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Charity trading through a partnership

May a charity trade through a partnership, rather than a limited company subsidiary?

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Charitable trust, ~£250k income p.a., wants to start a business for the purpose of raising funds. Turnover would comfortably fall within the 'small trading' regime. Is there any reason why it shouldn't trade through a partnership?

I regularly read on blogs that charities may not form partnerships, but I think that may be oversimplifying:

  1. charities can carry on non-primary purpose trade ‘with a view of profit’, and 
  2. a partnership is simply doing that in common with others (per Partnership Act s. 1)

(If the charity can form a partnership, it would probably opt for an LP or LLP to limit exposure.)

Alternatively, as a share in a subsidiary company is in the nature of investment rather than trading, would a share in the capital of an LP (or LLP) qualify as an equivalent?

Any help much appreciated.

(Full disclosure, I'm a charity trustee, not a 'finance professional', and sometimes people on AWeb get grumpy at that. If that applies, please excuse me and pass on to another post.)

Replies (22)

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By jonharris999
16th Jul 2020 19:01

Host of disadvantages to trying to do this. What's the imagined upside?

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Replying to jonharris999:
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By eteb3
16th Jul 2020 20:24

To me it looks simpler: there's no multiplication of entities (except for tax), but risk can still be fenced off.

Also if a company is used, the charity wouldn't be the sole beneficiary and so Gift Aid would have to be estimated. LP/LLP saves getting the estimate wrong - either by over-donating (with a serious headache for the trustees to 'repay' it) or by under-donating (and paying CT).

What are the disadvantages?

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Replying to eteb3:
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By WhichTyler
16th Jul 2020 21:27

But their wouldn't be gift aid if it was a minority shareholder in a company, there would be dividends wouldn't there?

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Replying to eteb3:
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By WhichTyler
16th Jul 2020 21:27

But their wouldn't be gift aid if it was a minority shareholder in a company, there would be dividends wouldn't there?

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Replying to WhichTyler:
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By eteb3
16th Jul 2020 23:51

WhichTyler wrote:

But their wouldn't be gift aid if it was a minority shareholder in a company, there would be dividends wouldn't there?


You're right if company has only one share class. I neglected to detail my thinking that it seems more tax efficient that in lieu of a dividend for the charity, the company makes a donation out of profits instead, which passes tax-free. It then pays tax on what remains and then a dividend to other shareholders. Obviously that requires A & B shares, perhaps with very different rights, and a good shareholders' agreement. In the context of basically aligned and supportive co-investors, my feeling is it would work. But it means convoluted company governance; one more reason why I want to investigate a partnership (which is more flexible, no?).
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Replying to eteb3:
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By WhichTyler
17th Jul 2020 16:28

eteb3 wrote:
But it means convoluted company governance; one more reason why I want to investigate a partnership (which is more flexible, no?).

Until one of the partners wants out; it's far easier to replace a co director or charity trustee than partner

Again what do you think is the forecast trading turnover of the business and net contribution?

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Replying to eteb3:
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By johnt27
17th Jul 2020 16:45

eteb3 wrote:

WhichTyler wrote:

But their wouldn't be gift aid if it was a minority shareholder in a company, there would be dividends wouldn't there?

You're right if company has only one share class. I neglected to detail my thinking that it seems more tax efficient that in lieu of a dividend for the charity, the company makes a donation out of profits instead, which passes tax-free. It then pays tax on what remains and then a dividend to other shareholders. Obviously that requires A & B shares, perhaps with very different rights, and a good shareholders' agreement. In the context of basically aligned and supportive co-investors, my feeling is it would work. But it means convoluted company governance; one more reason why I want to investigate a partnership (which is more flexible, no?).

You're forgetting the accounting requirements here. A donation from a charity trading sub to the charity parent is a distribution, effectively a dividend. So you'd need some form of alphabet shares to enable other shareholders to benefit from profit distributions as well. You'd be better to pay a salary or fee to the supporters if they so desperately want in on the action.

Any convoluted company governance is going to reflected in an LLP, given the rules are virtually the same. If you headed down the LP route, well they're even more fun

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By the_drookit_dug
16th Jul 2020 19:14

Who would be the partners?

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Replying to the_drookit_dug:
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By eteb3
16th Jul 2020 20:25

Wealthy supporters, including some business people.

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Replying to the_drookit_dug:
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By eteb3
16th Jul 2020 20:25

Wealthy supporters, including some business people.

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Replying to eteb3:
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By WhichTyler
16th Jul 2020 21:49

It's generally better to get wealthy supporters to give you money and/or free advice rather than letting them take an income from it. If the turnover is low, what is the need for external investment?

