limited liability

Clubs, charities and other social enterprises can limit their liability in much the same way as a business – but in forms that are recognised as “not-for-profit”. This ensures that the people who run these valuable services are protected from unacceptable risks.

wake-up call.

The employee benefit that nearly broke a charity

One charity that approached us for help had come close to losing everything as the result of an employee benefit scheme. They woke up to the realisation that the pension scheme was running into deficits that could put the charity and its trustees at serious financial risk. As a registered charity – but not a limited company – there was no legal limit to how much they could lose. They have now been re-registered as a Charity Limited by Guarantee.

Can an existing company convert to a Social Enterprise company?

Yes, in some cases. A private limited company (LTD) can convert to a CIC, whether it is “limited by shares” or “limited by guarantee”. A charity cannot convert to a CIC. It must adopt new Memorandum & Articles of Association and it must change its name to include the ending “CIC” or “Community Interest Company” (instead of LTD or Limited).

Can a company convert from “limited by shares” to “limited by guarantee”?

Unfortunately it cannot. Company law allows a limited company (LTD) to convert to a Community Interest Company (CIC) – but only in the same format or structure. A company limited by shares can only convert into a CIC limited by shares. A company limited by guarantee can only convert into a CIC limited by guarantee. See our page comparing the difference between the shares and guarantee formats for more information.

Can a CIC obtain public funding?

That depends on the policies of the funding body concerned; but CICs have been around long enough now to be recognised by most experienced funding bodies. A CIC cannot seek contributions from the general public.

Can a Charity buy and sell goods or services?

A charity is not allowed to “permanantly trade”. This means it can run a temporary fund raising event but not run price list of items permanently on sale. Many charities get round this problem by setting up a separate company (CIC or Guarantee) that dedicates its earnings to the charity.

Can a CIC buy and sell goods or services?

Yes. A CIC can run much like a normal business provided it acts responsibly and reasonably. Its actions are subject to scrutiny by the CIC Regulator.

Can a normal limited company be a social enterprise?

A limited company should act in the interests of its shareholders and employees. But, subject to the Memorandum & Articles of Association, it anything that the directors wish, including working for and giving to good causes. However, as a “for-profit” organisation it will not attract funding bodies to support its social enterprise activities. If you already own a company and wish to set it up in a manner more appropriate to a social enterprise you can convert to a Community Interest Company.

Can we pay our executives and directors?

For charities and companies limited by guarantee it is not permissible to pay salaries to trustees. This rule can be circumvented in certain special cases. For instance, where a trustee serves as part of his or her official position (e.g. a church or religious leader, a mayor or council leader). In some cases, this means that the person who founded the organisation and it its main driving force cannot be on the board of Trustees.
For CICs there is no such restriction provided the salaries can be shown to be reasonable (this is subject to scrutiny by the CIC Regulator).

How long does it take to register one of these companies?

There is a difference in processing time between the different types. The slowest is the Community Interest Company (CIC) because it has to pass through the normal Companies House procedures AND be checked by the CIC Regulator’s office. Furthermore, CICs cannot be formed electronically. We have to submit documents by post. So it can take up to four weeks to complete the process.
On the other hand, companies limited by guarantee (whether or not they are to be charities) can be registered electronically. Because they need special documents they are not quite as fast as regular limited companies, but they are normally processed in one or two days.
BUT, do not make your choice on the basis of speed. It is better to get the right result slowly that the wrong solution fast!

Is it faster, or better, to form a regular LTD first and then convert it to a CIC?

No, it is not. CIC conversion takes about as long as forming a new CIC and, of course, it increases the cost. There is also a risk that you will end up with the wrong structure, because most LTD formations default to the “limited by shares” format, which may not be the right format for your CIC. Take time to think through the options and discuss it with an advisor if you need help. It is better to get the right solution slowly than to rush into the wrong result. You can convert a “limited” into a CIC; but, if you know from the outset that it is a CIC you require, it is best to order a CIC from the start.

Can we omit the suffix “Limited” or “Ltd” from the company name?

Under Section 60 of the Companies Act 2006, only companies that have charitable articles of association are exempt from using the suffix at the end of their company name. We can deal with this process when registering your charitable company.

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Legal options for limited liability not-for-profit organisations

Community Interest Company (CIC)

A single registration social enterprise company overseen by a Regulator and recognised by funding bodies as not-for-profit.

CIC Pros and Cons
  • Recognised by funding bodies
  • Subject to oversight by the CIC Regulator
  • Can be either “limited by shares” or “limited by guarantee”
  • Must state its Aims/Objectives in foundation documents
  • The company is allowed to earn money by active trading
  • May pay salaries to directors (subject to controls)
  • Not available for registered charities
  • Not available for political parties
  • Taxed as a Private Limited Company

Charity limited by guarantee

A company registered at Companies House but with no shares. Run by Trustees who each put up a nominal cash guarantee for the company. Register as a company then register the company with the Charity Commission.


Charity Pros and Cons
  • Recognised by funding bodies and the general public
  • Regulated by the Charity Commission
  • Allowed certain tax concessions
  • Must state its Aims/Objectives in foundation documents
  • Charities are not allowed to “permanently trade” by selling goods or services
  • Accounts MUST be formally audited
  • Format (if limited) must be “limited by guarantee” (Directors are called Trustees)
  • Trustees may not draw salaries

Company limited by Guarantee

Before Community Interest Companies became a legal option this was the only way to incorporate a club or similar social enterprise as a not-for-profit venture. Run by Trustees, it remains an option and is the solution for organisations that are not permitted to register as CICs.


Guarantee Pros and Cons


Charity Incorporated Organisation (CIO)

A new type of limited liability organisation that can be registered direct with the Charity Commission. CIO registration only became available in early 2013. Please contact us to discuss this if you wish.


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