Community values
4 Aug 08
Companies that can show that they are of particular value to the community can bene?t from special status that makes them easy to set up and ensures assets and earnings are not misused
by Sara Burgess
Golf in the Western Isles, community radio stations, festivals, farmers markets, cinemas and even a fish and chip shop – disparate interests, but organisations like this have all set up community interest companies since 2005.
Companies that can demonstrate a social purpose can apply for community interest company (CIC) status. This type of company is easy to set up and has a lock on its assets to ensure it continues to provide benefit to its community throughout its life.
The CIC legal form can be adopted by a range of social enterprises and not-for-profit projects serving communities that combine the pursuit of a social purpose with commercial activities.
CICs were specifically designed for social enterprise. Compared with a charity, the CIC offers greater flexibility in terms of activities. It has directors, who can be paid, instead of trustees, light touch regulation, but no tax incentives. A charity has extra reporting requirements. As a company, a CIC can access the debt market for loans and bonds and may be able to sell shares. CICs cannot have charitable status, but charities can set them up as subsidiaries.
CICs face additional reporting requirements and administration under the relevant legislation to ensure that they fulfill their community purposes. Directors’ pay must be transparent and an annual community interest company report open to public scrutiny must be published.
An “asset lock” ensures that assets are used only for the benefit of the community. Other companies can set up asset locks, but this is expensive and there is a possibility the asset lock could later be removed by members. The CIC asset lock does not prevent assets being used in the normal course of business, for example as collateral and if the CIC does so, the assets will be available to creditors in the event of default.
A CIC is a limited liability company incorporated under the Companies Acts. It has to satisfy the Regulator of Community Interest Companies, whose post was set up by Act of Parliament in 2004, that it passes a community interest test; it must provide an annual community interest company report, along with its annual accounts, and adopt certain statutory clauses in its constitution, including the asset lock.
The community interest test looks at the motivation of the company and its underlying purpose. What will it do? Who will it help and how? What will it do with any surplus it makes?
The statutory clauses provide legal protection against demutualisation and “windfall profits” being paid out to members and directors, without all the necessary checks and balances attached to mutuality and community status.
The CIC also has continuity of community purpose from when it is incorporated until it is dissolved, or converted to a charity. If it is wound up under insolvency law, residual assets will be preserved for the community rather than distributed to members.
It is quick, easy and inexpensive for social enterprises to set up because it has a statutory asset lock. The CIC has the advantage of the company form which is familiar to the business community and provides enough flexibility to adapt to most organisations’ membership, governance or structure, from a single-member company to a co-operative.
A CIC has certain statutory obligation similar to those of other companies, to make sure that it maintains proper financial records, produces accounts and maintains statutory records – such as registers of members and directors – and provides Companies House with information to keep the public record up to date. Small fees are payable for filing the annual community interest company report and the annual return.
The accounting requirements for a CIC are the same as those of other companies – the amount of detail and the extent to which an audit is required varies with the size of the company, and according to whether it is public or private.
Failure to meet these requirements can lead to the prosecution of the directors and the imposition of civil penalties on the company.
Given the principle of transparency associated with them, the regulator considers that CICs should aspire to produce accounts and directors’ reports that provide high quality information for shareholders and other stakeholders rather than simply complying with the minimum requirements.
However, transparency must be balanced against the cost of providing this information, which (subject to compliance with the statutory accounting requirements) should not detract from maximising the community benefits provided by the company.
All the directors of a CIC have the important obligation to prepare the annual community interest company report, to be filed with the accounts. The purpose of the report is to show that the CIC is still satisfying the community interest test, and that it is engaging appropriately with its stakeholders in carrying out activities that benefit the
community.
The detailed form of the report will be a matter for the company but, as with the annual accounts, the regulator considers that CICs should aspire to provide the fullest possible information rather than simply comply with the minimum requirements; as good practice it should, for example, outline how the CIC has ensured that the assets have been solely used for the benefit of the community the CIC serves.
The CIC report is delivered to the registrar who will file it on the public record and pass a copy to the regulator. Consideration of community interest company reports is an important element in the regulator’s monitoring role.
The annual CIC report provides transparency of operation as anyone can access it from Companies House. It provides information about the benefit provided to a community, assets transferred for less than market value; dividends paid; performance-related interest paid; directors’ remuneration; and how stakeholders were involved and outcome.
The formation and registration of a CIC is similar to that of any limited company. All the directors have to sign a document explaining their community credentials for submission to the Registrar of Companies for England and Wales, or Scotland.
Existing companies can convert to CIC status by passing resolutions which make changes to their name and to their memorandum and articles of association and sending the paperwork to the relevant company registrar. They also have to confirm that the company is not a charity, or that permission has been obtained from the Charity Commission to convert.
The registrar will conduct the normal checks for registration and pass the papers to the Regulator of Community Interest Companies, to determine whether the company satisfies the community interest test. These processes attract small fees.
It should be noted that a CIC cannot be politically motivated; or be set up to serve an unduly restrictive group; and its activities must be lawful. Anybody considering setting one up may wish to refer to the CIC Regulator’s website for more detailed guidance.
With nearly 2,000 registered, CICs have touched every sector of the economy bringing real and tangible benefits to communities.
The social and personal services sector accounts for 32 per cent of CICs, education 20 per cent, real estate renting and business 19 per cent and health and social services 15 per cent.
The CIC, as a legal form, has a lot to offer and as regulator, I urge business support agencies, financial institutions and local and central government to review policies to ensure they give due credit to social enterprises that choose to be so transparent in their operation and have their social purpose and asset lock regulated. n
www.cicregulator.gov.uk
Sara Burgess is Regulator of Community Interest Companies.