Social Enterprise Incorporation Q&A, Entity Code of Conduct & Long Term Vision - E214

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Internally, what is more important is that you have a code of conduct, a constitution, or equivalent by-laws that regulate how you intend to govern the distribution of that. Whether you want to maintain it or how high you want to hard code it, it is obviously something that you may want to keep flexible for a while, because through this you have not necessarily decided or discovered how your product is market fit to be a sustainable enterprise as well.-Jeremy Au

Jeremy presents a question and answer session about social enterprise incorporation

Jeremy Au (00:29)
Okay, cool. Go for it.

interviewer (00:31)
I am actually working on this new initiative we started in our NUS club. It is really to help new founders with their products. We were wondering how you would go about setting up a corporation based on your previous experience with Conjunct Consulting.

Currently, what seems to be a good option is to set up a non-profit company limited by guarantee with a charity status, but we were wondering if you have any separate thoughts based on your experience to see if that is the best option. How did you go about doing it?

Jeremy Au (01:09)
The way to think about incorporation is by stating what is most likely your revenue source. We have to work backwards from there. If you think that your end requirement is going to be donations, then it is going to be charity and things.

Similarly, if you believe that your revenue is primarily going to be from classic commercial activities, then you should be a private limited company. That is the crux of it. Obviously, there are some minor tax advantages to being a charity, but honestly, at this level, it will not become a significant difference between both sides

interviewer (01:48)
We are wondering because most of our money is going to come from commercial activities such as taking up projects for clients. That points to being private limited based on what you have mentioned, but at the same time, we do not really want to keep the profits. Let's say we make money and there is a team. It should not be a case whereby this team gets to keep the money. You want to see how we can safeguard this as well.

Jeremy Au (02:18)
If that is the case, then you can always write that into the Constitution. If you are a private company, say that you are a social enterprise. Set it up as a private company in terms of a company structure. Publicly, you are a social enterprise, and you can even get on the way to becoming certified to be a B-corporation all the way there. Internally, what is more important is that you have a code of conduct, a constitution, or equivalent by-laws that regulate how you intend to govern the distribution of that. Whether you want to maintain it or how high you want to hard code it, it is obviously something that you may want to keep flexible for a while, because through this you have not necessarily decided or discovered how your product is market fit to be a sustainable enterprise as well.

You believe right now that you are going to do clients' commercially, but you may not necessarily have discovered whether the market wants it. Nor have you discovered if the rate that you get and the velocity that you do is enough to support the size or the quality of the company you are trying to build. What it means is that you cannot really hard-code the percentage or the objectives. At the very best, you could write in the interim constitution on the spirit of what you are trying to achieve and then make sure that your team is thinking about it on mission and values perspective.

interviewer (03:38)
Great. In the case of Conjunct hy was a company limited by guarantee the best option for you? Did you explore other options prior to that as well?

Jeremy Au (03:47)
Frankly, I have a more sophisticated understanding of company structure today of all the different types than I did when I began the position years ago. Two is that years ago, when I was asking questions just like you are, the people who could answer that question for me were much less sophisticated and mature about it because the concept of social enterprises or setting things up was much less mature in terms of understanding and in terms of the development of it. B-corporations at that time were a cookie idea, which we discussed on my recent podcast. At that point of time, social enterprises were considered relatively new, only being a couple of years old in Singapore and Southeast Asia. At that time, most people were really considering whether it should be a society or a charity. That was the space or the frame of the discussion.

I think for us in that context, those were the parameters for all of the discussion. From a consulting and client perspective, we felt society was not a good fit for our requirements. It was a big one, and we moved ahead with being a CLG. I think whether we would become a charity or not was something that we decided on later. We did not need to make that decision. If I was making decisions today, I feel that I would be open to either private limited or CLG. I do not think it would be a clear-cut and, obviously, I think it would be a different conversation altogether. It is more important that the mission and the vision of how to use the constitution is to have those values in it. That is much more important than the actual company structure.

interviewer (05:44)
Thanks a lot for that. We were just wondering if there are any big differences between a company limited by guarantee and a private limited company in terms of the operation or set up because I understand that in the case of a company limited by guarantee, as in a non-profit, you would need a board structure that may not necessarily be in the case of a private limited company.

Jeremy Au (06:05)
Yes. You require a board for a company limited by guarantee and, of course, you should check this with someone who is much more familiar with the current company's understanding. I am actually taking cues from you. That being said, a private limited company can have a board as well. It is not an issue against you having a board at a private company if that is what you want to have as well.

interviewer (06:28)
Yes. In contrast, we wanted to do something that was probably not as time-consuming in private limited and the CLG. Our understanding was that CLG is a little bit more cumbersome. What are the key differences between a CLG and a private limited company?

Jeremy Au (06:53)
I am going to defer to a company lawyer on this because things change from year to year and the last time I did this was back in 2011 or 2012. It was almost ten years ago. I would say counting on me would be a bad idea, and I am happy to admit that. What I am trying to say here is that you have to make that executive decision. The core crux of the issue is less about the cumbersomeness.

