Legal form is a bit of an old chestnut when it comes to setting up a new business and you have to try and decide what is a suitable corporate form or organisation for your new business.
You might think you have boxed and packaged the decision-making process on this neatly but, when you get it out and try and use it, it never seems to perfectly fit. There is always a bit of movement or room which suggests that another size or model might be more appropriate and therefore you start looking at other things on the market. Even if you have made a purchase some-time before, after a further period of time you begin questioning your original decision, weighing up the pros and cons again of different structures and whether, for example, if you switched the very nature of your organisation it would give you some competitive advantage or business benefit that you will not have had before. There is no doubt this is a frustrating issue for many when all you want is your pesky lawyers to get on with things.
One of the brain-jamming tools that affects our mentality on this issue is the fixation we have with tables of pros and cons; the advantages and disadvantages of different legal forms. The thought process is that if we have prepared one of those, or someone else has, then we should be there. Well, no, you should not be there. These tables are good in that they enable you to see different facets of the different structures, but they do not make the decision for you. You need to get under the skin of the table to do that. You need to get under the skin of your business to do that. You need to get into the very heart of your business to do that.
What kind of business do you intend to run? How will you run it? Will you be looking for lots of different contracts and tenderin? Will you need to be flexible and quick on your feet, be decisive and be able to make decisions quickly? Is a lighter regulatory system very important to you or does that not matter too much? Are the people involved used to some organisational forms rather than others? It’s “a vision thing”. Just as The Sisters of Mercy sang. In relation to your governance, who will be directors and will you want to pay them ? Who will your members be and how will their interests and the interests of stakeholders be represented to and heard by the Board ? You need to be able to vision and understand all these issues before you can expect a table of pros and cons to sort it out for you. There is no one right answer out there, but you are sure to get the wrong answer if you do not apply your understanding of your business to the question.
Lawyers are known to sit on the fence. On the one hand this and on the other that. A table of pros and cons is potentially a lawyer’s heaven - or hell. Heaven if the lawyer does the table and just hands it over to the client. And hell if the lawyer has to do something sensible with it. But it does not need to be if you and the lawyer understand the business. If the lawyer understands the business then the table of pros and cons can be used to stress test the ultimate recommendation. You should expect a recommendation from the professionals if the wider perspective is understood. If you do not understand the way your business is going to go because, for example, you are just in the process of putting together your business plan and do not know everything, then simple. Do not make your decision on organisational form yet. Delay it until you know enough. No writing about organisational form can be left without saying “function before form”, but it is not always understood why indeed we say that.
In times of austerity when money is tight then peoples’ minds are naturally focussed on saving money, this can include paying less tax. Charities have specific tax advantages compared with non-charitable social enterprises in the form, say, of Community Interest Companies and so I can understand at the moment why some CICs might be wanting to look at a change to a charitable form. However be careful of letting just the tax-tail wag the dog and do not forget about all those other characteristics of the business and would some of those be lost if you switched from a CIC to a charitable form. For example, a vital aspect of charitable organisations is that normally directors are not paid. How would that fit with your governance requirements and your desire to align governance so that the business was at its most effective and efficient, with the officers incentivised to do the very best job? With a charity you might have paid executives underneath the trustees as it were, but is that the best way to run your particular business? It might be of course but these are the things you need to probe. Just because you are a CIC it does not mean to say you should not be tax planning either. One issue here is the possibility of setting up a charitable subsidiary to enable it to receive gift aid from the CIC and we will look at some of these issues in more detail another time.
So, understand the business first and understand how you want to develop your governance within the organisation and only then start thinking about form. The right form should enhance the business and harness its “power and glory”. It’s not all about saving the most tax. Perhaps it’s more about feeling good as an organisation, having confidence, being able to do all those things you want to do with passion, being able to improvise, respond, and really getting out there and shaping events.
Chris Brophy, partner, Capsticks
Read Chris Brophy’s blogs at LGCplus.com/SocialEnterprise