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It is still a surprise to many people that charities (and organisations in the wider social economy, including the "not for profit" sector) actually trade.
A charity needs to understand whether it is conducting "primary purpose trading", ancillary, occasional, or mixed trading and whether (if non primary purpose) the de minimis rules may apply.
Get it wrong and not only is the exempt tax status at risk but also charitable status itself. Potentially there may also be personal liability on the part of the directors and trustees. Establishing a subsidiary trading company does not mean that an organisation will "get it right" either and there are numerous pitfalls for the unwary or ill-advised.
One of the first considerations must be whether you have the power to establish a trading company. Once this hurdle is overcome, what powers do you have to provide funds for a subsidiary to carry out its trade? There are strict obligations on charity trustees, for example to exercise skill and care (with the benefit of professional advice) as to whether the amount and nature of any proposed investment make it suitable for their charity. Should the charity take equity in its trading subsidiary or provide a loan? If a loan, should it be secured or unsecured, and what about interest, or the rate of interest? And of course a charity must also be concerned as to the tax status of any investment that it may make in a trading subsidiary, which may not qualify for the tax exemptions otherwise available.
One of the biggest problems for a charity can arise if its trading subsidiary gets into financial difficulties. There may be pressure or a desire for the charity to provide additional funds. This can be disastrous for the charity and for the trustees personally.
Once the subsidiary trading company has been established, another potential problem area is the relationship between the charity and its subsidiary. Often trustees in the charity may act as directors of the subsidiary. In such cases it is important that the individual understands the different responsibilities that are owed to the charity and to the subsidiary respectively, and the real prospect of a conflict between those responsibilities arising. Again, potentially this can result in personal liability on the part of the individual trustee.
Once the subsidiary is trading, there are ongoing issues which must be addressed, for example, can the subsidiary use the name of the charity? What about sharing space and using other resources - such as staff - and how best to structure the transfer of any trading profit from the subsidiary to the charity?
Entirely separate but still relevant for the subsidiary are the legal issues relating to its trade, such as terms and conditions of business, supply or service contracts, distribution and franchise agreements, partnership agreements and the like. The subsidiary will also need advice on property and tax matters.