People who want to run a business or other activity for community benefit rather than for private advantage can register either as a company limited by shares or by guarantee but most CICs are CLG. It’s best to be clear on the distinction between CIC and CLG companies, this post explains the difference.
Companies limited by guarantee
Companies Limited by Guarantee (CLG) are private companies that do not have shares or shareholders but instead have members called ‘guarantors’. The members agree to contribute a certain amount (usually a nominal £1 – £10) to the company’s assets if the company is wound up and as such the main reason for a CLG is to protect the people running the company from personal liability for the company’s debts. Limited liability is allowed provided the members have not acted negligently or fraudulently and not allowed the company to continue trading whilst insolvent. As with a company limited by shares, a CLG is a legal identity separate from the members and this allows the company to own property in its own name and even run a business.
Companies best suited to being CLG’s are non-profit making associations such as charities, professional, trade and research associations, social or sporting clubs supported by private subscriptions and other groups of people with mutual interests. Many flat management companies are CLG as are community interest companies and academy trusts. Sometimes funding bodies, such as local authorities, insist on an organisation being registered as a CLG.
Profits of CLG companies are generally reinvested back into the company or used for some other purpose as specified in the Articles of Association. Payments to board members can be made but only as remuneration (unless repayment of expenses only) and not a dividend. CLG’s have no shares so cannot distribute profit to shareholders or sell the shares. Technically CLGs can distribute profits to members (unless the Articles of Association say otherwise) but all charities and most other CLGs have a “not for private gain” clause so any profits cannot be distributed as otherwise, the company’s charitable status becomes invalid.
Commercial trading CLGs will likely use the term ‘profit’ in their accounts to describe any excess of income over expenses, voluntary membership organisations usually use the term ‘surplus’. The moment a trading activity (that is not mutual) is undertaken then that is a taxable activity. Unfortunately, this means that any grants and donations that cannot be specifically identified as relating to a non-trading activity are regarded as being used to off-set the trade expenditure and so become taxable.
A CLG has the same legal requirements as a private company limited by shares, as being registered at Companies House, submitting accounts and an annual return each year to both Companies House and HMRC within the usual deadlines. Also similarly to a share company, a CLG company can borrow money and issue debentures which can aid the task of securing external funding. Charitable organisations may also obtain capital through grants from the government or local authorities, by procuring charitable donations from the public, or charging a membership fee.
Community Interest Companies (‘CIC’s)
People who want to run a business or other activity for community benefit rather than for private advantage can register either as a company limited by shares or by guarantee but most CICs are CLG. The CIC limited by shares is useful where the company is being backed financially by one or more outside bodies or individuals who can invest in it by taking shares. There is, however, a statutory dividend cap, restricting the payment of profits out of the company.
Under the asset lock provisions for CLG, the assets and profits must be permanently retained within the company and used solely for community benefit, or transferred to a charity or another CIC.
If the company is a charity, registered with the Charity Commission, HMRC will usually require a corporation tax return but there will be no corporation tax to pay. As well as filing accounts a CIC must complete and submit a community interest company report. This report is placed on the public register, available to download.