An organisation must incorporate in order to be able to raise share capital – form a legal company and register at Company House. There are three main types of legal forms that can be used.
- Community Benefit Co-Operative
- Community Interest Company
Community Benefit Co-Operative (CBEN)
CBENs have limited liability status (which means that their members are protected to an extent) and have four unique attributes – they work to the principle of one member – one vote. Members elect directors and are fully involved in the running of the organisation.
The share capital held by a member can be withdrawn – sold back to the organisation. (Directors can refuse a request for withdrawal if this is deemed against the interest of the society.) Societies can choose to issue withdrawable shares, transferable shares or shares that are both.
There are limits on the number of shares a member can hold in any one CBEN of £20,000. This has been recently under review, with the aim of increasing this figure to £30,000 and has been enabled but not implemented.
There are two main types of CBEN: co-operative societies, which are run for the benefit of their members and community benefit societies which are run for the benefit of the wider community
Community Interest Company (CIC)
CICs are a relatively new form of company introduced in 2005. There are no special exemptions for CICs from the regulations covering financial promotions.
As a legal form, charities offer very limited scope for community investment.
Charities cannot issue share capital but can sell bonds and are exempt from regulation under the Financial Services and Markets Act.
An CBEN or CIC form is usually suitable legal structures for an organisation which wishes to issue shares. Several things should be considered when deciding which to choose.
Comparison of CIC and CBEN
|Governance||One share – one vote||One member – one vote|
|Limits on the amount a person can invest||No upper limit on how much money a person can invest||a £20,000 limit on individual shareholdings
|Interest/dividends paid||a CIC can distribute no more than 35% of its profits to shareholders in any one year||a flexible limit on the interest paid on share capital
|Shares||A CIC limited by share can issue transferable shares but not withdrawable shares||Can issue withdrawable or transferable shares|
|Asset lock*||Have asset locks||Only CBEN benefit societies can have asset locks|
|Set up costs||Cheaper to register and maintain||Can be expensive|
|Regulation||Are not exempt||Are exempt from regulation when offering shares or bonds|
*An asset lock prevents any assets held by a company from being distributed to its members when a company is dissolved.
Converting from one form to another
When an organisation is already incorporated in a format which may not be appropriate, then there are two options – to consider converting to a different form or setting up a new organisation. The rules for converting from one to another a re complex and it is best that professional advice is sought but it is worth noting that it is not possible at this time for a CIC to convert to a CBEN.