Community enterprise companies
There are two main legal forms that are typically used for community investment purposes:
- Industrial and provident societies;
- Community benefit societies;
- Co-operative societies;
- Community interest companies.
There are many different ways to set up that should ensure:
- The social mission is safe guarded
- Risk is managed
- Finance is protected
- Tax is managed
Co-operative societies have limited liability, but they aim to serve community interests. They allow the issue of “withdrawable” shares, which can be taken out by shareholders, at the discretion of directors. They operate on the principle of “one shareholder, one vote”, rather than the more shares owned, the greater the voting power, this means they are an inclusive and democratic legal form. There is a maximum limit of £100,000 for an individual shareholders. There is also a limit that can be paid out to shareholders to ensure the investment is for community benefit as opposed to financial return. This is not set by the Financial Conduct Authority, but is generally perceived to be between 2-9%.
Co-operative societies are usually set up for the benefit of their members whereas, community benefit societies aim to benefit the wider community, not just the members.
The FCA allow a Community Benefit Society (CBS) (former Industrial Provident Society Ben Com) to issue shares and is exempt from the prospectus requirements and the financial promotions regime. This means an IPS Ben com share offer can be promoted and distributed to an unlimited number of people, without needing to get ‘section 21’ approval
These shares can be withdrawable and/or transferable. However, setting up transferable shares is more onerous and costly and currently there isn’t a large trading platform for IPS transferable shares. Withdrawable shares offer the share holder an exit strategy, however, the shares can only be withdrawn if there is sufficient cash flow and the withdrawal is agreed by the Directors.
Community interest companies
Community interest companies or CICs are a form of limited company designed to benefit the community rather than its shareholders. CICs have to pass a “community interest test” and commit to an “asset lock”, similar to community benefit societies, which ensure that they‘re established for community purposes and the assets and profits are used principally for the benefit of that community. CIC Regulator website has more information on CICs and how to set them up.
CICs are able to issue shares, however they are ‘transferable’ shares and would require a ‘regulated’ prospectus’, this makes it very expensive in the tens of thousands of pounds, according to Wessex Community Assets
Setting up an CBS
Most community enterprises that wish to undertake, own and manage a community energy project, use the IPS model, raising funding through a community share issue.
There are now many examples of community solar schemes, ones currently raising finance to install are:
Governance of a CBS
- Members – or shareholders, are rewarded by giving them interest on their shares;
- Membership is based on shareholding which is open to anyone over the age of 16;
- Shares are valued at £1 each. A minimum shareholding is agreed by the Director’s, it is suggested that a minimum of £500 is chosen to reduce the cost of administration. There is also a route whereby groups of people can club together to buy a share of £500, so the share issue is open to all. Currently there is a maximum shareholding of £100,000, per member.
- A CBS is run democratically, with members having one vote regardless of the number of shares they own. One Member – One Vote
- Membership is governed by rules which are agreed by the Directors when the IPS is incorporated.
Registering a CBS
A Community Benefit Society is registered with the Financial Conduct Authority rather than companies house. Setting up can be done here. The registration fee is dependent on the rules adopted by the new society, but is £40 if model rules are laid down, such as those defined by the Co-opertives UK, here. A set up service can also be used, for example by ‘Share energy’, Cooperatives UK’ or ‘Wessex Community Assets’., this cost in the region of £500-£800.
It takes about 3 weeks for the FCA to set up a CBS, once set up there are running costs and legal responsibilities for filing accounts and annual returns.
Co-operatives UK also give useful advice on setting up community enterprises alongside their set-up service.
According to Cooperatives UK:
‘A community benefit society registered with this model version may engage in any lawful activity, including trading. This model is suitable for an organisation which is owned and controlled democratically by a variety of stakeholders, that wish to work together to achieve their shared interests.’
To set up a CBS, 3 founding Director’s are required. A broad skill set is great to have on the management team, including:
- Expertise in renewable energy and energy efficiency projects
- Legal expertise
- Business experience
- Accounting and financial expertise
- History of working on community projects
- Enterprising/ entrepreneurial zeal and drive
The main steps for setting up a CBS:
- Agree the ‘rules’ which are the Governing documents;
- Apply for registration – this can also be done by a ‘sponsoring body’ such as cooperatives UK;
- Founding members appoint the Board and Secretary;
- Set up a bank account, maybe 2, one for day to day, the other for Share issues monies;
- Apply for VAT registration on HMRC’s website;
- Apply for advanced assurance the scheme will qualify for Enterprise Investment Scheme tax relief HMRC’s website.;
Running a CBS
As soon as a CBS is registered, the Director’s are liable for the management and running, including annual accounts and returns. A CBS will also be liable for tax and may be able to negotiate a reduction in business rates, but any trading surplus will attract corporation tax. However, investors' interest payments are deducted before tax as it is an expense as opposed to a company where share dividends to investors are paid out of profits after tax.
Capital allowances and Corporation Tax
Capital allowances are a tax relief designed to allow the cost of certain of your company or organisation's assets to be written off against its taxable profits. They take the place of the depreciation shown in the financial (commercial) accounts, which isn't allowable for Corporation Tax purposes. Further information about Capital allowances should be reviewed, here.