CIC Association

Serving Community Enterprise

Hi folks


This is my first post. I'm extremely grateful for this resource and community. I've been spending many hours on this and I've hit a wall; reactions and thoughts would be extremely helpful.

I'm converting my self-employed business to a social enterprise company. I am running on a budget of £zero and can't afford legal / consultancy / accountancy support yet, but reckon I'm competent enough to work my way through this - I would also be happy to find ways of giving public thanks / promotion in return for help.


Some of my work will be straight trading with other businesses providing training and facilitation with an emphasis on democratic participation, but a large part involves support for other social enterprises and third sector orgs and projects and services which support sustainability, wellbeing and economic inclusion.


At first the bulk of the work will be me trading my services, although I hope to bring others in when they are ready and if work is available. I would very much like to access some grant funding for some of my work, but I don't consider that to be critical. Thinking ahead, I want to work co-operatively if others join, and sharing surpluses among worker members is fundamental to my vision of a sustainable economy.

Company structure
I am therefore proposing to incorporate as a CIC CLS now, with a view to converting to a Co-op CIC CLS later. The CIC CLS seems much more attractive since the dividend cap reforms last Autumn.

Start up shares
I intend to set up with 100 £1 shares, with initially just myself as shareholder, director, employee.


Rewarding initial investment / buying the business

Although I could just set up and find ways of rewarding myself somehow for the start up sweat equity, ie through salary, dividends and bonuses, I want to find the most clear, open and fair way of doing so. Really, I am selling my self employed business to the new company, along with all assets. Is there a good way of doing that, other than just issuing start up shares?


Let's say I value my business at £10k and write off all the start up sweat (which would anyway be rewarded by issuing normal shares). I would love it to be really clear, perhaps in a policy statement or ideally in the official accounts, that if the business ever turns enough profit, that I may over time pay myself the equivalent of £10k (on top of any salary etc). Perhaps by the company buying the business with 'founder shares' or similar, with a cap on total amount that can be repaid (£10k)?


Any thoughts on the actual process of doing this? Should I worry about this at incorporation stage, or deal with it later? If it is too complicated or time consuming I might be tempted to write it off and reward myself through wages, but it would be a shame.

Can anyone share their own stories? What do you reckon? Thanks!

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Replies to This Discussion

Hi Martin,

I can think of a number of ways of skinning this cat!

Perhaps the simplest is for your self-employed business (ie. you) to 'lend' the £10k-worth of assets to the CIC. Among the terms of the loan can be repayment in cash out of future profits - making it a 'quasi-equity' loan.  A simple loan agreement, and writing it into the accounts, will ensure the CIC respects the arrangemnet even if you are no longer there.  This does have the disadvantage of (probably) making the CIC initially technically insolvent - not an unusual situation for a start-up, but it could hamper other business operations - eg. getting an overdraft facility.

Another way of looking at it is that the £10k value you are 'giving' will in fact end up in the value of the shares you will own, so new members that come along ought to be willing to buy some shares from you at a price that reflects this real value (eg. £100 per share).  If you build a successful business in the CIC that is paying good salaries and dividends, they might be willing to pay much more per share in future.  This is elegant from a tax point of view, since it's a capital gain, and therefore tax free within your annual allowance (and your share sales can be planned across years to ensure this).  Well why should the bankers and billionaires get all the perks?

Hi Martin

I've not got experience working with CICs limited by shares, but here are my thoughts.

I'm not entirely sure what you mean by "converting to a co-op". My understanding is that being a co-op just means your shares are owned by the community you serve (e.g. local people owning shares in a community shop, or workers owning shares in their employer).

You could perhaps loan the company £10k and take a return through interest payments dependant on how well the CIC performs. There is a cap on how much "performance related interest" can be paid, currently 20%. See https://www.gov.uk/government/uploads/system/uploads/attachment_dat...

Finally, I note you want to become a social enterprise company. Many people won't consider a CIC CLS a true social enterprise as profit can be distributed to private individuals. And you won't be able to seek project funding from places like the Big Lottery. This is something to bear in mind.

Regards

James

Hi Martin

Just to add a bit more detail, James is correct to say that in general the approach of grant makers is not always favourable to CIC limited by shares when compared with CIC limited by guarantee, but perhaps more accurate to say that more grants are available to CIC limited by guarantee.

The truth is the system prefers to be complicated, I have even had employees of grantmaking bodies confirm to me a CIC limited by share wouldnt qualify for a particular fund....when they do.

For example, Big Lottery will and do fund CICs limited by share.....as an example their Awards for All fund will expect the grant to be ring fenced for CIC limited by Share.

The sector the CIC operates in, the activity in the project, the CIC governance, ability of the team and track record are normally the barriers..............for eg being a single director CIC limited by shares would mean you couldnt apply for Big Lottery Awards for All..........however I can cite one CIC (share) that received over £380k from Big Lottery (not Awards for ALL fund) to expand their very successful CIC that was single director.

best of luck

John

Many thanks folks! Any more insights and stories very welcome, not just for me but for others reading. It can be so helpful when grappling with this to find nuggets and examples online.

