The social mission is the common strand which runs through every social enterprise yet it can quickly become subservient to commercial pressures as organisations become increasingly fixated on the financial bottom line. This may occur despite the best intentions of those who run such enterprises, but to avoid such potential dilemmas it is perhaps prudent to build in safeguards which will protect the social theme.
One way of acheiving this is to articulate the social mission in the enterprise's Memorandum and Articles of Association (the governing documents/constitution). Through clearly stipulating the social objectives of the enterprise such documents can help focus those in charge and maintain standards. The governing documents can also be drafted in such a way as to ensure that profits are retained to fund the social mission. Assets can also be 'locked in' to the enterprise so that their benefit will be retained for the community in the event of a sale/dissolution of the company.
Such safeguards are useful but have their limitations in a traditional company structure as it is possible for the board to remove such clauses from the constitution if a majority agree.
As such it may be beneficial for a social enterprise to employ the Community Interest Company structure as a security blanket with which to enfold the normal company arrangement. The Community Interest Company structure contains an asset lock which is legally enshrined and cannot be removed. There are also caps on the ways in which profits may be distributed and any social enterprise that wishes to adopt this structure must pass a community interest test which ensures that the company will carry out activities which benefit the community.This reporting obligation is on-going and must be prepared at the end of each financial year, thus ensuring that the enterprise does not take its 'eyes of the ball' regarding the social mission.
Another way in which the social mission can be protected is by ensuring democratic control of the enterprise. To this end a co-operative type structure (Community Benefit Society)may be employed which encompasses the concept of "one member, one vote". By allowing each member an equal vote regardless of their share capital it would be hoped that vested interests could not reduce the 'social scope'. The Community Benefit Society structure also prevents the distribution of profits to the members; they must be retained for the benefit of the community. Upon dissolution or winding up of such a society only the amount invested by members may be re-claimed. Any other assets must pass for the benefit of the community.
The social mission can be protected in different ways through the effective implemenation of varying legal structures. Which one suits your enterprise best will often depend on the your particular circumstances and goals.
Showing posts with label CIC. Show all posts
Showing posts with label CIC. Show all posts
Monday, 23 August 2010
Wednesday, 21 April 2010
Community Interest Companies (CIC's)
Community interest companies (CICs) are limited companies with a number of additional features and regulations, created for those who want to conduct a business for the community benefit and not purely for private advantage. This is achieved by a community interest test and asset lock which ensures that the CIC is established for community purposes and the assets and profits are dedicated to those same goals.
The UK Governments stated objectives when drawing up this new legal model were to improve access to finance, create a strong new brand, provide protection from demutualisation (investors changing the aims and nature of the company) and preserve assets and profits for social purposes.
CICs will generally be structured as either a company limited by shares (CLS) or a company limited by Guarantee (CLG) although in practice the majority of CIC's register as the latter.
Setting up a CIC
When registering your company with Companies House, you will need to provide additional documents, including a community interest statement describing your social purpose. The CIC regulator will approve your application if your statement passes the community interest test - ie the business activities you intend to undertake will be carried out for the benefit of the community or a section of it. The test is whether a reasonable person could consider those activities to benefit the community.
Features of a CIC
CICs have to follow specific rules, including the following:
Asset lock
CICs must have an asset lock. This ensures that the company cannot generally transfer its profits or assets for less than their full market share. The exception being a transfer to another asset locked company such a charity or other CIC. It will also protect any remaining assets for the community if you dissolve the CIC. The lock is legally enshrined and cannot be removed under any circumstances.
Dividend Cap
If you set up your CIC as a company limited by shares, you will have the option of issuing shares that pay a capped dividend to investors. The cap is set by the CIC Regulator to protect the asset lock and strike a balance between encouraging people to invest in CIC's and the principle that the assets and the profits of a company should be devoted to the benefit of the community.
There are three elements to the Dividend Cap:
1. maximum dividend per share limits amount of dividend that can be paid on any given share. Currently the limit is a flat rate of 20% of the paid up value of the share.
