Social enterprise is an increasingly popular way to achieve social good. Social enterprises and charities are not necessarily the same thing. Many social enterprises have worthy goals, such as social wellbeing or environmental sustainability. However, Charities Services can only register an organisation when:
- it has exclusively charitable purposes
- its activities advance its exclusively charitable purposes
- it is for the public benefit, and
- it is not carried on for the private benefit of any individual or group.
The legal definition of ‘charitable purpose’ is quite different to what may be commonly understood. To learn more about ‘charitable purpose’ and its legal definition refer to our information about ‘Charitable purpose’.
Social enterprises can take many different forms. What they have in common is that they combine a desire to achieve social good with commercial methods.
When a social enterprise provides a private benefit or profit, this will usually prevent it from becoming a registered charity. Another common problem that may prevent an organisation becoming a registered charity is when the wording of its purposes is too broad.
To meet the requirements for registration under the Charities Act, a charity must provide benefits to the public, and not to private individuals or groups.
A registered charity can carry out profit-making activities, as long as all of the profits created are used to further charitable purposes and are not used to further the private financial interests of individuals (known as ‘private benefits’). When a profit is made, payments or dividends must not be distributed to shareholders, as this would create private benefit which is not considered ancillary or incidental. The only exception to this is when the shareholders are themselves registered charities or the shareholders hold the money on trust for a charitable purpose, which needs to be specified in the charity’s rules. Any profit created by a registered charity can only be used to further charitable purposes.
It is acceptable for a registered charity to make payments for goods or services, as long as these payments are reasonable and based on ‘arms-length market rates’.
Private profit clause
We recommend that all charities have a clause in their charity’s rules which prevent activities from being carried on for private pecuniary benefit or profit to an individual. In particular:
If an organisation is a trust, and it wants to be able to make reasonable payments or provide other benefits to its trustees, its trust deed must clearly show that this is allowed.
If an organisation is a company, it must have clauses in its rules that either prevent the distribution of dividends or payments to shareholders, or restrict current shareholders and the transfer and issue of shares to registered charities or trustees of a trust for charitable purposes.
Having a broad purpose that can be interpreted in a number of different ways can prevent registration, if the purpose could be interpreted in a way that is not charitable.