Should your social venture be set up as a shareholder owned company?

Incorporating a social venture as a company limited by shares can enable sustainable growth but can also increase the risk of mission drift, according to a new report released by UnLtd today. 

The Pushing Boundaries report looks at social entrepreneurs’ motivations for setting up their ventures as companies limited by shares (CLS) and the different ways that they embed and demonstrate social mission in this context. 

It says that over the past decade an increasing number of social entrepreneurs applying for UnLtd’s awards schemes have been choosing to incorporate their venture in this way.

UnLtd interviewed 25 social entrepreneurs via telephone or Skype, all but two of whom had started a venture incorporated as a CLS. One venture grew out of a company limited by guarantee and is today a Limited Liability Partnership, and another had a CLS as a subsidiary of a Public Limited Company. 

The report found that most of these entrepreneurs said that incorporating as a CLS had a positive impact on their social mission. 

“Being a CLS has enabled the sustainable growth of their business models by allowing them to attract investment capital and to scale, which has, in turn, fostered social purpose,” it says. It adds that some interviewees noted that being a CLS had enabled them to compete more fairly with commercial competitors because the company form was recognised by the mainstream.

The report found that in the majority of cases clients, funders and other stakeholders did not query a CLS’s for-profit legal form. “There was general consensus that the quality of the product/service offered was what matters most to stakeholders, as well as the relationships they built up with clients, and the broader reputation they acquired,” the report says. 

However, UnLtd also found that some respondents had encountered a degree of mistrust and negative perceptions among certain public sector and institutional clients, and being a CLS was noted to increase the risk of mission drift and the pressure to demonstrate social credentials.

If you have more flexibility on the making money side and can make the organisation sustainable financially, you can make more money and create more change.

“In addition, certain types of funding and some public sector contracts were found to be less accessible, along with the exclusion from benefits afforded to not-for-profit or asset-locked organisations that ostensibly had the same mission,” it says.

The report found three main reasons why entrepreneurs chose this legal structure. Firstly, for its simplicity, due to the lack of bureaucracy involved and the fact that a CLS was cheap to set up. 

Secondly, because it enabled access to a wide range of finance and investors. As Tom Hooper, founder of Third Space Learning, a venture that connects primary schools with affordable, one-to-one numeracy assistance to help disadvantaged students, said: “My ambitions are very big and I didn’t want to constrain what funding might be available…We’ve got international plans and to do that we’re going to need equally ambitious investors to put risk capital in place.”

Thirdly, they chose this form due to its flexibility, which allowed both an investable structure and social purpose to be built in. The report says that one respondent spoke for many when noting: “If you have more flexibility on the making money side and can make the organisation sustainable financially, you can make more money and create more change.”

The report found that there were a number of ways these organisations were ensuring the integrity and sustainability of their social mission. These varied from embedding the venture’s commitment to social purpose in the Articles of Association, to making a commitment to collect and publish evidence of social impact. 

Others were found to have an affiliated charity or not-for-profit organsation that the CLS was accountable to, while others legally committed to using profit in a particular way, such as reinvesting in the venture or reinvesting a percentage to charity or social projects. 

 

Photo credit: Ken Teegardin, Flickr