how to kick start a social enterprise joanne o’brien carne reidy herd lawyers level 10, 193 north...

How to Kick Start a Social Enterprise

Joanne O’BrienCarne Reidy Herd LawyersLevel 10, 193 North QuayBrisbane Qld 4000

P: 07 3236 2900E:jobrien@crhlaw.com.au

Carne | Reidy | Herd

CONTEXT

• Sourcing finance• Delivery of products & services• Marketing• Employees & Volunteers• Legal structure to support desired aims

outcomesLEGAL COMPLIANCE

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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

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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

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LEGAL STRUCTURE

• What legal structure will you use?• Options:

– Operate within your existing structurePossible regardless of whether you are a company

limited by guarantee or an associationEstablish a separate business unitIts own reporting lines

– Establish a new separate legal entity

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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

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IN HOUSE OPTION

• Potential problems– Impact on charitable status– Impact on tax endorsements – Risk to core business

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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

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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

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CHARITABLE STATUS

• Charities Act 2013• Passed by both houses of Parliament on 27

June 2013• Commences 01 January 2014• Query impact of Federal election

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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

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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

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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.

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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

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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

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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

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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

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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

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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”

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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

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COMPANY ALTERNATIVES

• How those issues are resolved depends on:– The nature of the enterprise; and– Its dominate objective:

To generate funds; orTo provide social outcomes

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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

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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

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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

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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

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CASE STUDY 2

• The Solution (cont’d):– Association continued to provide

administration functions– Documented arrangements through loan

agreement & service agreement

Thank YouJoanne O’BrienCarne Reidy Herd LawyersLevel 10, 193 North QuayBrisbane Qld 4000

P: 07 3236 2900E:jobrien@crhlaw.com.au