Not for Profit - options.....
Not for Profit - options.....
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StevieBee

Original Poster:

14,277 posts

271 months

Wednesday 26th October 2022
quotequote all
Looking to establish a Not For Profit company, initially for a specific purpose but with the potential to expand. Small group of founders who will receive financial benefit from the fees the NFP will pay them to do they work they need to do. Reason for the NfP approach is to access funding that supports Charities, NGOs, NFPs, etc but not commercial entities and what it will do fits into that space.

There is a strong chance that if we get the first project the NfP delivers right, it could grow to a level that makes it an attractive proposition for acquisition at some point in the future, despite the fact that it will make no profit (the value being the content it creates and owns).

The question I have is whether it's possible for the founders to benefit from that sale should it happen. And if so, are there any measures other than the initial agreement between the parties, that need to be implemented at start up.

s2kjock

1,799 posts

163 months

Wednesday 26th October 2022
quotequote all
You will be making a "profit" though surely, albeit one on the disposal of original capital investment by the founders?

StevieBee

Original Poster:

14,277 posts

271 months

Wednesday 26th October 2022
quotequote all
s2kjock said:
You will be making a "profit" though surely, albeit one on the disposal of original capital investment by the founders?
Therein lies the conundrum.

I guess the question might be better framed as can you change the status of a company for the purpose of sale?

s2kjock

1,799 posts

163 months

Wednesday 26th October 2022
quotequote all
A Community Interest Company I think will allow some limited "return" to any equity type investment, but not on sale of the entity AIUI due to the assets being "locked".

A charity doesn't have private "equity" anyway, so any funds distributed on wind up (or change of control) shouldn't be going to private individuals.

I would think you are stumped in practise.


phil95

190 posts

270 months

Wednesday 26th October 2022
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One option to investigate is an "Unincorporated Association". No need to submit Companies House returns but would need to register for corporation tax with HMRC if trading.

If each participant is a member and a constitution is drawn up that says each member shares any surplus or loss in the event the association is wound up this might work.

One thing that cannot be done in such a structure is for profits/surplus to be distributed to members, otherwise it's clearly not a "not for profit". Any surplus funds must be retained to meet the future needs of the association and can only be released when the association ends.

I've been though all this in detail recently for our boat club, but one difference is that we don't have any employees (all work done on a voluntary basis by members) so the process for reimbursing members for work done might discount this option.

Hope this helps.

Simpo Two

89,358 posts

281 months

Wednesday 26th October 2022
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StevieBee said:
Reason for the NfP approach is to access funding that supports Charities, NGOs, NFPs, etc...

...could grow to a level that makes it an attractive proposition for acquisition at some point in the future...
Ethics rarely trouble me, but I have to say I find that a bit dishonourable. Either you want to work for free or you don't. Sorry!

StevieBee

Original Poster:

14,277 posts

271 months

Wednesday 26th October 2022
quotequote all
Thanks for the replies chaps. Very helpful. Has helped to narrow the thinking.

Simpo Two said:
StevieBee said:
Reason for the NfP approach is to access funding that supports Charities, NGOs, NFPs, etc...

...could grow to a level that makes it an attractive proposition for acquisition at some point in the future...
Ethics rarely trouble me, but I have to say I find that a bit dishonourable. Either you want to work for free or you don't. Sorry!
That's not how it works, Simpo.

Not For Profit isn't charity. It's the same as any normal Ltd company. The difference is that the purpose of a NfP is for the direct benefit of its chosen endeavour whereas a Ltd company's purpose is for the direct benefit of its shareholders. You could have a CEO of a Not For Profit earning a £1m a year (and many do!). They just can't benefit from any surplus the company makes (dividends, profit related bonuses, etc). Nobody is working for free - quite the opposite.












s2kjock

1,799 posts

163 months

Wednesday 26th October 2022
quotequote all
phil95 said:
One option to investigate is an "Unincorporated Association". No need to submit Companies House returns but would need to register for corporation tax with HMRC if trading.

If each participant is a member and a constitution is drawn up that says each member shares any surplus or loss in the event the association is wound up this might work.
Charity lawyers IME tend to have a fit when unincorporated associations are considered as a constitutional form due to the liability that creates for the members, so for the same reason it would likely not be suitable for "investors" in the OP's scenario. Grant funding might also have restrictions on awards to entities that did allow wind up surpluses to be distributed to members, which seems to be the desired outcome here.

BoRED S2upid

20,762 posts

256 months

Wednesday 26th October 2022
quotequote all
StevieBee said:
Thanks for the replies chaps. Very helpful. Has helped to narrow the thinking.

Simpo Two said:
StevieBee said:
Reason for the NfP approach is to access funding that supports Charities, NGOs, NFPs, etc...

...could grow to a level that makes it an attractive proposition for acquisition at some point in the future...
Ethics rarely trouble me, but I have to say I find that a bit dishonourable. Either you want to work for free or you don't. Sorry!
That's not how it works, Simpo.

