Briefing Paper No 2

Democratic:
from the beginning the community enterprise movement was linked closely and naturally with the co-operative movement. Community enterprise is based on common ownership and a 'one person one vote' principle. That right to an equal vote is extended not only to members of the community but also to workers, volunteers and other stakeholders. As a result of this principle the Company limited by Guarantee has become the standard legal framework for community enterprise.

Independent:
a Community Enterprise project or organisation has to be owned, controlled and managed by its members. The community which it seeks to benefit must understand that it is their project or their organisation. Community Enterprise is essentially independent from public and private sector bodies. Whilst in larger projects a partnership with other sectors may be reflected in minority representations on the Board the independence of Community Enterprise should not be compromised. Assets utilised by community enterprise should be owned by the enterprise and not by a public or private body.

Accountable:
Community Enterprise should have clear and transparent social objectives and these should be set and measured through a participative process that involves both internal and external stakeholders. The sustainability of community enterprise should be measured by its ability to set objectives that deliver benefits to its members in the long term.

Social Enterprise Partnership has produced and developed a social audit toolkit which enables community enterprise projects to plan and manage their social objectives through the involvement of their stakeholders.
Within the definition of community enterprise there exists a variety of models using different rules, constitutions and legal structures. We use the following definitions to explain the different choices open to members involving the ownership, management and control of Community Enterprise projects.

The term 'Community Enterprise' was coined in the 1970s and refers to organisations that are not-for-profit (the organisation can make profit but this is retained in the business itself, rather than distributed to shareholders or directors) and run democratically by, and for, a defined community of people; sometimes known as a Development Trust.

Developing a Community Enterprise takes time. Many Community Enterprises start in response to a problem or a set of problems that mainstream services do not solve. Frequently they stay focused on the initial problem(s) but sometime they expand into other areas and develop a number of services focused on a range of problems, whether there is a single issue focus or a range of activities, both can be described as a Community Enterprise.

The diagram below shows the separate components of a Community Enterprise and how they fit together. The text, following the diagram, briefly explains how it works. This model is based on the experience of many community groups over the past 30 years and describes the extent to which a Community Enterprise can develop over a few years.

Community Enterprise Organisational Structure
At the heart of Community Enterprise is the partnership between the service providers and the community users. That partnership is successful when the providers and users are either managing the process in a participative and democratic decision making way or when they are, by and large, the same people. Partnership between service providers (government and non-government agencies whose services are free if charge, such as police, housing advice, etc.) can work well, but partnership between the providers and users is often weak and this is the real reason for users not utilising the services provided. Community Enterprise primarily focuses on the partnership between providers and users in order to generate long term and continuous flows of benefits; sustainability.

A Community Enterprise is managed by a system that is participative, democratic and inclusive. It uses the Social Audit method (see fact sheet No 5) to engage the community in planning and managing the organisation. It uses a method of Project Cycle Management to develop and implement new initiatives and a financial system based on mixed receipt accounting to permanently account for both grant funds and commercial income.

The structural components are related through the processes of the Social Audit and Project Cycle Management methods, and financial mixed receipt accounting system. The Licence Agreement determines how the Community Enterprise lets out the assets to projects and business. All of these processes use similar terminology, principles and procedures.

These methods are used in planning, managing and monitoring the activities of the organisation within the context of a standardised, stable and easy to learn procedure, with the aim of encouraging people to understand how to participate and have their say. If these issues are clearly understood and planning is standardised and stable then people have access and are included in the democratic control of the Community Enterprise. Overall management is then carried out on the basis of clearly worked out ideas and policies which are set by the community and managed by the Executive Board and manager.

Membership
The membership of the Community Enterprise is made up of residents (1), staff (4), volunteers (5), separate projects and commercial activities (8). [Numbers relate to the diagram]

Community Enterprise The Community Enterprise (2) is registered as a company limited by guarantee. This structure provides the legal qualification to conduct any form of commercial activity and/or social provision activity. This type of legal structure means that the wealth and physical assets of the enterprise are held collectively and can only be used to benefit the defined community and its members. It also provides limited liability so that the enterprise, and not the individual members, is responsible for any debts and other liabilities incurred by the organisation.

As part of the Community Enterprise's work it runs services (6) to provide the community with asset ownership, training and advisory support, project development (this uses Project Cycle Management methods) and credit facilities (this can be a credit union or a revolving loan fund). The services will vary and each organisation will decide which ones they want to operate at any time.

