Deciding the right legal-form for your start-up

Eight years ago, I set up Justice Studio, a social justice consultancy. At that time, although it grew quickly, I had a dearth of knowledge around the legal-forms/structures of organisations. I think most budding entrepreneurs, excited about setting up a new venture, probably don’t want to think about legal-structures, as they don’t have a stimulating reputation. However, the legal structure is the first vital step. 

Know what you are giving birth to

Maybe I work too much, but I genuinely think legal forms can actually be pretty exciting. They are so important that recognising their role as the structural skeleton of your organisation gives them a stimulating gravitas that some might even call sexy. As most social justice activists know, structures matter. What legal-form your organisation takes reflects its identity and what it stands for.

When I just started out, I didn’t have anyone to ask except my accountant, and as helpful as she was, I’ve seen too many entrepreneurs blindly follow what their lawyer or accountant says about their legal form, based purely on tax considerations. Yet tax implications should only be secondary to the overriding purpose of the organisation. If you don’t make a decision on legal structure based on the organisation’s purpose at its birth, then it may not be structured appropriately to fulfil that purpose, and you could be welcoming problems down the line.

Do you want more freedom or protection?

The first main distinction to make is between freedom and protection. You can either do what you want with your income, but end up taking on personal risk (unlimited liability), or you can protect yourself (limit your liability), but recognise that your venture is no longer of yourself, and along with it comes great responsibility. This distinction of freedom + risk versus protection + responsibility is relevant whether your aim is to make money or do good, or both at the same time.

Let’s step back a moment. Do you want to do this on your own or do you want to venture out with others, now, or in the future? If you like your freedom and just want to work on your own, then a Sole Trader, or Sole Proprietor in the US, could be for you. If you want freedom, but want to work with people, then a Partnership or an Unincorporated Association will allow you to do that without the legal restrictions of having your own entity. You don’t need much to set up, although there are some requirements for Sole Traders or Sole Proprietors, and I would recommend you have a partnership deed or agreement setting out the roles and responsibilities of partnerships or associations.

If something does go wrong, you don’t necessarily want to have your own finances harmed as a result, so, the protection option is limiting your liability. To properly work out the best type of limited liability is necessary, it’s important to be clear on your motivation for setting up your organisation.

Do you want to make money or do good, or do both?

Regardless of what type of organisation you set up, first think of it like a baby or a plant. It’s not you. It’s something separate from you. It has a separate legal personality, and it needs protection from harm. In creating an organisation you have legal and moral responsibilities towards it to ensure that it flourishes. You are its guardian.

Moneymaker

If you just want to set up a simple profit-making business, then you can either set up a private limited company or a Limited Liability Partnership (LLP) – the half-way house between a partnership and a limited company. All businesses in the UK need to be registered at Companies House. In the US, be aware that in setting up your LLP or Limited Liability Company (LLC) every state has its own code of business laws authorising the formation of business entities, so check out your responsibilities. You’ll need ABN entitlement to set up your Proprietary Limited Company (Pty Ltd) in Australia.

Doing good

Doing good usually means that you will be aiming to set up a charity or not-for-profit entity. A Company Limited by Guarantee (CLG) is the most common form of organisation in the UK and it has members rather than shareholders. The majority of charities that were established before 2013 were set up as a CLGs, and registered as a charity through the UK Charity Commission. However, now there is a simpler structure called the Charitable Incorporated Organisation (CIO), which has been designed specifically for charities, meaning you just need to register once with the Charity Commission as an incorporated form of charity and you don’t need to worry about registering with, or reporting to, Companies House. In the US, charitable status is recognised through your tax code, so to do charitable work you need to register as the catchy sounding, 501(c)(3).

Doing both

If you want to do good and make money, then there are more options to consider. Generally, organisations that have a double or triple bottom line, can operate under a few different legal forms. In the UK, it is possible to simply use a limited company structure and have an added social purpose. Alternatively, you can have a specific status such as a cooperative or, since 2005, a Community Interest Company (CIC). CICs have an asset lock to ensure that their assets and profits are used for the benefit of the community. If you want to set one up you need to get it registered with the CIC Regulator. Whilst the CIC is close, there is no specific legal structure for a social enterprise, so for validity, you can join a membership body such as Social Enterprise UK, or in the US, the Social Enterprise Alliance. The US has also set up a new certification for companies driven by profit and purpose: B-Corps.

These self-managing and purpose-driven companies, who care about social mission and profit, have been analysed as the next generation of organisation, ‘teal’, in the amazing book Reinventing Organizations by Frederic Laloux. This is the type of organisation that Justice Studio aims to embody as it reminds us to think of an organisation as an organic, living thing, that should benefit society.

If I haven’t convinced you about how exciting legal structures are yet, then at least, finally, we get to the genuinely fun bit: thinking of a name! If you are in the US, working out what names are available might take a while, however, in the UK or Australia there are handy company name checkers.

Anyway, good luck, have fun, and if you need any extra help with setting up an organisation aiming to do good, then do not hesitate to get in touch with us – info@justicestudio.org.

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