This has given me some food for thought.... in particular, I reckon I'm safe that I can proceed and deal with some of the detail after incorporation, rather than being stuck at a hurdle.

In response to James, by converting to a co-op, I'm explicitly referring to amending the articles to substitute the model CIC CLS Co-op articles, rather than a Co-operative Society under the new 2014 Act, and not just having share ownership, but also the 7 international principles of co-operation hard wired into our constitution.

I believe a CIC CLS alongside a CIC CLG is well understood to be a social enterprise, including by the UK SocEnt bodies & regulator. Although, especially since the rule changes Autumn 14 re profit sharing, a share of surplus is allowed, it is strictly limited to find the right balance so that maximising profit can not be the driving force. The Fair Shares model and discussion is very helpful - indeed I was using the expression to define new company types prior to their initiative, from permaculture principles.

I will go further. To my astonishment, I just saw in the CIC official documentation the note that a CIC CLS is a not for profit company..... I've spent days of research and discussion debating this point (actually years!). I would prefer to describe my company as not for profit, by which I mean that profit is not the main focus, is not extracted endlessly from the business at the expense of workers / society / planet, and is democratically allocated with all stakeholders co-creating the decision (I'm a fan of Sociocracy). I don't have the quote to hand, but I will post back the exact link and reference shortly - I reckon this official statement will be a game changer for many.

I do fully acknowledge however, that funders will have a variety of opinion on this. I want to make a very strong statement with my company that we are either Fair Shares, Beyond Profit, More Than Profit, Social Benefit Co. etc.... I also talk about Transition Enterprises (I'm a fan of the Transition Movement) and the Solution Economy. I would love to find the right banner(s) to march behind, but if we can legitimately call a CIC CLS not for profit, that would be a significant shift. I do believe a CIC CLS social enterprise already falls under some definitions of not for profit, but not others. The devil, perhaps is in the detail, including who makes decisions about surplus and so on, and how it is shared beautifully between workers, investors and community / earth.

Martin,

There is a specific discussion of whether a Share CIC can be regarded as 'not-for-profit' in my Template Social Firm Share CIC booklet, available from Social Firms UK...

http://www.socialfirmsuk.co.uk/resources/library/template-social-fi...

This cites a Charity Commission letter approving a charity trustee's shareholding in the charity's subsidiary Share CIC.

Hi again

We adopt the voluntary code of practice for social enterprise in Scotland at http://www.se-code.net/the-code-2/the-criteria/

Under this definition a SE's constitution must include the requirement that profits are reinvested in the business or in the beneficiary community and not distributed to owners/shareholders/investors.

It is of course possible for a CIC CLS to include in its articles a provision preventing it from paying a dividend, but I don't think that's the intention here.

James

Many many thanks again everyone. I'd encourage anyone else reading this to chip in with further thoughts or stories.

Geoff, I really appreciate you sharing that (I imagine) invaluable resource. I won't be buying the booklet today, but I do wonder if there is a definitive statement in there on profit / not for profit?

James, I was really surprised to see that Scottish SocEnt definition, which seems to go much further than any other definition I've seen, and seems out of step not just with recent rules changes re profit sharing in CIC's but what I understand to be the prevailing view. I understand that common view to be that a Social Enterprise to explicitly include CIC CLS (Company Limited By Share). The key understanding here for me, is that such a model must not be primarily for private profit - and I believe the articles and legislation explicitly cover this (although not in a way that is satisfactory to many funders).

CIC CLS model articles of association statement on Not For Profit

However, I don't know how I haven't seen this or come across any discussion of it before - it's glaringly obvious:

From the Office of the Regulator of Community Interest Companies, Model Articles of Association - CIC model constitution 5: private schedule 3 company limited by shares with a small membership - memorandum of association

Article 4
4. Not for profit
The Company is not established or conducted for private gain: any surplus or assets are used principally for the benefit of the community.

https://www.gov.uk/government/publications/community-interest-compa...

The same articles of association explicitly allow for paying dividends on profits, albeit in a way that is transparently limited according to CIC regs, as updated by rule changes in Autumn 14, which cap profit sharing at 35% - the remaining 65% must be reinvested in the business or used to serve the defined community the CIC is set up to benefit.

See the official guidance, chapter 6, item 6.3 re Dividend Cap https://www.gov.uk/government/publications/community-interest-compa...

To summarise, I believe the law and government guidance direct me, if I choose, to describe my CIC limited by shares as Not For Profit, and explicitly ensures that while it may distribute some profit as dividends, it is not primarily for profit, is primarily for social (and / or environmental) benefit, and must reinvest at least 65% of profits back into either the business or specified community beneficiaries.

I don't get the impression that such clarity and interpretation of the profit / not for profit issue is widely understood or shared. I realise I've gone off on a profit tangent. If there is already a discussion elsewhere, please point us there with a link and I'll continue there, or I'll be happy to kick one off when I get time.

Your comments, feedback or reactions are extremely welcome - have I got this right?

If I am correct, I might choose to describe my CIC as not for profit, not primarily for profit, 'Fair Shares' or some similar other as discussed above.

Thanks again everyone!

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