Purpose
The objectives are very important and will require a lot of work to ensure that they form the foundation from which control and accountability can be adequately exercised. It is recommended that the objectives be incorporated into a Statement of Purpose. This includes the main aims from the constitution, an up to date Statement of Purpose, an up to date list of the organisational rules and an analysis of these into a single description of the organisation's Value Base. The Value Base determines the culture of the organisation and sets the criteria against which all other activities and overall performance indicators are measured. This will be done as part of the Social Audit (3.2). The general policy of the Community Enterprise (2) embraces five equally important objectives (this is the basis of sustainability).

These are: The overall policy of social benefit and financial wealth covers all the activities planned and guided by the Social Audit Team (3.2) and the Board of Directors (3.1). The policy covers not only the Community Enterprise (2), but also the separate trading activities its sets up (8).

Management
The elected Board of Directors is comprised of the Executive Group and the Social Audit Team who will be responsible for overseeing the social and financial policy and the planning of all the activities. Any member is eligible to stand for election to the Board of Directors. The actual day-to-day management is run by the Community Enterprise manager (4), workers (4) and volunteers (5). The Executive Group is made of the treasurer, chair, company secretary and other elected members (about four members) who are responsible for managing the organisation and the finance. They practice a system of 'management by objectives' and with the staff will execute the plans designed in partnership with the Social Audit Team. The Social Audit Team is made up of the remaining members of the Board of Directors and individual external people (about three people who are not members and are from outside the community and independent). Their responsibility is to manage the Social Audit process and be accountable for their findings, together with the Executive Group, to the members.

The Licence Agreement
The Licence Agreement (7) is a legal document drawn up between the Community Enterprise and its separate initiatives to confirm the terms and conditions of their formal relationship. It covers the use of property, equipment and other facilities owned by the Community Enterprise. This licence is essential for maintaining proper relationships between the various parts of the Community Enterprise.

Projects and Businesses
Projects and Businesses will be supported by the Community Enterprise. Sometimes they will be owned by the Community Enterprise and sometimes they will be autonomous and owned by a small group from the community (1). This should be flexible but each project or business must be connected through the License Agreement (7).

The relationship between the Community Enterprise and the autonomous projects and businesses is through the provision of training, advice, loans, rent of property or equipment and will most likely have been supported in its initial stages by the Community Enterprise. Over time the projects and businesses may move away from the Community Enterprise and become fully independent.

Running a Community Enterprise
The governing principles determine the way the organisation is managed and held accountable to the members.

Roles and Responsibilities

Financial

1. The Community Enterprise is responsible for raising and collecting funds.

2. Subsidised (output) activities, e.g. social benefit activities, will draw up a budget and contract with the Community Enterprise for assistance. These contracts will be reviewed half yearly.

3. Profit (input) activities, e.g. commercial activities, will contract with the Community Enterprise to pay over a percentage of profits and will budget and contract for reinvestment capital.

4. Start up capital for new ventures will be made available from the Community Enterprise.

5. All activities should be directed towards self-sufficiency based on a relationship of interdependence between the various trading activities.

6. The Management Board will be responsible for budgeting and financial planning for the Community Enterprise, and for assisting new ventures in determining their financial requirements.

7. The financial mixed receipt accounting system is divided into core accounts and unit accounts. A unit account covers any recognised separate activity, such as the Advice and Support unit, or a subsidiary trading unit, etc.. Each unit will run their own income and expenditure account as a ledger within the core accounts. In this way the finances of each unit can be managed through a discrete set of accounts and be measured against a regular budget, actual and variance statement.

8. All separate trading or social activities will be issued with a licence, renewable annually, that provides the terms and conditions of use for any resources of the Community Enterprise and stipulates both the financial and social responsibilities of each.

Social

1. Primary objectives would be those that the Community Enterprise and all its separate activities adopt as a central overall focus.

2. Secondary objectives would be those that are relevant only to a particular activity and, while adhering to the primary aims and objectives, would differ in accordance to the actual function being carried out.

3. The social objectives should be developed first, in full participation with all components of the Community Enterprise and the Social Audit Team. The Social Audit will add a new dimension of participation, in addition to the normal elected representative system of the Board of Directors.