You need to think about it from a requirements basis, but you also need to think about it from a shareholder perspective. That is true in any scenario, which is the shares of the ownership requirements of a private limited company. I think that is the real difference between a private company and a CLG. A CLG has no ownership and no shares involved. That is the core crux of it, and it has not changed in the past ten years. It is something that you have to think more carefully about because this can be held in a personal name or it can be held in a trust or some equivalent of it.

interviewer (07:58)
These are quite interesting. Let's say in the case of Conjunct what we are trying to do, there is going to be a regular turnover of staff, especially amongst senior roles. Again, in this case, a private limited may not make as much sense in terms of the ownership of the company as compared to a CLG.

Jeremy Au (08:20)
Well, it depends on where you put the ownership of the company. If you are the founder, then you are in it for a long time in any scenario. Either as a CLG or as a private limited, the fundamental fact is that if you are the founder and you are incorporating this, you have to be there as an executive in charge of the ownership because even as a CLG, there is no ownership. It is still controlled by the board in terms of executive control. Who you choose there does not change the fundamental question of who is in control.

The only question is whether the dynamic of control is based on shareholding or based on the director's seat. That is something that you have to decide on the one that you are comfortable with. By setting this entity up, you have to choose a preferred form of stability and control. You foreclose the possibility of future private investment because you no longer have shares in central and you are no longer able to take on private investments. The angels are out of investments, whereas private limited companies can potentially take that capital vulnerable and you can foreclose on capital contributions.

interviewer (09:36)
Let's say you are raising external money. The only way to do so is to make a donation.

Jeremy Au (09:41)
Yes, but it is not really raising money. This is just getting into the mission. It is fundraising contributions. That is not fundraising for investment dollars. You cannot fundraise investment capital.

interviewer (09:54)
That is interesting.

Jeremy Au (09:55)
Fundamentally, why you are asking yourself here is if you should be thinking too hard about cumbersome or not, because you are asking questions that imply finding the easiest way to incorporate something. The real question is, what are your goals for this thing? If your big vision is to set up to do some services in the short term, there is no requirement to set up anything. You can provide services today without setting up any entity. If the goal is to set up something for a short period of time, maybe a couple of years, there is also no requirement to set up anything because you can also do that in your free time as a volunteer. The real question now is, do you want to set up something large, such as a non-profit, or do you want to set up a large social enterprise or investment like dynamic?

interviewer (10:58)
Great. I think that is roughly all of the questions we have at this point. It is quite interesting to think back. If I may summarise the main takeaways, first of all, it does not matter too much whether it is CLG or Private Limited. The main thing is your code of conduct, your constitution, and what do you want to hard code into that. Other than that, I guess we should not think too much about the cumbersome mentality and instead try to understand two things. One is our ownership perspective in terms of who it belongs to, and the next is, how do we foresee this going along in the long run?

Jeremy Au (11:41)
What is the situation plan? What is the five-year vision for this thing? The truth here is that you are committing to this entity if you set this up. You are committing to this for the next ten years. You should budget and invest in that. 5 to 10 years is what I gave in terms of time.

interviewer (11:58)
In the case of Conjunct Consulting, did you plan to step back eventually or was that not in your calculation at the very beginning.

Jeremy Au (12:09)
I knew that I was going to build this and I knew that I wanted to build this to be strong and sustainable financially and from the people side as well. I had initially built it to be a social enterprise, and I knew that it was not going to be my entire career in that sense. I knew it was not a 20-year career, and once you know that, there is neither when nor if. It is the when or if that you have to think carefully about. What does it take to build? The question I have to push around and request you to ask yourself is if this is something that I care about so much that this could be my career and I want to drive this to become number one, to be the best and to be huge for the next ten to thirty years.

If the answer is yes, then the question is what should you incorporate? When you think of that, you do not have to worry about the code of conduct or anything because the truth is you will be in executive leadership. That is the code of conduct because you will be the controller and the owner of it. Either true ownership or through the board, because you will have that time horizon to manage it. The following question would be to know what you are trying to build on that vision of ten to thirty years. Are you building a charity, a social enterprise, or a for profit thing that provides return on investment and will absolve investment capital.

And if it is going to absorb investment capital from angels, then it has to be private limited for sure. If it is going to receive donations primarily, it should definitely be a CLG, if that is the vision. If it is a social enterprise with customer contracts, we might see some investment dollars. That is more likely to be private limited because you cannot receive investment that involves being private limited. As a private limited company, you can always receive donations from the public and crowd-funding. Then it will not have any tax benefits. That is the question that you have to ask yourself.

interviewer (14:23)
Great. I think that is quite interesting and I will definitely think about it. I do have a rough answer to that, but again, I do think that you would find that I would like it to be after this conversation.

Jeremy Au (14:35)
I know what you are saying is super straightforward. We set out the conversation outside in, which is what the difference between a private limited and a CLG is.

We are starting to wrap this conversation inside out. What is your vision for this company and how do you see the revenue mix supporting your vision of the company and therefore the company structured as a plus in ten years' time?

When you are bringing your successor in ten years' time, they are going to be picking up your vision from there and you are not going to change company structure there. It sort of keeps the ball going. You need to make sure how you incorporate is aligned with that.

Choosing your company structure based on whether if it is cumbersome or not is short-term expensive, long-term cheap versus short-term cheap, long-term expensive sort of thinking. You have to think of a way around it.

Interviewer (15:40)
Great. Thanks so much.