Not For Profit isn't charity. It's the same as any normal Ltd company. The difference is that the purpose of a NfP is for the direct benefit of its chosen endeavour whereas a Ltd company's purpose is for the direct benefit of its shareholders. You could have a CEO of a Not For Profit earning a £1m a year (and many do!). They just can't benefit from any surplus the company makes (dividends, profit related bonuses, etc). Nobody is working for free - quite the opposite.
HMRC will be very interested in you. Believe me Trustee of a NFP childcare setting who doesn’t take a wage.

paulrockliffe

16,204 posts

243 months

Wednesday 26th October 2022
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StevieBee said:
The difference is that the purpose of a NfP is for the direct benefit of its chosen endeavour
When I was involved in a NfP sports organisation, one of the conditions of registration was that all the activity had to support the endeavour. Yes you could pay people their wages at market rate, but if they built something really valuable and it was sold or wound up the Constitution had to ensure that that money could only be distributed to the benefit of the endeavour. In essence if you sold the sports club all the money had to be donated to another sports club.

I think you'll butt up against that issue whichever way you go for obvious reasons. And you'll be limited in how the people doing the work are taxed, that's the other aspect that really limits the appeal of trying to be a pretendy charity for a while then cashing in on the sly.

Wills2

26,480 posts

191 months

Wednesday 26th October 2022
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Sounds legit.


Countdown

44,906 posts

212 months

Wednesday 26th October 2022
quotequote all
StevieBee said:
Looking to establish a Not For Profit company, initially for a specific purpose but with the potential to expand. Small group of founders who will receive financial benefit from the fees the NFP will pay them to do they work they need to do. Reason for the NfP approach is to access funding that supports Charities, NGOs, NFPs, etc but not commercial entities and what it will do fits into that space.

There is a strong chance that if we get the first project the NfP delivers right, it could grow to a level that makes it an attractive proposition for acquisition at some point in the future, despite the fact that it will make no profit (the value being the content it creates and owns).

The question I have is whether it's possible for the founders to benefit from that sale should it happen. And if so, are there any measures other than the initial agreement between the parties, that need to be implemented at start up.
From a technical accounting point of view when you come to dispose of it you will actually HAVE made a profit because you've created an intangible asset.

Sorry to say but to all intents and purposes it seems like you want to create a normal company but just badge it as NFP so that you can access funding. It's clearly profit making as the reason for the founders getting involved is so they can generate work for themselves and the possibility of benefitting from the sale of the company.

StevieBee

Original Poster:

14,277 posts

271 months

Wednesday 26th October 2022
quotequote all
BoRED S2upid said:
StevieBee said:
Thanks for the replies chaps. Very helpful. Has helped to narrow the thinking.

Simpo Two said:
StevieBee said:
Reason for the NfP approach is to access funding that supports Charities, NGOs, NFPs, etc...

...could grow to a level that makes it an attractive proposition for acquisition at some point in the future...
Ethics rarely trouble me, but I have to say I find that a bit dishonourable. Either you want to work for free or you don't. Sorry!
That's not how it works, Simpo.

Not For Profit isn't charity. It's the same as any normal Ltd company. The difference is that the purpose of a NfP is for the direct benefit of its chosen endeavour whereas a Ltd company's purpose is for the direct benefit of its shareholders. You could have a CEO of a Not For Profit earning a £1m a year (and many do!). They just can't benefit from any surplus the company makes (dividends, profit related bonuses, etc). Nobody is working for free - quite the opposite.
HMRC will be very interested in you. Believe me Trustee of a NFP childcare setting who doesn’t take a wage.
Why's that?

A good 20% or 30% of my clients currently are NfPs who pay me and many others for the work we do for them. They themselves employ staff who receive the going rate for the work they do - in some cases more so.

Should we proceed with the plan, I would be a co-owner of the NfP. Any fees I and others would receive as 'external' service providers would be at market rate and overseen by the board of trustees that would be assembled to ensure proper process applies.

In no way am I looking to do anything underhand. The concept we have will provide social value (globally) and fits more naturally into a NfP framework as well as gain access to grants unavailable to corporate concerns, which require absolute transparency.

The product that the NfP will create (films) have the potential to generate long term value via streaming and broadcast revenue. The idea is that this would fund future productions but it may get to a point where such is the portfolio and reputation that's built, interest may arise from some quarters. My enquiry was to see if there is a way that those who contributed to that position could be remunerated....which seems not to be the case.







StevieBee

Original Poster:

14,277 posts

271 months

Wednesday 26th October 2022
quotequote all
Countdown said:
From a technical accounting point of view when you come to dispose of it you will actually HAVE made a profit because you've created an intangible asset.

Sorry to say but to all intents and purposes it seems like you want to create a normal company but just badge it as NFP so that you can access funding. It's clearly profit making as the reason for the founders getting involved is so they can generate work for themselves and the possibility of benefitting from the sale of the company.
Well, this is where we're getting a little stuck. The exit thing's a bit of a red herring to be honest. That may not come to pass and just mulling the options if it does.

