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Social Enterprises in the UK are struggling
But one under-reported sector is suffering just as much as the bigger names, and possibly more because of their unique structure and mission. 

We’re talking about Social Enterprises - community run businesses that operate to provide services and social good rather than express and extensive profits.  

There are currently over 100,000 of these operating all over the UK and collectively employ more than two million people, so these are not a niche branch of the economy - they are fundamental to the communities and groups they serve. 

Many have been caught in a Covid-19 crunch situation themselves as demand for their services such as helping newly-unemployed people, recently released prisoners, the disabled and SEND groups and senior citizens has exploded. 

But their own funding options and financial support have been narrowed, delayed or in some cases even stopped altogether as sponsors have closed and personal donations have dried up. 

Loophole in the system

They’ve also found themselves in an unfortunate loophole in the government’s Coronavirus support systems with one example being access to the Bounce Back Loan (BBL) scheme.

While designed to help viable businesses cope with temporary income drops caused by the pandemic and lockdown, several social enterprises have been unable to access the scheme because the ethical banks they tend to use are not accredited and therefore cannot lend funds under the scheme.

It would be difficult for them to open new accounts with accredited banks and meet the criteria quickly so instead of being able to access funds of up to £50,000, some are not being able to get any help at all. 

Others have turned to other forms of funding such as Coronavirus Business Interruption Loans (CBILs) but these come with a higher interest rate and involve borrowing a higher amount.

While there have been other sources of funding made available for Social Enterprises such as the Resilience and Recovery Loan Fund worth £29 million and the Social Enterprise Support Fund worth £19 million - they have proved insufficient to meet demand. 

Social Enterprise UK, the representative membership body for social enterprises, estimates that one in 50 have permanently closed during the pandemic. 

Andrew O’Brien, director of external affairs at Social Enterprise UK, said: “A lot of social enterprises are desperate to get back to helping people and they are not going to be able to do that if they can’t get access to the financing they need.”

What are social enterprises?

Social Enterprises are constructed differently from other businesses in several ways but the most significant difference is that they will be a Limited By Guarantee (LBG) company. 

An LBG company will most likely be a non-profit organisation along the lines of a social club, a sports club, housing tenants association or a student union. 

Depending on their function, some decide to become a Community Interest Company (CIC) instead which prevents any profits from being extracted and instead see them being reinvested in the cause that the company promotes and supports. 

Another big difference is that while LBG and CIC companies don’t have shareholders, they do have members who will act as guarantors if the event that the company is wound up.

Board members of CICs are allowed to be remunerated for their work but this must be done through staff payroll and cannot be through paid dividends. 

Sadly, like any other business, LBGs and CICs can face winding-up and liquidation if they’re unable to pay their debts as and when they fall due.

The process of winding up an LBG or CIC can be slightly more complicated for several reasons including when it comes to holding the essential meetings required to wind up the organisation. 

This is just one more area where we give our professional, specialist help.

If you’re a social business caught between trying to help your primary audiences and make ends meet then you should get in touch with us

We can arrange a free virtual initial consultation with one of our expert advisors to talk through your options. 

Whether you’re working hard to keep the lights on and want some extra ideas or if you’ve already made the decision to close your doors and need to close with a minimum of fuss and stress - we’ll be able to help the helpers.

Companies limited by guarantee (LBG) are often non-profit organisations. Therefore, they are often converted to be a community interest company (CIC) to prevent extraction of profits. Whilst a limited by guarantee company does not have shareholders, it still has members who will act as guarantors upon winding up. We will come to the implications on this later in the article. Unless the incorporation documents state otherwise, all members will have an equal vote on any resolutions. With shareholders, this would be based on their holding.
The limited by guarantee structure is almost unique to the UK. Only Australia has a similar structure for companies. Examples of types of business which use the limited by guarantee structure are:

Limited by guarantee

What is a community interest company?

Community interest companies were only introduced in the UK in 2005 as a way to demonstrate the company’s intention to act for the benefit of the community. The model was quickly adopted with over 10,000 companies registered in this fashion between 2005 - 2015. A community interest company is not a charity, but still has a business aim in the public good. The community interest company status ensures that all profits are reinvested in improvement of the cause behind the company.
To qualify as a community interest company, the following criteria must be met, which will be examined by companies house. They cannot:

Compared to charities, board members of community interest companies can be remunerated for their service. However, this must be done through the payroll, and dividends cannot be paid. Upon voluntary winding up, the liquidator will be required to examine any payments paid to the board to ensure they have been made appropriately.

Winding up a limited by guarantee company

As with companies limited by shareholding, limited by guarantee companies may face voluntary liquidation if they are unable to pay their debts as they fall due. The likely reasons for CICs and LBGs to become insolvent are:

Whilst there are significant difference within the structure of the companies, voluntary winding up of an LBG or CIC is a very similar process to a company with a shareholding. A meeting of the members is arranged with the relevant notice to pass a resolution that the company be wound up voluntarily. One of the big differences, particularly with social clubs, is there are often a lot more members in limited by guarantee companies. Often voluntary liquidation meetings are called at short notice, with the consent of 90% of members. However, it is practically much more difficult to do this when there may be in excess of 100 members.
All members have an equal vote, unless stipulated otherwise. Similarly, 75% of members, in attendance at the meeting, voting in favour of the winding up resolution is required. Once the members resolutions have been passed, the liquidation process is very much the same. The procedure moves on to a decision process by creditors to establish the conduct of the liquidation moving forward.

What are the implications for members of a limited by guarantee company?

As stated in its names, members of an LBG company provide a guarantee instead of paying for a shareholding. This is treated effectively the same as uncalled share capital, payable upon liquidation of a company towards the assets. The upside to this is the guarantee will generally be a fairly nominal amount, usually between £1 - £10. Once a company is liquidated, the liquidator will look to recover from the members any ‘guaranteed’ amount.
If you are managing a limited by guarantee company or community interest company, coming to the end of its natural life, or facing cash flow difficulties, our business rescue experts can provide advice of the next steps.
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Business Rescue Expert is part of Robson Scott Associates Limited, a limited company registered in England and Wales No. 05331812, a leading independent insolvency practice, specialising in business rescue advice. The company holds professional indemnity insurance and complies with the EU Services Directive. Christopher Horner (IP no 16150) is licenced by the Insolvency Practitioners Association

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