UK Formation Of A New Community Interest Company

WORLDWIDE: UNITED KINGDOM: FORMATION OF A NEW COMMUNITY INTEREST COMPANY

A CIC is a new type of company, designed for social enterprises that want to use their profits and assets for the public good. CICs will be easy to set up, with all the flexibility and certainty of the company form, but with some special features to ensure they are working for the benefit of the community.

"A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners. Social enterprises tackle a wide range of social and environmental issues and operate in all parts of the economy. By using business solutions to achieve public good, the Government believes that social enterprises have a distinct and valuable role to play in helping create a strong, sustainable and socially inclusive economy.

Social enterprises are diverse. They include local community enterprises, social firms, mutual organisations such as co-operatives, and large-scale organisations operating nationally or internationally. There is no single legal model for social enterprise. They include companies limited by guarantee, industrial and provident societies, and companies limited by shares; some organisations are unincorporated and others are registered charities.

LEGAL FORMS AND SOCIAL OBJECTIVES
Currently companies that do not have charitable status find it difficult to ensure that their assets are dedicated to public benefit. There is no simple, clear way of locking assets to a public benefit purpose other than applying for charitable status. The Community Interest Company will help to meet the need for a transparent, flexible model, clearly defined and easily recognised.

The CICs regulator will consider whether applications meet the criteria to become a CIC. If satisfied, the regulator will advise the registrar in Companies House who, providing all the documents are in order, will issue a certificate of incorporation as a CIC.

A charity can convert to a CIC with the consent of the Charity Commissioners. In so doing it will lose its charitable status including tax advantages. A charity may however own a CIC in which case the CIC would be permitted to pass assets to the charity. In the same time an organisation must choose whether it wishes to incorporate as a CIC or a charity. CICs will be more lightly regulated than charities but will not have the benefit of charitable status, even if their objects are entirely charitable in nature.

A charity may, however, own a CIC in which case the CIC would be permitted to pass assets to the charity. This for example enables a CIC to run a charity shop and pass all the profits to the charity that owns it.

The sort of people who will want to set up a CIC will typically be entrepreneurs who want to do good in a form other than charity. This may be because:

	They are looking to work for community benefit with the relative freedom of the non-charitable company form to identify and adapt to circumstances, but with a clear assurance of not-for-profit distribution status.
	Members of the board of a charity may only be paid where the constitution contains such a power and it can be considered to be in the best interests of the charity. It means that, in general, the founder of a social enterprise who wishes to be paid cannot be on the board and must give up strategic control of the organisation to a volunteer board, which is often unacceptable.
	The definition of community interest that will apply to CICs will be wider than the public interest test for charity.
	CICs will be specifically identified with social enterprise. Some organisations may feel that consequently this is a more suitable than charitable status.

COMPANY FORMATION
A CIC can choose from one of three company forms:

Community interest is the heart of the CIC and the community interest test is what differentiates CICs from other not-for-profit organisations. Demonstrating community interest is of value to those seeking grant funding or philanthropic investment. The test is intended to be light touch. To become a CIC, an organisation would need to satisfy the regulator that its purposes could be regarded by a reasonable person as being in the community or wider public interest. It will also be asked to confirm that access to the benefits it provides will not be confined to an unduly restricted group.

If you incorporate a company yourself, you will need to send the following documents, together with the registration fee to the Registrar of Companies:

	A memorandum of association
	Articles of association
	Form 10
	Form 12
	A community interest statement
	An excluded company declaration

Each of these documents is explained below.

MEMORANDUM OF ASSOCIATION sets out the company name, the registered office address and the company objects. The object of a company may simply be to carry on business as a general commercial company. The company's memorandum delivered to the Registrar must be signed by each subscriber in front of a witness who must attest the signature.

ARTICLES OF ASSOCIATION is the document which sets out the rules for the running of the company's internal affairs. The company's articles delivered to the Registrar must be signed by each subscriber in front of a witness who must attest the signature.

FORM 10 gives details of the first director(s), secretary and the intended address of the registered office. As well as their names and addresses, the company's directors must give their date of birth, occupation and details of other directorships they have held within the last five years. Each officer appointed and each subscriber (or their agent) must sign and date the form.

FORM 12 - is a statutory declaration of compliance with all the legal requirements relating to the incorporation of a company. It must be signed by a solicitor who is forming the company, or by one of the people named as a director or company secretary on Form 10. It must be signed in the presence of a commissioner for oaths, a notary public, a justice of the peace or a solicitor.

A COMMUNITY INTEREST STATEMENT - this is one of the documents that must be filed on formation of or conversion to a CIC. It must be in the form approved by the CIC Regulator who will publish an approved format for further guidance. The statement, which must be signed by all of the directors (or intended directors) is required to confirm that the company will serve the community rather than operate for private profit motives. It must also describe the intended activities of the company.

AN EXCLUDED COMPANY DECLARATION - this is one of the documents which must be filed on formation of (or conversion to) a CIC. It must be in the form approved by the Regulator who will publish an approved format for further guidance. The declaration, which must be signed by all the directors (or intended directors) is required to confirm that the company will not be an excluded company i.e. will not be a political party or pressure group or controlled by a political party or pressure group.

COMPANY OFFICERS
Every company must have formally appointed company officers at all times.

A private company must have at least:

ONE DIRECTOR (if the company's articles of association do not require more than one). The company director can be anyone with some exceptions. You are restricted from being a Limited Company director if you are unable to consent to your appointment and you must seek legal advice if you are intend to direct the company. You are restricted also if you have been preciously or are declared bankrupt or banned from being a company director by the court.