2. The maximum aggregate dividend limits the total dividend declared in terms of the profits available for distribution. Currently, the limit is 35% of the distributable profits.
3. The ability to carry forward unused dividend capacity from year to year to a limited extent. Currently the limit is 5 years.
It should be noted that these caps set maximums. They should not be taken as in any way suggesting that those who invest in CICs are entitled to a particular rate of return on their investment.
Performance Related Cap
CIC will generally have the same borrowing powers as any other company. On rare occasions the situation will arise were the interest payable on debts or debentures is linked to the performance of the CIC (also known as quasi equity). The ability to pay uncapped interest in this fashion would circumvent the Dividend Cap.
Therefore a cap exists on the maximum interest payable. It has been set as 10& of the average amount of a CICs debt or sum outstanding under a debenture.
Accounting
Together with your annual accounts, you must present an annual community interest company report for public record. The report must show what the CIC has done during the year to pursue its pre-specified community interests.
Whilst take up of the CIC structure has been relatively muted in Northern Ireland the structure does appear to have struck a chord with many social entrepreneurs and is unquestionably a useful addition to the social enterprise sector.
For further information see the CIC Regulator website: http://www.cicregulator.gov.uk/
The UK Governments stated objectives when drawing up this new legal model were to improve access to finance, create a strong new brand, provide protection from demutualisation (investors changing the aims and nature of the company) and preserve assets and profits for social purposes.
CICs will generally be structured as either a company limited by shares (CLS) or a company limited by Guarantee (CLG) although in practice the majority of CIC's register as the latter.
Setting up a CIC
When registering your company with Companies House, you will need to provide additional documents, including a community interest statement describing your social purpose. The CIC regulator will approve your application if your statement passes the community interest test - ie the business activities you intend to undertake will be carried out for the benefit of the community or a section of it. The test is whether a reasonable person could consider those activities to benefit the community.
Features of a CIC
CICs have to follow specific rules, including the following:
Asset lock
CICs must have an asset lock. This ensures that the company cannot generally transfer its profits or assets for less than their full market share. The exception being a transfer to another asset locked company such a charity or other CIC. It will also protect any remaining assets for the community if you dissolve the CIC. The lock is legally enshrined and cannot be removed under any circumstances.
Dividend Cap
If you set up your CIC as a company limited by shares, you will have the option of issuing shares that pay a capped dividend to investors. The cap is set by the CIC Regulator to protect the asset lock and strike a balance between encouraging people to invest in CIC's and the principle that the assets and the profits of a company should be devoted to the benefit of the community.
There are three elements to the Dividend Cap:
1. maximum dividend per share limits amount of dividend that can be paid on any given share. Currently the limit is a flat rate of 20% of the paid up value of the share.
2. The maximum aggregate dividend limits the total dividend declared in terms of the profits available for distribution. Currently, the limit is 35% of the distributable profits.
3. The ability to carry forward unused dividend capacity from year to year to a limited extent. Currently the limit is 5 years.
It should be noted that these caps set maximums. They should not be taken as in any way suggesting that those who invest in CICs are entitled to a particular rate of return on their investment.
Performance Related Cap
CIC will generally have the same borrowing powers as any other company. On rare occasions the situation will arise were the interest payable on debts or debentures is linked to the performance of the CIC (also known as quasi equity). The ability to pay uncapped interest in this fashion would circumvent the Dividend Cap.
Therefore a cap exists on the maximum interest payable. It has been set as 10& of the average amount of a CICs debt or sum outstanding under a debenture.
Accounting
Together with your annual accounts, you must present an annual community interest company report for public record. The report must show what the CIC has done during the year to pursue its pre-specified community interests.
Whilst take up of the CIC structure has been relatively muted in Northern Ireland the structure does appear to have struck a chord with many social entrepreneurs and is unquestionably a useful addition to the social enterprise sector.
For further information see the CIC Regulator website: http://www.cicregulator.gov.uk/
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