1. How to Kick Start a Social Enterprise Joanne O’Brien Carne Reidy Herd Lawyers Level 10, 193 North Quay Brisbane Qld 4000 P: 07 3236 2900 E:jobrien@crhlaw.com.au

2. Carne | Reidy | Herd CONTEXT Sourcing finance Delivery of products & services Marketing Employees & Volunteers Legal structure to support desired aims outcomes LEGAL COMPLIANCE

3. Carne | Reidy | Herd 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

4. Carne | Reidy | Herd 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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6. LEGAL STRUCTURE What legal structure will you use? Options: –Operate within your existing structure  Possible regardless of whether you are a company limited by guarantee or an association  Establish a separate business unit  Its own reporting lines –Establish a new separate legal entity

7. Carne | Reidy | Herd 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

8. Carne | Reidy | Herd IN HOUSE OPTION Potential problems –Impact on charitable status –Impact on tax endorsements –Risk to core business

9. Carne | Reidy | Herd 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

10. Carne | Reidy | Herd 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

11. Carne | Reidy | Herd CHARITABLE STATUS Charities Act 2013 Passed by both houses of Parliament on 27 June 2013 Commences 01 January 2014 Query impact of Federal election

12. Carne | Reidy | Herd 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

13. Carne | Reidy | Herd 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

14. Carne | Reidy | Herd 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.

15. Carne | Reidy | Herd 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

16. Carne | Reidy | Herd 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

17. Carne | Reidy | Herd 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

18. Carne | Reidy | Herd 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

19. Carne | Reidy | Herd 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

20. Carne | Reidy | Herd 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 ”

21. Carne | Reidy | Herd 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

22. Carne | Reidy | Herd COMPANY ALTERNATIVES How those issues are resolved depends on: –The nature of the enterprise; and –Its dominate objective:  To generate funds; or  To provide social outcomes

23. Carne | Reidy | Herd 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

24. Carne | Reidy | Herd 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

25. Carne | Reidy | Herd 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

26. Carne | Reidy | Herd 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

27. Carne | Reidy | Herd CASE STUDY 2 The Solution (cont’d): –Association continued to provide administration functions –Documented arrangements through loan agreement & service agreement

28. Thank You Joanne O’Brien Carne Reidy Herd Lawyers Level 10, 193 North Quay Brisbane Qld 4000 P: 07 3236 2900 E:jobrien@crhlaw.com.au