ONE SECRETARY. A company's sole director cannot also be the company secretary. The company secretary - formal qualifications are not required.

A public company must have at least:

TWO DIRECTORS (You can't be a company director if: a) you are an undischarged bankrupt or disqualified by a court from holding a directorship, unless given leave to act in respect of a particular company or companies; b) in the case of PLCs or their subsidiaries, you are over 70 years of age or reach 70 years of age while in office, unless you are appointed or re-appointed by resolution of the company in general meeting of which special notice has been given.

ONE SECRETARY. (Must be qualified - read FORMATION OF THE NEW PUBLIC LIMITED COMPANY)

In Scotland the Registrar will not register for any company the appointment of a director under the age of 16 years old. A child below that age does not have the legal capacity to accept a directorship - Age of Legal Capacity (Scotland) Act 1991. If you need more information, contact Companies House, Edinburgh.

Some people not of British nationality are restricted as to what work they may do while in this country.

SHARE CAPITAL
In order to raise investment, CICs limited by shares will have the option of issuing shares that pay a dividend to investors. In order to protect the asset lock, the dividend on these shares will be subject to a cap set by the Secretary of State, which can be adjusted by the Regulator (after consultation and subject to the Secretary of State’s approval).

The Government proposes to structure legislation so as to allow CICs to issue suitably capped investor shares, while recognising that demand for such shares may initially be limited. The level of demand will be influenced by the way in which the cap is set. The Government intends that the cap should be set at a level which will allow CICs to access investment, without undermining their focus on community benefit.

The Government will set the structure of the cap in secondary legislation, and the CIC regulator will be responsible for setting the cap in a way that will balance need to encourage investment with the primacy of community interest. The regulator will take the views of the social enterprise sector into account in setting the cap.

SPECIAL FINANCIAL ISSUES
CICs will not enjoy any special tax status as such. They will generally be in the same position as any other organisation in obtaining any tax concessions or grants otherwise available, for example due to their type of activity or location. A charity which becomes a CIC will lose its charity tax status.

It is a restriction on distributing profits and assets to their members – assets should be used to benefit the community.

Like other social enterprises, CICs will find funds from a variety of sources, including grants and donations, loans from high street banks and other institutions. The Government is proposing limited access to equity finance.

The Government is supporting finance for social enterprises, through community development finance institutions and the Community Investment Tax Relief. As the concept of social enterprise becomes more widely understood by the finance community, social entrepreneurs should find it easier to explain what they are doing and to get a competitive price for finance. Clear recognition of the CIC form will help this process.

The Government is supporting social enterprises through the tax system. The Community Investment Tax Relief (“CITR”) gives tax benefits to investors who back businesses in less advantaged areas through Community Development Finance Institutions (CDFIs).

CITR provides tax relief of 5% per annum to investors who invest in an accredited CDFI, which then in turn lends to or invests in a qualifying profit-distributing enterprise or community project. Accredited CDFIs may invest in qualifying CICs.

CICS will be eligible for the same tax relief's available to other companies. The Government is considering carefully the various technical points about fiscal matters that were raised during the consultation, in order to ensure that the introduction of the CIC will be of real practical value to the social enterprise sector.

COMMUNITY INTEREST REPORT
CIC will be required to file with its accounts an annual community interest report which will be placed on the public record at Companies House and will be copied to the CIC Regulator.

The report will need to include details of the remuneration of the directors, the dividends paid on shares and the interest paid on capped loans. It will also need to explain what the CIC has done to benefit the community and how it has involved its shareholders in its activities.

COMPANY ACCOUNTS
A company's first accounts must start on the day of incorporation. The first financial year must end on the 'accounting reference date' or a date up to seven days either side of this date. Subsequent accounts start on the day following the year-end date of the previous accounts. They end on the next 'accounting reference date' or a date up to seven days either side.

To help you meet this filing requirement, the Companies House send a pre-printed 'shuttle' form to your registered office a few weeks before the anniversary of incorporation. This will show the information that you have already given to the Companies House. If your accounts are delivered late, there is an automatic penalty. This is between £100 and £1,000 for a private company and between £500 and £5,000 for a PLC .

The first accounts of a private company must be delivered:

	within 10 months of the end of the accounting reference period; or
	if the accounting reference period is more than 12 months, within 22 months of the date of incorporation, or three months from the end of the accounting reference period, whichever is longer.

The first accounts of a public company (PLC) must be delivered:

	within seven months of the end of the accounting reference period; or
	if the accounting reference period is more than 12 months, within 19 months of the date of incorporation, or three months from the end of the accounting reference period, whichever is longer.

You may change the accounting reference day by sending Form 225 to the Registrar. You must do this during the accounting period affected by the change or during the period allowed for delivering the associated accounts to the Companies House. For more information, see 'Accounts & Accounting Reference Dates'.

ANNUAL RETURNS
Every company must deliver an annual return to Companies House at least once every 12 months. It has 28 days from the date to which the return is made up to do this.

To help you meet this filing requirement, we send a pre-printed 'shuttle' form to your registered office a few weeks before the anniversary of incorporation. This will show the information that you have already given us.

All you have to do is:

check that the details are still correct;

amend any that are not; and

send the form back, signed and dated, within 28 days of the date of the return which is shown on the front of the form.

There isan annual document-processing fee of £30 (or £15 for users of our Electronic Filing or WebFiling services), which must be sent to us with the annual return.