Social enterprise - In whose interest?

A new type of company which can make profits that don't go to fat cats is on its way. Gideon Burrows

It has been labelled the saints' and sinners' bill. In the wake of accounting scandals at Enron, WorldCom and Parmalat, the new Companies Bill now being scrutinised by the Lords proposes to give regulators stronger investigatory powers. But it also proposes a new legal form, the community interest company (CIC), which would allow social entrepreneurs, charities and community groups to establish profit-making firms that have the specific aim of benefiting the community. Profits earned by CICs would be locked into the company, to be spent on community work rather than passed on to shareholders.

The result, the Department of Trade and Industry hopes, will be a new type of company: a brand that commands the same public trust and recognition as charities.

Social enterprises are a growing movement. They range from small, parent-owned creches in deprived neighbourhoods to large co-operatives such as Greenwich Leisure Ltd, which operates 35 leisure centres across London and is owned by its 2,000 employees. But they suffer from a lack of understanding among bankers and accountants ("You want to set up a company that doesn't make you a personal fortune?") and from difficulties in their legal constitution.

The present options are unattractive. A social enterprise can opt for charity status, along with the tax breaks - but that entails stiff regulation by the Charity Com- mission, which operates according to 400-year-old laws governing "charitable purposes" (though the laws are being updated). Or it can become a co-operative, under Industrial and Provident Society rules, which are as creaky and cumbersome as they sound. Or it can set up a private limited company, and hire expensive lawyers to write clauses into its constitution to ensure profits stay in-house. Those clauses can be overturned at any time if shareholders begin demanding a financial as well as a social dividend.

CICs, the government says, will provide for social firms that have fallen between these company types. The detail is yet to be worked out. They are likely to be similar to private limited companies, with obligations to submit annual reports and accounts to Companies House, with paid directors and shareholders. However, CICs will have to prove to a newly created CIC regulator that they are operating for the benefit of the community. They will be legally obliged to "lock in" profits to grow the businesses or to further their aims, and shareholders will receive dividends only to a capped level. The government has promised "light-touch" regulation, and CICs will not receive the tax breaks their charity cousins enjoy.

All this has implications for Tony Blair's agenda for public service delivery. CICs fall neatly between what he sees as the inefficient and union-dominated public sector and what many of his fellow party members see as the rapacious private sector. Though CICs will not be suitable to take over hospitals or schools, they could, according to the DTI, run community transport, childcare, employment schemes and social housing.

"Everybody who works in community enterprises, or uses them on contracts, agrees there's so much added value in social enterprises," said Mark Sesnan, managing director of Greenwich Leisure.

As Sesnan points out, private companies are now setting up not-for-profit or charitable arms so that they can enjoy charity tax breaks when they take on outsourced local authority services. Because tax relief comes from central government, local authorities and private firms can agree to split the benefit. The CIC will be hard-wired against such sly dealings, which give social enterprise a bad name. They will be allowed to transfer assets and cash only to other CICs or charities, not to private firms or individuals (though there will be no limits on directors' pay).

But it is hard to see the immediate benefits of becoming a CIC to an organisation already operating, in one form or another, as a social company. Charities won't want to lose their tax relief, while co-operatives and limited companies that operate within their current tried and tested structures are unlikely to want to change to one with no track record.

"There are those in the sector that are very happy using other structures like Industrial and Provident Societies successfully, even if they are regulated," said Jonathan Bland, chief executive of the Social Enterprise Coalition.

Charities are concerned that CICs, if they do become a recognised brand, shouldn't be the only show in town. They argue that it would be wrong to expect socially minded companies or organisations to become CICs in order to qualify for government funds or local authority contracts. "We'd prefer to see social enterprise promoted as something done by a wide range of different organisations, not just by CICs," said Belinda Pratten, policy officer at the National Council for Voluntary Organisations. "Social enterprise should be an activity, rather than a sector."

Above all, there may be difficulties in giving to the concept the public recognition that the government hopes for. Most people don't make a choice as to which firm's bus they board, so they won't care if it is run by the public sector, a private sector firm or by a CIC.

Where the public might be able to make a choice - in deciding to shop at a not-for-profit supermarket, for example, rather than in one that lines the pockets of fat cats - CICs won't be on offer. Unlike public transport, cheap ethical groceries do not qualify as a community benefit.

The New Statesman's annual Upstarts Awards, supported by the Co-op Bank and rewarding the business of social enterprise, take place on Wednesday. For more details, go to www.upstarts.org.uk