Setting up a Community Organisation
Definition
Setting up a community organisation is essential to provide a vehicle for asset transfer to take place.
Guidance
Setting up a community organisation should happen only where and when it is necessary. In the initial exploratory stages of development it is best to utilise existing community structures. This reduces the potential for time and resources to be wasted if the development does not come to fruition. It also makes it easier to reach people already engaged in community development.
A community organisation should be set up in two circumstances:
- Where no community organisations currently exist in the area and
- Where purpose has been defined and a new organisation is needed to pursue the development
In the first case setting up a community group should be done in conjunction with defining purpose. This initial stage can take place with an unincorporated organisation as no significant financial transactions are taking place. As ambitions for the building are shaped discussions should turn to the most appropriate organisation to carry that out.
Setting up a community group should be approached in the same way as defining purpose. The process should be as open and collaborative as possible, with guidance when appropriate from legal experts. It is vital that people feel a sense of ownership about the organisation.
When setting up a community organisation there are several possible legal structures including:
- Company Limited by Guarantee
- Community Interest Company (CIC)
- Industrial and Provident Societies (IPS)
Deciding which type of organisation is most appropriate is crucial and should be given significant thought. Each structure has its own set of strengths and weaknesses. The following summaries detail the basic differences. Further research should be done (see External Links) before making a decision.
Company Limited by Guarantee
- This legal structure limits the liability faced by Directors in the case of insolvency, except in cases of negligence or recklessness.
- This is the most flexible legal arrangement. The major restriction is that shares cannot be issued.
- Registration is required with Companies House and company law must be abided by.
Community Interest Company (CIC)
- A CIC is a company limited by guarantee or share issue with several added features such as a community interest test, an asset lock and a cap on dividends.
- The legal form gives greater flexibility than charitable status, but emphasises public benefit over private profit.
- Each CIC must specify the community that is intended to benefit from any profits made by the company (this could be as wide as all the residents of a defined geographical area) and the CIC regulator must approve this.
- The asset lock ensures capital gains are directed to the specified community and the dividends cap limits the amount of profit private investors can take out of the business.
- CICs were established in 2005 and so far over 1,000 have been registered across the country.
Industrial and Provident Society (IPS)
- An IPS is a trading organisation that operates as a co-operative either for the benefit of its members or the wider community.
- IPSs are currently exempt charities which means they do not have to register with the Charity Commission. This will cease to be the case when the 2006 Charities Act comes into force.
- An IPS is usually funded by share capital, but this takes a different form to limited companies. The value of the shares is fixed and does not go up and down with the value of the organisation.
- An IPS is the only vehicle that can issue shares on a low-cost basis.
- Buying a share confirms membership and decisions are taken on a one-member-one-vote basis (regardless of number of shares owned). There is an upper limit on the cash value of shares that can be held by one individual (£20,000 currently).
- IPSs are regulated by the Financial Services Authority (FSA).
This basic summary indicates the key differences between the different legal structures. Further research should be done (see External Links) before making a decision on which is most suitable.
A final option is to establish a charitable organisation. This introduces further complications as charities face certain trading restrictions. In some cases a trading subsidiary must be formed. Charitable status has certain tax benefits but it can introduce unnecessary complications. If you decide to follow this route it is advisable to seek professional advice.
Once the legal structure has been decided it is necessary to draft a constitution and / or an articles of association. Advice and model examples can be obtained from the respective regulators. Again it is important to take the time to ensure details are correct. This will protect the organisation and individual Directors / members in the future. Where you are uncertain specialist legal advice should be sought.
Whichever form of legal incorporation is chosen the organisation should also consider becoming a Development Trust. This is a group that engages in the economic, environmental and social regeneration of a defined geographical area. A Development Trust provides a range of services and / or facilities for the local community and is defined by a few key principles:
- Independent and aiming for self-sufficiency, with profits reinvested
- Community based, owned and managed
- Actively involved in partnerships with the voluntary, community, public and private sectors
Locality is a source of information, advice and support for newly formed Trusts. It currently has a membership of 450, with a combined annual income of £260m and assets totalling £490m. A successful building development can provide an anchor for a Development Trust, giving it an identity and revenue source.
What to avoid
Avoid making rash decisions. The structure you choose cannot be changed easily and could last many years. Consider what levels of flexibility you need and what circumstances may need adapting too. Your early decisions will be difficult and costly to reverse.
External Links
The CIC Regulator
The Charity Commission
Companies House
The Financial Services Authority