Any successful charity should have a diverse range of funding sources. Income generation through trading, by selling goods or services for a profit, can be an attractive prospect, but you need to look before you leap! There’s a lot to think about before considering trading, and you should be aware of all the pros and cons.

Charity law imposes restrictions on the nature and level of trading activity charities can carry out, and some types of trading are subject to tax, and have various legal and financial implications. To help explore this minefield, we’ve organised a special seminar on Setting Up a Trading Subsidiary with Burness Paull, partners in our free legal advice service. This will look at when a charity can and cannot trade, and the practical issues around tax, risk management and governance.

Here are five key issues to consider before even thinking about establishing a trading subsidiary:

  1. CONSTITUTION – before starting any new activity you need to check your governing document to see if you are permitted to do so, and also whether you have the necessary investment powers to finance your proposed activities. If you don’t then you may need to change your constitution.
  2. RISK – a major consideration for charities is to safeguard existing assets. Any trading activity by its very nature will have a certain amount of risk associated with it. Therefore trustees may want to ring fence the activity into a separate entity, even if it fulfils the primary charitable purpose of the charity.
  3. INVESTMENT – don’t just think about how much money you need to invest at the start of your new business, also consider any ongoing financial requirements. If the parent charity is going to loan the trading subsidiary any money, then there should be a formal loan agreement in place. It would be good to get professional financial and investment advice here.
  4. GOVERNANCE – you need to think about the composition of the board for any trading subsidiary. Its governance should be independent of the parent charity in order to prevent conflicts of interest and you may need to bring in trustees with relevant areas of expertise, however a proportion of the trustees from the parent charity can also be on the trading subsidiary board.
  5. REPORTING – you will also have to consider how your trading subsidiary is going to report back to the parent charity on its success or otherwise, and its future plans.

OSCR have produced some great guidance for social enterprises thinking of becoming a charity, and for existing charities considering setting up a social enterprise trading arm. The Inland Revenue also has detailed guidance on Charities – Trading and business activities

When it comes to charity trading you need to get it right to avoid any potential reputational or financial mistakes. Come along in to the seminar in September to find out more.