Accessing the grant funding is part of the strategy but not all of it. We have something that is of genuine social value that wouldn't sit as well within a corporate entity. But maybe the concept needs to be tweaked!

Arghh! Was going to have night off as well!

phil95

190 posts

270 months

Wednesday 26th October 2022
quotequote all
s2kjock said:
Charity lawyers IME tend to have a fit when unincorporated associations are considered as a constitutional form due to the liability that creates for the members, so for the same reason it would likely not be suitable for "investors" in the OP's scenario. Grant funding might also have restrictions on awards to entities that did allow wind up surpluses to be distributed to members, which seems to be the desired outcome here.
Not sure this has anything to do with charities, and it's not clear there will be "investors" in this scenario more likely people who put some effort in and get paid for that effort.

I do get your point about grant funding though.

It would be feasible to draw up a constitution that defines what happens to a surplus in the event it is wound up and still be an Unincorporated Association.

But I didn't suggest it was even a solution, just that it would be worth investigating.

Edited by phil95 on Wednesday 26th October 19:02

s2kjock

1,799 posts

163 months

Wednesday 26th October 2022
quotequote all
phil95 said:
Not sure this has anything to do with charities, and it's not clear there will be "investors" in this scenario more likely people who put some effort in and get paid for that effort.

Edited by phil95 on Wednesday 26th October 19:02
Charity lawyers tend to also deal with other non-profit entities, and the form of an unincorporated association is one that is common to charities and other groups (such as sports clubs) so that was the only reason I referred to it. It is the risk of this constitutional form of organisation that means it may not be suitable for the sort of (corporate style/high growth) enterprise the OP is talking about, and he is referring to potentially extracting value by a capital gain which would mean an "investor" in some form.

s2kjock

1,799 posts

163 months

Wednesday 26th October 2022
quotequote all
StevieBee said:
Should we proceed with the plan, I would be a co-owner of the NfP.
I can't really see that being compatible with the usual forms for NfPs, but have a look at Community Interest Companies to see if that might work for you to a degree.

StevieBee said:
Any fees I and others would receive as 'external' service providers would be at market rate and overseen by the board of trustees that would be assembled to ensure proper process applies.
Seems fine.

The only other way potentially to remunerate external service providers in the future if it all takes off might be to have contingent fee arrangements with them, but that might not be commercially ideal for them. Also a risk that an independent board of trustees acting in the interests of the entity might not feel this sort of arrangement was appropriate for an NfP given the potential exposure, but I suppose it depends on what is agreed. Funders might not like the idea of that sort of thing though and you couldn't hide it.

Simpo Two

89,358 posts

281 months

Wednesday 26th October 2022
quotequote all
StevieBee said:
Not For Profit isn't charity. It's the same as any normal Ltd company. The difference is that the purpose of a NfP is for the direct benefit of its chosen endeavour whereas a Ltd company's purpose is for the direct benefit of its shareholders. You could have a CEO of a Not For Profit earning a £1m a year (and many do!). They just can't benefit from any surplus the company makes (dividends, profit related bonuses, etc). Nobody is working for free - quite the opposite.
So the company takes funding that was designed to go to charities, then the CEO takes all the profit as salary so there's no 'technical' profit left. It reeks even more now.

StevieBee

Original Poster:

14,277 posts

271 months

Thursday 27th October 2022
quotequote all
Simpo Two said:
StevieBee said:
Not For Profit isn't charity. It's the same as any normal Ltd company. The difference is that the purpose of a NfP is for the direct benefit of its chosen endeavour whereas a Ltd company's purpose is for the direct benefit of its shareholders. You could have a CEO of a Not For Profit earning a £1m a year (and many do!). They just can't benefit from any surplus the company makes (dividends, profit related bonuses, etc). Nobody is working for free - quite the opposite.
So the company takes funding that was designed to go to charities, then the CEO takes all the profit as salary so there's no 'technical' profit left. It reeks even more now.
No mate. That's really not it!

NfPs have trustees (or guarantors) who would only sign-off on high salaries if there's justifiable reason. At that level, we're talking about global organisations that work in international development, turning over hundreds of millions that channel surplus back into tangible projects. For this you need a highly competent board and CEO who need to be lured from the corporate the world where salaries are boosted with share options and other inducements.

Charities and Not For Profits are entirely different entities. One of my biggest clients is a Not for Profit; a company limited by guarantee (i.e. it has no shareholders but guarantors). It bids for and wins projects that it delivers and bills for as any company would. But the projects it bids for are only accessible to NfP companies due to the nature of those projects being social development. Only one person in that company receives a modest salary, everyone else earns their fees that relate to the projects on which they work - fees that are set out in the bid used to win that project.

NfPs are subject to far higher scrutiny than Ltd companies and there exists greater legislative (and enforced) requirement for transparency. This is why certain sectors, clients and funders prefer an NfP structure over a corporate one.