Karina MacRitchie from Senscot Legal outlines the issues charities must think about when becoming a social enterprise, and vice versa

A common query for us at Senscot Legal is whether a social enterprise can be a charity or if a charity can become a social enterprise. The answer is yes and yes!

It is important to note though that a charity is a charity first and foremost, and the social enterprise activity must comply with charity legislation. The social enterprise activity must be in line with the charitable purposes and must not deviate from that. But there are many good examples of how an organisation can successfully operate as both.

Firstly, any charity must meet the charity test to become and remain a charity in Scotland. This therefore means the organisation must have charitable purposes in accordance with the purposes as set out in the 2005 Charities Act – they must have an activity that furthers that purpose and which generates public benefit. Any private benefit that arises must be necessary and incidental to the delivery of those activities.

A common query for us is whether a social enterprise can be a charity or if a charity can become a social enterprise. The answer is yes and yes!

The proposed charity trustees of the social enterprise must comply with the requirements to become a charity trustee in Scotland. This means the trustees must act in the best interests of the charity at all times.

Most social enterprises will have the view that they would like to retain an element of control. However, as a charity, the board is a collective and no control can and should be exercised by any one individual.

Another common issue is payment of trustees. Usually a social enterprise that is set up as a non-charitable legal entity will have the power to pay its directors, especially those who are effectively the founder of the organisation. It is not so simple for charity trustees and care should be taken as to whether the requirements of section 67 of the 2005 act are being met. This section deals with the remuneration of trustees and must be followed carefully. Charity law goes a bit further with relation to private benefit and any remuneration of trustees must also comply with these further restrictions.

In order to assist organisations to navigate through these issues, Senscot Legal and the Office of the Scottish Charity Regulator (OSCR) have worked together to prepare a joint statement. This outlines the regulatory challenges faced, including the objectives, private and public benefit considerations, and trading.

If you are setting up a social enterprise you should think about these issues before applying for charitable status. Thinking about your answers right at the beginning of the process will help Senscot Legal support you, and make it easier for OSCR to deal with your charitable status application more quickly. Considering the issues identified should help you to decide on your favoured option and get it right should you wish to apply.

Karina MacRitchie is senior paralegal at Senscot Legal