Stay in touch with the latest news from AIM and get information on sector grants, jobs and events with our free fortnightly E-News.
Setting up a trading company
CFG, with Fiona Wharton at Wrigley’s Solicitors, have prepared this advice on setting up a trading subsidiary exclusively for AIM.
For many in the museum sector the Coronavirus pandemic has prompted thoughts of diversifying income streams with some looking at establishing their own or joint trading initiatives to replace income previously relied on from cafes, events or ticket sales.
Museums must continue to deliver their core (charitable) purposes. Many are innovating to allow people to continue to access their galleries, archives, spaces and assets in a virtual way, particularly with an education focus. The need to explore different business models is likely to be with the sector for some time; establishing a trading subsidiary is one option.
Museums which are registered charities must only carry out primary purpose trading through the charity i.e. trading directly in furtherance of their objects. Most other trading, unless of minimal amount or ancillary to allow it to deliver its core purpose, must be done via a trading subsidiary.
Museums could consider establishing a subsidiary in order to manage commercial risk or simply to ringfence the activity from the core purposes of the parent body.
Generating new sources of income
Setting up a subsidiary is a form of investment, usually in terms of both financial and resource input. Any decision to do so should be evaluated carefully against a clear and robust business plan and having done appropriate market research.
The subsidiary should have a clear purpose. In an era when the traditional use of a subsidiary, to operate shops or cafes, is changing organisations will be looking to other areas such as merchandising, consultancy services or collaborative working to generate income.
A subsidiary could be set up by a museum alone or could be jointly owned which could maximise shared skills, resources and efficiencies, perhaps a shared merchandising website to service similar organisations. Any collaboration should be agreed and recorded in a written agreement setting out what the relationship will cover, how it will operate and when, and how, it could or will end.
A company limited by shares of company limited by guarantee are the usual options for a trading subsidiary and the governing document should build in key governance requirements, such as the right of the parent entity to appoint members to the board and that the subsidiary will be wholly owned by the parent body.
The profits from the subsidiary can be donated to the parent body and, if a registered charity, the arrangements can benefit from the corporate gift aid system.
The following is a non exclusive list of areas to be considered before setting up a subsidiary:
- Market research – is there demand for the produce, services, project proposed?
- Funding – will the subsidiary need start up funding, from either the parent body or external funding? Arms length contracts should be agreed and recorded.
- Viability/Sustainability – is the business and financial model viable and sustainable
- Governing body – the directors of the subsidiary cannot all be the same individuals as the trustees/directors of the museum to ensure conflicts of interest can be managed.
- Inter group arrangements –should be agreed in writing and cover access to shared resource including property, staff, intellectual property, use of assets, governance and funding arrangements, termination provisions.
Trading subsidiaries can be good generators of unrestricted income but clear benefit/risk analysis is required to assess if a subsidiary is a good option for your museum.
Have you joined Charity Finance Group? As part of your membership with AIM, you can join CFG for free, and receive member benefits including discounted access to charity finance events and training, free member meetings and special interest groups, online resources and exclusive publications, helping you to stay informed, connected and supported on charity finance issues. Join now at www.cfg.org.uk/aim