Guest blog: Judy Fu currently works for the Law Commission. She has an LLM from University of Cambridge an an LLB from the LSE.The idea of limited liability is a fundamental feature of a modern economy. Incorporating a limited company allows people with good ideas to create a separate entity for their business. This ensures that the individuals behind the company will not be held personally responsible for any debts or legal obligations owed by the business. As a result, people are able to take risks, and be ambitious.
This company law principle has been an instrumental building block to the growth of the private sector. In the UK, an entrepreneur can start a new company simply by submitting three forms to Companies House and paying a £20 fee. Our private sector is stronger, more diverse and more creative as a result.
There is no reason why the same arguments do not extend to communities and the third sector. Individuals with good ideas for how to help their community need to be able to take risks and benefit from protection. Yet, charities are notoriously difficult to set up. Firstly, the process of registering with the Charity Commission can be incredibly time-consuming. Next, the charity must navigate around stringent restrictions on trading and political activities throughout its life. Finally, in most circumstances, charities do not allow for board members to be paid. These problems constitute important deterrents for small enterprises.
This is why Community Interest Companies (CICs) are so important. In 2005, the UK made available a new corporate form which is designed for social enterprises that do not have charity status. Fundamentally CICs afford social entrepreneurs with the same protections as a normal company: members are afforded limited liability and directors can be remunerated (unlike a charity). Just as someone with a good idea for how to make money can easily set up a company, someone with a good idea for how to help his community should be able to set up a CIC. When a friend recently asked me to help incorporate his social enterprise, I expected it to be easy.
It was not. While there is nothing complicated about the structure of CICs from a company lawyer’s point of view, features like the CIC’s asset lock, quorum, references to the Companies Act, and formalities for board meetings are difficult to explain and understand. The documentation required for setting up a CIC is only slightly more complex than a normal company but without legal advice, it is difficult to imagine how a lay person with a good idea would navigate through the legal jargon.
My friend did approach a firm of solicitors; they had quoted him a fee of £2,000 to incorporate his social enterprise. While this might be a simple upfront investment for a profit-making business, it is not feasible for small social enterprises. There are many conclusions to be drawn here. Yes, legal advice should be cheaper, and legal documents designed to be used by nonlawyers should be written in plain English.
But a more fundamental policy decision is also at play. Just as business entrepreneurs are critical to the growth of a flourishing private sector, social entrepreneurs will be the drivers of a locally-led, thriving third sector in a Big Society. If the Government is committed to scaling back the state, empowering communities, and allowing small organisations to flourish, it should look seriously at improving life for both business and social entrepreneurs. There are a number of ways to do this, and promoting low-cost legal advice to social entrepreneurs is a good start. Fundamentally, it’s time to commit to giving people with good ideas the assistance they need so they can start making a difference.
