A Company Limited by Guarantee operating as a Social Enterprise in Scotland

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A Company Limited by Guarantee (CLG) is a popular structure for Scottish social enterprises, particularly those that want to prioritise social impact over private financial gain. Unlike a Community Interest Company (CIC) in Scotland, a CLG can apply for charitable status if it meets the criteria set by the Office of the Scottish Charity Regulator (OSCR). However, it can also operate as a non-charitable social enterprise, reinvesting profits into its purpose/mission.

By choosing a CLG structure to operate as a social enterprise, organisations can balance financial sustainability with mission-driven impact, while ensuring all profits and assets serve the community. If charitable status is desired, a CLG structure is one of the best choices available in Scotland. However, if trading flexibility is the priority, a non-charitable CLG or a CIC (despite its funding limitations in Scotland) may be worth considering.

Features of a CLG as a Social Enterprise

  • No Shareholders, Only Members: Instead of issuing shares, a CLG has members who act as guarantors, each committing a nominal amount (e.g., £1) in case of insolvency.
  • Profits Reinvested in the Mission: Unlike a Company Limited by Shares (CLS), a CLG does not distribute profits to shareholders - profits must be reinvested into the organisation’s social objectives.
  • Legal Entity: The CLG operates as a separate legal entity, meaning it can enter into contracts, employ staff, and own property in its own name.

The company can register as a Scottish Charity: Unlike CICs, which cannot be charities in Scotland, a CLG can apply for charitable status with OSCR if it meets the legal requirements.

There is a clear, defined asset lock (if a Charity or Social Enterprise with internal restrictions): A CLG with charitable status will have a chartiable asset lock as defined in the legislation, ensuring that assets and profits are used solely for the organisation’s purpose.

In terms of a governance structure, the board of directors manages the CLG, and if it is a charity, the charity trustees must follow both charity law and regulations as regulated by OSCR, and the Companies Act 2006.

Benefits of a CLG for Social Enterprises

  • A CLG can achieve charitable status: Unlike CICs in Scotland, a CLG can register as a charity with OSCR, making it eligible for tax reliefs and more funding opportunities.
  • Strong Social Mission: Since there are no shareholders, the focus remains entirely on delivering social impact rather than distributing profits.
  • Easier Access to Grants & Funding: Many funders, particularly in Scotland, prefer to support CLGs with charitable status over CICs or CLSs.
  • Limited personal financial liability: Members’ liability is limited to the small guarantee amount as set out in the articles, protecting them from financial risk.
  • Democratic governance & accountability: A CLG structure often allows for wider stakeholder involvement as members of the company, particularly in community-led organisations. This can be democratic through electiions at general meetings (e.g. the AGM).

Key Considerations & Challenges

  • Limited Access to Investment: Unlike a CLS, a CLG cannot issue shares, making it harder to raise equity investment. Social enterprises using this structure often rely on grants, loans, or trading income.
  • Regulatory Compliance: If the CLG is also a Scottish charity, it must comply with charity law and regulations in addition to company law. This includes restrictions on trading and asset distribution.
  • Funding Dependency: If reliant on grants, sustainability can be a challenge if funding sources change. Many social enterprises should aim to generate their own income through trading to reduce reliance on external funding.
  • Complexity Compared to a Sole Trader Model: While offering protection and credibility, running a CLG involves more administration and compliance than a simpler sole trader or partnership structure.

Is a CLG the Right Structure for Your Social Enterprise?

A CLG is ideal for social enterprises that:

  • Want to prioritise social impact over financial returns to investors.
  • Do not require external equity investment and instead rely on grants, loans, or revenue from services.
  • Want to register as a Scottish charity to benefit from tax relief and increased funding opportunities.
  • Need a formal governance structure that reassures funders, partners, and stakeholders.
  • Want to maintain independence without shareholder influence over decision-making.

A CLG may not be suitable if:

  • You need to raise investment through shares; a CLS (Company Limited by Shares) or Co-operative model would be better.
  • You want to distribute profits to private individuals; a CLS or standard business model may be more appropriate.
  • You want the flexibility of a social enterprise without charity restrictions—a CIC (despite its limitations in Scotland) or a non-charitable CLG may be an option.

Further resources and links

Legal structures overview - Company Limited by Guarantee

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