Set up a trading subsidiary

Charities are allowed to trade under certain circumstances.

If your charity is engaging in ‘trading’ to raise funds for the charity, rather than further the charity's objects directly, you may need to establish a trading subsidiary.

Trading subsidiaries can take any legal form appropriate for businesses.

Most commonly trading subsidiaries are 'normal' commercial companies limited by shares, but they can also be set up as a Community Interest Company or a Co-operative Society. Learn more

Trading subsidiaries of charities need start-up finance.

Charities can provide this finance to a trading subsidiary by making a loan or an equity investment by purchasing shares. Any funds provided to the subsidiary must be given on an arm's length, commercial basis.

The charity must not subsidise the trading company's operations.

A charity must consider the specific investment duties that apply to charity trustees.  Trustees' must not take undue risks with charitable funds.

They must also consider the suitability of any proposed investment and the extent to which their charity's investments should be diversified.

Issues that the charity's trustees must explore include:

• Do the charity's investment powers permit investment in a trading company that it owns?
• Does the subsidiary have a credible business plan, budget and cash-flow forecast? Or is this investment too speculative?
• Is the investment in line with the charity's investment policy?
• Is the investment in the charity's best interests?

Read the Charity Commission's guidance on investment matters.

Trustees should take seek appropriate professional advice before deciding to use charity money to finance the subsidiary.

It's important to establish and maintain a clear boundary between the parent charity and its trading subsidiary. This avoids any possibility that charitable resources are used for non-charitable purposes.

Financial management

Separate accounts should be established and maintained for the parent charity and its subsidiary.

Any transactions between the two should be carefully considered and recorded. These must be made on arm's-length terms. This applies not only to start-up finance but also to ongoing funding and other arrangements.  

Sharing resources

If the trading subsidiary will use the charity’s assets (including its premises and brand) establish an open market rent or fee. Arrangements involving staff must be approached carefully, for example based on fair cost apportionment.

Subsidiaries can make supplies of premises or staff time without charge – this is effectively a donation to the charity.

Charities must ensure that there are sufficient independent directors on the trading subsidiary's board that any conflicts can be managed. This means that on the charity's and the subsidiary's board there are sufficient independent trustees/directors (as applicable) to be able to form a quorum.

'Independent' people are those who do not sit on the other's board or otherwise have direct and senior involvement in their activities.

While it’s common for there to be some cross-over between the trustees of a parent charity and the directors of its trading subsidiary, anyone involved in the administration of both should be aware that each is a separate entity, with distinct responsibilities.

The Charity Commission has further guidance on the governance of trading subsidiaries.

We recommend you seek professional advice to help you with setting up a trading subsidiary.

You can find detailed advice on all the issues in:

• Trustees trading and tax: how charities may lawfully trade (CC35) Section 4
• the Sayer Vincent Made Simple Guide.