It might be a social enterprise but legal issues cut across all and every entity established within a geopolitical space. That is why it is a matter of necessity to understand the legalities involved before starting a social enterprise.
– By Aderinsola Fagbure
As I go about, I hear people talk about their desires to give back to the society. This is not strange because studies show that millennials are not only interested in posting profits, they are passionate about purpose. Many of such people, particularly young ones say things like “Oh I have a strong urge to give back, a mission to empower and mentor young ladies”,“I want to devote some time to teach at schools and feed children and where possible carry out some medical outreach activities”.
I am excited hearing all these and I always have a few legal tips to offer such people. Generally, it is important that the motive behind social entrepreneurship must be altruistic. The desire to contribute to societal development should be driven by passion and nothing else. It should never be about being like the Jones’s. Yes, I am aware that your mentor has a foundation. You do not necessarily have to set up your own, you may opt to volunteer and assist others in their mission to make the world a better place.
Anyone who sees himself or herself as a social entrepreneur would do well to have a look at the tips below. However, please note that the tips below do not in any way constitute legal advice.
Set Up a Legal Structure
If you are really serious about getting involved in social entrepreneurship, you must do it within a structure that is legal and can allow for perpetuity. After all, I am sure you would be happy to see your legacies live after you. In terms of structure, three options are open to you as explained below;
- Carry out a great deal of Corporate Social Responsibility (CSR) activities within your existing business structure: Sometimes a hybrid approach can be adopted by a social entrepreneur with a view to making meaningful contributions to the development of society, by setting aside a portion of profits for CSR activities. Also the entrepreneur could set up a for-profit business to provide a social or ecological product or service. In this instance, profits are generated, but the main aim is not to maximize financial returns for shareholders but to grow the social venture and reach more people in need. Wealth accumulation and dividend sharing is not a priority and profits are reinvested in the enterprise to fund expansion. The entrepreneur of a social business venture seeks investors who are interested in combining financial and social returns to their investments.
- On the other hand,the entrepreneur can set up a non-profit organization to drive a cause that addresses a market cum government failure or a societal imbalance. In doing so, the entrepreneur engages a cross section of society, including private and public organizations, to drive forward the innovation through a multiplier effect. Assistance is also sought from externalphilanthropic funders and donor agencies.With this style being adopted, the social entrepreneur is expected to either;
- Incorporate a Company Limited by Guarantee
- Register Incorporated Trustees
Please do not run away, I am not speaking big grammar, guys. Nothing I have said above is that complicated. Both registrations are carried out at the Corporate Affairs Commission and they are established for economic, religious, educational and social advancement objectives. Both entities have their similarities and their differences.
For instance, the approval of the Attorney General of the Federation is needed to set up a company Limited by Guarantee, but there is no such requirement for incorporated trustees. This requirement often discourages promoters from going through the bureaucratic nature of applying for consent of the Attorney General who may in his absolute discretion withhold consent.
Another distinguishing factor is that, once an association or organisation is registered by the Commission as an incorporated trustee, the trustees jointly become a body corporate with perpetual succession and have the power to sue and be sued. It is pertinent to state that the registration of an incorporated trustee confers the corporate status on the trustees rather than on the organisation itself unlike a company limited by guarantee which confers the status of a corporate body on the company itself. The significance of this fact is that, where an organisation has incorporated trustees registered under CAMA, the trustees on behalf of the organisation are empowered to contract in the same form and manner as an individual. This includes the power to hold, acquire and transfer any property on behalf of the association.
Just in case you are wondering why you need to set up a legal structure, remember that this structure is the legal identity of the organization and the vehicle through which donations and grants will be received.
Look Out For Trustworthy Trustees/Advisers/Directors
As the brain behind a social enterprise, you are accountable to a wide range of stakeholders, including the local community in which the organization operates. In the same vein, all the trustees must accept ultimate responsibility for directing the affairs and ensuring that it is solvent, well-run and delivering the charitable outcomes for which it has been set up. They are expected to act in accordance with the provisions of the Constitution of the association.Trustees are expected to understand the rules relating to money laundering and anti-terrorisms and must ensure that the association is not used as a vehicle for perpetuating crime.
It is important to understand that the director, trustees and advisers of the foundation are there to give credibility to the association. In the event that the trustees act imprudently, or are otherwise in breach of the law or the governing document, they may be personally responsible for liabilities incurred by the foundation, or for making good any loss to the foundation.
Do Not Run away from the Tax Man
The good news is that generally, registered non-profit organisations are exempt from tax. Did I hear you shout in excitement? The Companies Income Tax Act (CITA)provides for tax exemption on the profits (so long as such profits are not derived from a trade or business) of any statutory or friendly society, co-operative society registered under any law, a company engaged in ecclesiastical, charitable, or educational activities of a public character, a company formed for the purpose of promoting sporting activities of a public character and trade union.
Furthermore, the President may exempt by order or if applied for by any company or organization to be exempted from all the provisions of CITA and from all or any profits from any source.
The Federal Inland Revenue Service (FIRS) has issued a directive stating that all non-profit organisations are required to register with the nearest integrated tax office of the FIRS close to the place of operation or registered office of the non-profit organisation. Upon registration, a unique Tax Identification Number (TIN) is generated for tax purposes. It is also mandatory for every non-profit organisation to file its tax returns every year in the state where it was registered.
It is pertinent to note that non-profit organisations are required to pay Value Added Tax (VAT) on goods and services consumed except those purchased exclusively for its humanitarian projects or activities.VAT is not assessed in respect of persons but on goods and services supplied. However, VAT will not be assessed on the provision of certain goods and services as listed in the VAT Act and schedule, as amended.
Tax benefits in form of allowable deductions are available to any company which makes a donation to certain Nigerian funds and institutions specified in the fifth schedule.The amount of deduction for any year of assessment may not exceed 10% of the total profits for the company during that year.
Also, in Lagos State, for example, the Land Use Charge Law exempts payment of land use charge on properties which are owned and occupied by a religious body, registered institution or educational institute certified by the commissioner for finance to be non-profit making.
Draw up Contracts with Suppliers, Partners and Service Providers
The fact that an organization is established for purposes relating to societal development does not preclude it from entering into financial transactions and partnerships. Do not leave everything to trust in such dealings. Documentation is key. Document as much as you can, because non-profits thrive on accountability. When purchasing goods and engaging the services of consultants for example; it is important to know your legal duties. What could contract terms mean for your organisation? On the flip-side, please get your lawyer to review any contract before you sign it.
Some say social entrepreneurship is the new business model. I totally agree with them. Because it is not only about posting the huge figures, it is also about making a lasting impression on people’s lives. In conclusion therefore, it is important to mention that social entrepreneurship thrives on accountability. Donors and supporters of charitable causes want to put their monies where their mouths are and always want to know what their money is being used for. It is not a bad idea to make your accounts accessible to the public. As a social entrepreneur, always bear in mind the fact that society will hold you accountable for the good you do.
Editor’s note: This magazine was originally published in the Spark Magazine. Find the magazine here to read other articles.
Aderinsola Fagbure is a Corporate lawyer with a special interest in corporate governance. She is a Senior Associate in the Transaction and Business Support Practice of Esher and Makarios. She is a graduate of Igbinedion University and has a Master's Degree in Corporate Law from University College London. She is a member of the African Society of Crowdfunding. Her column "in black and white "which is published in Thisday Law discusses innovations in corporate governance and finance. Derin is passionate about advising small businesses with a view to ensuring that they outlive their founders. An active bar member, she currently serves as the Chairman of the Young Lawyers' Forum of the NBA Lagos Branch.