4. The Social Audit Team with a statement of the achievements and/or progress made should carry out the evaluation procedure annually. In the case of error or mismanagement, both the Social Audit Team and the executive committee (the Board of Directors) will be responsible for negotiating with the particular unit to resolve the problem.

Developing a Community Enterprise.

The development of a Community Enterprise should be conducted as an action learning process. Each step should be carried out in conjunction with training and include:

1. Relevance (what is the problem to be addressed or opportunity to be exploited)

2. Feasibility (how is it to be done, what resources are required and who is involved)

3. Sustainability (this concerns how people use the services and gain benefits).

Relevance

Identify a group of active members
Define the community
Identify problems and solutions to community issues
Determine the Objectives
Identify business opportunities and social needs

Feasibility

Conduct community constraints and opportunities profile

Community Problems
Community Opportunities
Physical Assets Knowledge and Experience Community
Social Organisation Economic and Finance Analysis Natural Assets
Project Cycle Management Portfolio
Mixed Receipt Finance
Prepare and register the Community
Enterprise constitution with charitable objectives

Legal

Constitution
Company Limited by Guarantee registration

Start the activity:

Set up the Board of Directors
Prepare job descriptions and recruitment procedure, recruit staff
Establish the Social Audit Team
Prepare the organisational systems
Establish the legal and financial requirements
Set first year's targets as identified in the Social Audit Project Cycle Management Social Audit Portfolio Mixed Receipt Finance Sustainability Develop and have operating the holding company structure to prepare the organisation to enter into partnership between itself (the provider) and users (beneficiaries) using the Licence Agreement Legal and Organisational Structure Develop and have operating terms and conditions of Contracts and Licences Licences Agreement Set up and have operating Training and Advice Resource Unit Social Audit Develop Credit Union/Revolving Loan Fund Unit and have lending in place Project Cycle Management Form separate social and commercial activities that meet the problems and needs residents face.

Project Cycle Management Websites

Ethical Trading Company www.ethicaltrade.org
Federation of small businesses www.fsb.org.uk
Manchester Progressive Enterprise Network (MPEN) www.mpen.org.uk
New Economics Foundation www.neweconomics.org
The Scarman Trust www.thescarmantrust.org
School for Social Entrepreneurs www.sse.org.uk
Social Enterprise London www.sel.org.uk

Further Reading

Definitions of Community Enterprise
A Community Enterprise Company
Why a Social Audit
Social Wealth Organisations
The Voluntary Sector Legal Handbook - Directory of Social Change
Voluntary but not Amateur - London Voluntary Service Council
A practical Guide to Company Law - Directory of Social Change

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Notes
(1) Common ownership Does not exist as a recognised legal term in UK law, which only recognises individual ownership and ownership by corporate bodies. It is best understood as "stewardship" rather than ownership of assets. A common ownership co-operative cannot be asset-stripped as it cannot go into liquidation and then divide up the assets between the members. Any assets left over after liabilities have been met must be donated to another co-operative or organisation with similar aims to the co-operative. Not all co-operatives are common ownership, some are co-ownership or employee ownership where individuals own shares - and are entitled to get them back if/when they leave the co-operative. ICOM (the umbrella body for worker co-operatives in the UK) has been developing model rules (constitutions) for co-operatives for years and is the recognised source of legal expertise in common ownership co-operatives.

(2) I&PS vs Co ltd by G I&PS (Industrial and Provident Society) structures are ideal for registering co-operatives as they were designed for this purpose. The Company Limited by Guarantee structure is ideal for voluntary sector organisations, but was not designed for co-operatives. The reason some co-operatives registered using this legal framwork was that until (1993?) I&PS rules required a minimum of 7 members. For a new worker co-operative this could create problems. A new business could never provide wages for 7 people in its start-up period, therefore a worker co-operative would be set up with 2 employees, earning their living from the co-operative, and 5 supportive colleagues, who didn't. This often caused conflict, so ICOM lawyers looked at the Companies Act & came up with the Company Ltd by Guarantee model, which only requires a mimimum of 2 members. Of course a co-operative of 2 people is a nonsense, but the intention was that you could start up the business with 2 people, and work to grow to greater numbers as and when you generated sufficient income. However since 1993, I&PS rules now require a minimum of 3 people, so for a co-operative these rules are better, as they are based on how co-operatives work.