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Scalloway Castle
By scalloway
16th Jul 2020 19:27

A large charity I used to work for was a partner in an LLP set up for a particular investment.

If your charity was setting up an LLP would you be bringing in a partner that had expertise in the area you will be trading in?

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Replying to scalloway:
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By eteb3
16th Jul 2020 20:28

scalloway wrote:

If your charity was setting up an LLP would you be bringing in a partner that had expertise in the area you will be trading in?


Yes, one or two. Most would have only general business experience.
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By WhichTyler
16th Jul 2020 22:22
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By eteb3
16th Jul 2020 23:50

WhichTyler wrote:

Oh and stop reading blogs until you have read https://www.gov.uk/guidance/guidance-for-charities-with-a-connection-to-...


Yes, I've read it: investment in a subsidiary is permitted, as long as conflicts are managed. Again, it seems much easier to manage conflicts in a partnership (where the partnership agreement can authorise conflicts by dictating that the charity's interests shall prevail over the co-investors interests) than in a company (which is a separate person).
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By jonharris999
17th Jul 2020 07:01

I'm wary of this, especially for a small group of people rather than a large, well-capitalised and professionally-advised enterprise. The phrase "wealthy supporters, including some business people" has my alarm bells ringing. These are patrons, trustees....not partners.

I generally advise people to start a partnership only if they tick all the boxes re the advantages of self-employment, but can't do it by themselves. Ltd cos are only rarely in this position and charities even less so. Otherwise it's liability that is always the stand-out issue.

It's much simpler if the business is wholly-owned by the charity and the 'partners' have some kind of agreed structure of incentives. Is it really impossible to satisfy the partners' ambitions in that scenario? Is there that much profit/benefit at stake for them? (And if there is, why's anyone doing it for charity!?) As long as it isn't, there is more clarity with share ownership of a Ltd co, even if you need to set it up exactly right.

Apart from the challenge of clarity on tax, the potential liabilities of a partnership are far greater than the potential liabilities of shareholding. The trustees would be wise to have more extensive and onerous controls if it was a partnership, and there is time and trouble in that.

Also, VAT - depending on what the business activity is. (Cultural exemption, for example, or zero-rate on certain supplies....who's the entity?)

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By johnt27
17th Jul 2020 11:58

I can only see downsides to using some form of partnership arrangement. Any concerns could easily be dealt with using a company or CIC with a decent shareholders agreement.

Whatever the charity is proposing to sell at £250k turnover must have a decent margin for "wealthy supporters" to expect a portion of the returns...

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By WhichTyler
17th Jul 2020 16:37

Final thought; in all these scenarios you will need legal advice to draw up the partnership agreement/subsidiary articles/shareholders agreement, so you should really go to those legal advisors (experienced in charity law, naturally) rather than us...

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Replying to WhichTyler:
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By eteb3
20th Jul 2020 21:24

Thanks all for your comments. Thank you Scalloway for advice that it's *possible* for a charity to trade through a partnership, even if that's not the usual way of doing things. Also useful to know (from the majority) why the established ways are the established ways, and the long-form responses waving red flags are especially helpful.

I can see the value of being absolutely clear what money is leaving the charity into the business (and possibly being lost). And yes, given how vastly more complex it seems to be than at first I thought, I will be advising the director to get full professional advice even at this early stage.

Thanks again for all your time and thoughts.

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Replying to eteb3:
By tonyaustin
22nd Jul 2020 10:16

You talk about money leaving the charity and possibly being lost. Any payment by a charity which is not for charitable purposes (fundraising expenses are considered as being for charitable purposes) within the meaning of the Charities Act results in a loss of exemption from tax on an equivalent amount of income. If wealthy individuals want to run a business from which the charity will benefit, they can donate a share of profits to the charity, without the charity having a minority interest in the business. It could even be made legally binding with Deed of Covenant.

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Replying to tonyaustin:
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By eteb3
22nd Jul 2020 22:18

Deed of covenant as legally binding gift obligation is news to me - thank you.

Quote:
Any payment by a charity which is not for charitable purposes (fundraising expenses are considered as being for charitable purposes) within the meaning of the Charities Act results in a loss of exemption from tax on an equivalent amount of income.

I've understood there's an exemption under a 'small trading' regime - 25% of turnover to a maximum of around £80k iirc. I think that applies here?
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By Bubz
22nd Jul 2020 09:35

It is not uncommon for charitable trusts to be limited partners of an LP or non-designated members of an LLP as a form of investment. This is a structure frequently used for social impact investment funds, for example.

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