Choosing a structure

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A key element of setting up and running your out of school club is to determine which business and/or management structure suits you best. This is important because it could have a significant impact on the way you operate your out of school club and the commercial and personal risks you take. Whichever structure you decide to operate under, whether it is a private enterprise or a voluntary management committee, you will be running a childcare business.

Childcare businesses can fall into the private sector, the voluntary sector or the public sector. Increasingly childcare businesses are seen as social enterprises, where surplus profits are used for public benefit, part of the growing social economy sector.

A growing proportion of voluntary sector childcare providers, including community organisations, set up as a charitable limited company as this will enable them to access various grants and funds as well as enjoying the status of incorporation.

The majority of private sector businesses aim to make a profit (like any other business) and so adopt one of the more typical business structures such as sole trader, partnership or limited company.

Businesses can be structured in many ways and each has its advantages and disadvantages. Tax implications can have a large influence on choosing the structure you should adopt and it is probably best to seek legal advice on which structure is best for you. Your business development officer at the Out of School Network will be able to point you in the right direction, but the following summary highlights the key points:

1. Sole Trader - the simplest form of a business where one person has total responsibility and control. Any profits belong to them, as do any losses. The downside is that if things go wrong the individual is personally liable for the debts of the business.

2. Partnership - more than one person working together. The benefits are the sharing of skills, experience, resources, duties, profits losses and risks. The drawbacks are that unless the partnership is limited, personal liability exists for all partners. It's always good practice to draw up an agreement to formalise any partnership.

3. Private Limited Partnership - similar to a partnership as there is an opportunity to share resources and skills. This type of partnership enables partners to limit their personal liability in the event that the business fails. In return for this protection partners must comply with a number of legal obligations such as submitting audited accounts to Companies House.

4. Private Limited Company - company limited by shares; set up and operated by one or more directors and a company secretary. Directors are responsible for complying with specific legislation including submission of accounts, holding meetings and keeping records. Director's liability is limited. In most situations, even if the business gets into difficulties, the directors will not be held personally liable for debts unless they have provided personal guarantees.

5. Limited Company - company limited by guarantee; common in the voluntary childcare sector is the company limited by guarantee. Directors have to comply with the requirements of Companies House, however the liability of directors is protected and the profits from trading have to be invested back into the business, rather than being distributed to shareholders. A company limited by guarantee can also have charitable status.

6. Community Interest Company (CIC) - a new type of company, designed for social enterprises that want to use their profits and assets for the public good. CICs will be easy to set up, with all the flexibility and certainty of the company form, but with some special features to ensure they are working for the benefit of the community. The sort of people who want to set up a CIC will typically be entrepreneurs who want to do good in a form other than a charity.

7. Registered Charity - many voluntary sector businesses become registered charities as this enables them to apply for funds and grants from charitable trusts and foundations. Run and managed by a voluntary management committee, the organisation is accountable to the Charity Commission and has to comply with charity legislation. A registered charity is an unincorporated organisation but can apply for incorporation as a company limited by guarantee.

8. Co-operative - co-operatives are businesses owned and democratically controlled by their members - the people who use their services - not by investors. In simpler terms the customers are the owners. Unlike investor owned businesses, co-operatives are organised solely to meet the needs of the member-owners, not to accumulate capital for investors. Co-operative members elect a board of directors from within the membership.

An additional legal structure for voluntary organisations may soon be available. The Charities Bill, currently going through parliament, includes provision for organisations to become a Charitable Incorporated Organisation (CIO). This will be a limited liability organisation registered with and accountable only to the Charity Commission, removing the need to be accountable to both the Charity Commission and Companies House, which is the current situation for a charitable company limited by guarantee.

Contact the Out of School Network for support in choosing the right structure for your childcare enterprise. You can also download the factsheet on Childcare Management Models (131KB) produced by Playcare Services here, or visit other web sites for a wealth of information on business structures. Try Companies House (www.companieshouse.gov.uk), CIC Regulator (www.cicregulator.gov.uk) and the Charity Commission (www.charity-commission.gov.uk) for model documents and other support.

Relevant business tools from OSN

Constitution (committee) (PDF 43KB)
Outlines management procedures for a club that is run by a voluntary management committee.

Partnership deed (PDF 17KB)
If you are setting up a private enterprise you may choose to go into partnership with a friend, family member of colleague. This document forms the basis of an agreement between the two partners - you should also seek legal advice.

Go to the OSN Business Toolkit >