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CIC limited by SHARES or limited by GUARANTEE?
A Community Interest Company can be set up in either of two formats – “limited by shares” or “limited by guarantee”. You may not be familiar with these terms, so let’s see if we can help you choose.
For further help with your decision you are welcome to speak with us directly. Click for an online chat with an advisor (top right) or contact us by phone or email.
Shares are tokens of ownership and control and determine who is in charge of the company and how much share each person (shareholder) has in the value of the business. In a regular limited company (LTD) run as a business this means that the shareholder can receive a proportion of the profits (as “dividend”) and has the right to a proportion of the proceeds if the company is sold. The shareholders are the investors in the business.
A “Guarantee” company does not have Shareholders and nobody can take a “dividend”. Instead, the Directors (also called “Trustees”) each puts up a cash “guarantee” that would be lost if the company were to fail. The guarantee does not have to be a big commitment. The minimum is just £1 each. We normally recommend £10 each, because it looks a bit more serious. When it comes to voting power, every Trustee is equal. On the board of a CIC limited by guarantee it is strictly “one person one vote”.
The CIC is subject to many of the same rules as any other “private limited company”. It must report changes to its registered details (including members names and addresses), it must complete a Confirmation Statement (formerly annual return) and it must file Accounts each year. In these matters, the same obligations apply whether the CIC is limited by shares or limited by guarantee.
Either type of CIC is allowed to sell products and/or services and to generate profit from those sales. In this respect CICs differ from Charities, which are not allowed to “permanently trade”.
Before answering that question, we should point out that there is nothing to stop a normal limited company from distributing part or even all of its profits to good causes. If the shareholders agree to it, any company can be charitable with its money. But a CIC will be recognised by the public and funding bodies specifically as a Social Enterprise company. Having said that, if the CIC brings in most of its money by selling goods and services it it probably best to be set up as a CIC limited by shares. The more it behaves like a business the more suited it is for the “limited by shares” format.
Funding bodies each have their individual policies about what sort of organisation they will support; but many will be happy to support either kind of CIC if it offers the sort of services that the funding body approves. However, more funding bodies will support a CIC limited by guarantee than one limited by shares, because they know that the directors cannot take a dividend. As a rule of thumb, the more reliant your organisation is on external support (other than sales) to support its work the more suited it is for the “limited by guarantee” format.
In a CIC limited by guarantee the Directors may also be called Trustees. They are the ones who run the company (on a “one person one vote” basis) and they are the ones who put up the “guarantee” (normally a nominal sum, such as £10). The words “Trustee” or “Director” may be used interchangeably… they are the same people.
Yes and No! Either type of CIC can pay a salary to the people who work for it – and that includes the directors. But their salary is for the work they do, rather than just for holding the directorship. The CIC Regulator’s office will look at the annual accounts and check to ensure that the salaries that are “reasonable” (meaning that they are not excessive compared with salaries paid for an equivalent job elsewhere).
Either is allowable and sometimes it is a matter of personal preference. But one possible issues point to a specific answer:
A CIC limited by guarantee has no shareholders, so this question applies only to a CIC limited by shares. When the CIC is limited by shares the default Articles of Association used by Ordered Management is in a “Schedule 3” format, which does allow payment of dividends. This, however, is subject to a cap imposed and monitored by the CIC Regulator (currently the lesser of 20% of paid up share capital, or 35% of distributable profits). Where the new CIC is required to be limited by shares but no dividend payment is intended (e.g. because it is to be the subsidiary of a charity) we can provide a “Schedule 2” format, which excludes dividend payments to any shareholder not specifically named in the Asset Lock.
There is no absolute rule that makes one format better than the other. It is a case of “fitness for purpose”. If the nature of your activities requires that you look absolutely “clean” from any suggestion of profit then your choice must be “guarantee”. If you intend running the CIC much like a business, but with Social Enterprise aims and an intention to contribute to the community out of your earnings then you will probably be best with the “shares” option.
For further help on making the choice, or for help in ordering your CIC, call 0117 370 2725 – or click for an online chat (top right).
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