Essential Law – Assessing community interest companies

Sean Egan assesses the potential of new legal definitions for arts organisations.
In my experience, arts organisations, particularly those working in the performing arts, are understandably focused on ensuring the highest quality of their work and the need to maintain funding from a variety of sources such as grant funding, box office income, fundraising, sponsorship and commercial income. The effort needed to sustain these elements is considerable and does not usually allow organisations, largely operating with lean overheads and staffing, to take time out and consider whether alternative approaches to their legal status would be better.

The use of social enterprise as a term to describe new and existing organisations is a significant development. New sources of funding are available and social entrepreneurs are investing substantial sums in projects of different types. This is a good moment for an assessment of whether the arrangements currently favoured by most arts organisations are the best available. After all, arts organisations are the archetypal social enterprise  trading organisations that provide substantial local community benefit.

There are financial reasons why charities are a favoured legal vehicle: no tax on profits, the ability to offer the advantages of gift aid when fundraising, rates relief, and the fact that some trusts and foundations only offer grants to charities. Against this are the myriad rules and restrictions associated with being a charity and the requirement, in practice, that charity trustees are not remunerated and therefore charities tend to be made up of volunteers who generally have busy day-jobs. Trustees necessarily tend to be risk averse, particularly with the possibility of being personally liable for the charitys liabilities, and this can lead to a conservative approach. By using an alternative model, the valuable experience and contacts of trustees could be offered through an advisory committee.

Community interest companies (CICs) offer many of the freedoms of commercial companies with restrictions protecting the assets. CICs cannot be charities and can be set up either as limited by guarantee or limited by shares, with directors who can be full-time and paid. CICs can raise loan finance and issue dividends (subject to limits  see below) and are eligible for grants from funding bodies and local councils though, at present, applications are considered for eligibility on a case-by-case basis. As the number of CICs grows, government and quasi-governmental funding should become easier. CICs offer providers of assets the protection of an asset lock. Historically, councils transferring arts assets have chosen the vehicle of independent charitable trusts or companies partly because of the protection to the assets. Councils could now consider CICs on the basis of this protection.

If you compare CICs and charities on a purely financial basis, being a charity will generally seem to be the best option. However, I feel the value of CICs is in the freedom offered to pursue opportunities without needing to refer back to ones charitable objects and that, in the right circumstances, CICs can be more financially stable than charities. Arts organisations often have assets (such as intellectual property) that have unrealised potential. CICs can offer the opportunity to bring in outside investment, which may help organisations to be less dependent on outside funding.

Sean Egan is Head of Theatre and Arts at Bates, Wells and Braithwaite Solicitors.
w: http://www.bateswells.co.uk

What is a CIC?
– A CIC is a type of company that uses its assets and profits for the public benefit.
– It can be a company limited by shares, a company limited by guarantee or a public company.
– A CIC will have a Memorandum and Articles of Association and be registered with Companies House.
– A CIC is able to accept grants and take out secured and unsecured loans.
– A CIC may have paid directors on its board.
– CICs escape the strict rules for charities relating to trading (a charity may only trade in furtherance of its objects).
– A CIC will not benefit from the corporation tax rules or gift aid advantages for charities.

Raising finance
– CICs are subject to the asset lock, meaning that their assets and profits must be used for the community interest.
– Loans: where a loan is supplied to the CIC and where interest is performance-related, it is capped at 4% above the Bank of Englands base rate.
– Equity: return on dividends is capped at 5% above the bank of Englands base rate and dividends paid must not be greater than 35% of the CICs profits.
– Buy-back: shares can only be bought back by the CIC at par.
– Sale/Transfer to third parties: there are no restrictions on this.

Potential examples
– Arts organisations formed for a special purpose, having paid directors and having profit-generating aims
– Activity funded by social investors who want the assets to be retained for the benefit of the local community
– Councils out-sourcing arts assets
– CICs undertaking activity currently undertaken by a trading company.