • Employees & Volunteers • Legal structure to support desired aims outcomes LEGAL COMPLIANCE

  3. WHAT IS SOCIAL ENTERPRISE? • NFP organisations were engaged in social enterprise long before it had a name • Economic and social factors have created an increased need • Reduced government funding • Increased focus on profit in the market • Growing field of academic study & research • Plethora of definitions

  4. WHAT IS SOCIAL ENTERPRISE? • A more creative capitalism that can adapt business and the market to better address unmet social needs. • Non-loss businesses with social objectives • Profit for purpose

  5. LEGAL STRUCTURE • What legal structure will you use? • Options: • Operate within your existing structure • Possible regardless of whether you are a company limited by guarantee or an association • Establish a separate business unit • Its own reporting lines • Establish a new separate legal entity

  6. IN HOUSE OPTION • Advantages • Minimal establishment costs • Utilises existing staffing & financial reporting frameworks • No changes at Board level • Surpluses become part of general revenue & can be utilised for core purposes

  7. IN HOUSE OPTION • Potential problems • Impact on charitable status • Impact on tax endorsements • Risk to core business

  8. CHARITABLE STATUS • Distinction between being a charity and being entitled to tax exemptions • ACNC determines charitable status • ATO determines entitlement to tax exemptions & concessions • But if an entity is not registered with ACNC as a charity, it is not entitled to ATO endorsement • Must maintain registration with ACNC

  9. MAINTAINING REGISTRATION • Entity must continue to: • Operate on a NFP basis; • Pursue charitable objectives; • Meet requirements of sub-type; • e.g. PBI • Report to the ACNC; • Keep records; and • Comply with governance standards

  10. CHARITABLE STATUS • Charities Act 2013 • Passed by both houses of Parliament on 27 June 2013 • Commences 01 January 2014 • Query impact of Federal election

  11. CHARITIES ACT 2013 • Statutory definition of Charity • Not for profit • All of its purposes are charitable purposes or • Purposes incidental or ancillary to & in furtherance or in aid of charitable purposes • No disqualifying purposes • Not an individual, political party or government entity

  12. CHARITIES ACT 2013 • Charitable purpose • Advancing health, education, social or public welfare, religion, culture • Promoting reconciliation, mutual respect & tolerance • Promoting or protecting human rights • Advancing the security or safety of Australians or the Australian public • Preventing or relieving the suffering of animals

  13. CHARITIES ACT 2013 • Charitable Purpose (cont’d) • Other purpose beneficial to the general public that may reasonably be regarded as analogous to or within the spirit of the above; • Promoting or opposing change to law, policy or practice in Australia or another country.

  14. CHARITIES ACT 2013 • Public Benefit • Satisfied by purposes directed to benefit the general public or a sufficient section of the general public • Tangible or intangible • The aim is that the benefit should be widely available and not directed to people closely connected with the entity e.g. founders, trustees, employees

  15. IMPACT ON REGISTRATION • Issues to consider: • Is the enterprise an activity undertaken in pursuit of the entity’s charitable purposes? • Does the entity’s Constitution need to be amended to allow for this activity? • If the enterprise does not fit within the charitable purposes as set out in the constitution then other structures will need to be considered

  16. UBIT • Unrelated Business Income Tax • Better Targetting of NFP Tax Concessions • Start delayed to 1 July 2014 • Response to the Word Investments Case • Profits generated from business activities must be directed to charitable purposes

  17. OUT HOUSE OPTION • Set up a new separate legal entity to operate the social enterprise • Alternatives: • Company limited by guarantee • Proprietary Limited company • Incorporated Association • Trust

  18. COMPANY ALTERNATIVES • Minimum requirements: • Public Company (Ltd) • 3 Directors • 1 Member & that can be a corporate member • Private Company (Pty Ltd) • 1 Director • 1 Shareholder • Both can be NFP but that would negate the main advantage of a Pty Ltd company

  19. COMPANY ALTERNATIVES • The main distinction between the two company types in this context is the ability for a private company to distribute dividends • A company limited by guarantee can only use its income to further its objects • One of those objects can be “To contribute funds to XYZ Foundation/Ltd”

  20. COMPANY ALTERNATIVES • Issues: • Registration as a charity with ACNC? • Entitlement to tax concessions? • Who will be the Directors? • The whole Board of the parent; or • Sub-set of the parent Board; or • Individuals with particular skills + a representative of the parent Board

  21. COMPANY ALTERNATIVES • How those issues are resolved depends on: • The nature of the enterprise; and • Its dominate objective: • To generate funds; or • To provide social outcomes

  22. CASE STUDY 1 • Aged Care Provider Ltd • PBI • Operating a construction business • Building for itself & other Providers • Builder’s Licence required minimum asset ration that could not be met because of the accommodation bond liabilities • Large cash reserves

  23. CASE STUDY 1 • The Solution: • Amend Constitution to allow the entity to set up an enterprise • Register a Pty Ltd company • Issue shares equal to the cash injection required – minimum amount to secure BSA Licence • CEO became the sole Director

  24. CASE STUDY 2 • Endorsed environmental organisation • Incorporated Association • Aim was to reduce reliance on government funding • Used expertise to secure private contracts • Delayed establishing a separate entity until satisfied it would be successful • Costs associated with financial reporting became a burden

  25. CASE STUDY 2 • The Solution: • Amend Constitution to allow the entity to set up an enterprise • Register a Ltd company • Objectives included providing funds for the Association’s charitable fund • Association became sole member • Lent the capital built up in the parent to the new company

  26. CASE STUDY 2 • The Solution (cont’d): • Association continued to provide administration functions • Documented arrangements through loan agreement & service agreement

  27. Thank You Joanne O’Brien Carne Reidy Herd Lawyers Level 10, 193 North Quay Brisbane Qld 4000 P: 07 3236 2900 E:jobrien@crhlaw.com.au

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