As part of our series of blog posts summarising the common forms of social enterprises, here we look at Community Benefit Societies, or Bencoms.
A Bencom is a form of registered society (formerly known as Industrial and Provident Societies) registered with the Financial Conduct Authority (“FCA”). It is particularly well-suited as a legal structure for a community commercial social enterprise, often funded by members of the community concerned (see our Glossary for a definition of social enterprise). In this two-part blog we will explore how they are set up, how they raise funds, some pros and cons of this legal structure and give some illustrations of how they are used.
If you think a Bencom might be the right legal structure for your social enterprise, or you wish to explore other options, Stone King can talk you through your options.
- So why is a Bencom a good legal structure for community social enterprises?
A Bencom is a good legal structure for a community social enterprise because it must exist to benefit the community and, as a corporate vehicle, it limits liability of its members to the share capital they hold in the society. It protects directors from personal liability for acts carried out within their powers or the law, so the Bencom can trade without risk of operating liabilities attaching to the directors or members personally.
A Bencom must reinvest any profits back into the business to benefit the community it is set up to serve. If its purpose is exclusively charitable, a Bencom can apply to HMRC for recognition as a charity and, if accepted, may enjoy the same tax benefits as registered charities (but without being subject to regulation by the Charity Commission). Equally, a Bencom might not have wholly charitable aims, since the “community benefit” test is different to the “public benefit” test for charity status.
- Registration, Incorporation and Regulation
A Bencom is relatively easy to set up. An application must be submitted to the FCA, which consists of: an application form signed by three members and the secretary of the society, a signed copy of the rules of the society and the appropriate registration fee.
The FCA is the registrar for societies, which includes Bencoms. The FCA will only register a Bencom where it is satisfied that “the industry, business or trade of the society is being or is intended to be conducted for the benefit of the community”. There is an ongoing obligation to carry on the industry, business or trade: if the Bencom becomes dormant, the FCA could cancel its registration.
The requirement for a Bencom to conduct an industry, business or trade is noteworthy because in the other social enterprise legal forms we consider in this series, enterprise activity is not a legal requirement. For example, there is nothing to prevent a community interest company (CIC) from operating on a purely grant-funded and non-income generating model. This requirement can also be problematic if the FCA does not recognise the Bencom’s proposed activity as an industry, business or trade.
Stone King works closely with clients to achieve the right structure within the regulator’s framework. For example, in the context of our work in the renewable energy sector with the Ashden Award winning consultancy, Energy4All, engagement with the FCA continues on the inter-relation between community project financing, co-operative principles and applicable regulation.
- What does the FCA expect of a Bencom
The FCA expects a Bencom to have the following characteristics:
- to benefit people and the wider community and not just its members;
- to state in its rules which community or communities should benefit;
- usually to be charitable or philanthropic in character;
- to either have:
- nominal share capital; or
- if more than nominal, there is a £100,000 withdrawable share subscription limit per individual with only a reasonable rate of coupon payable on that capital;
- profits or society assets must not be distributed to members; and
- profits or proceeds from the sale of assets must generally be used to further the objects of the Bencom or for similar purposes.
Registered Bencoms are listed on the FCA website on the Mutuals Public Register.
The FCA is perceived to be a light-touch regulator of registered societies (it is more of a registrar than a regulator). Some enterprises consider this to be an attractive feature, compared with the increasingly pro-active and enforcing role played by the Charity Commission as regulator of registered charities. Nonetheless, at Stone King we have been seeing an increasing number of charitable registered societies making the decision to convert to become charitable companies regulated by the Charity Commission so that they can have a registered charity number and enjoy the reputational advantages that registered charity status confers.
Examples of organisations commonly incorporated as a Bencom include:
- Housing Associations;
- Credit Unions;
- Community Development Finance Institutions;
- Community Pubs (a Stone King colleague is one of the initial shareholders of the first community pub in London!);
- Businesses with a purpose to regenerate a local area; and
- Businesses that focus on preserving heritage or assets.
- Ability to adopt a statutory asset lock
A Bencom is able to adopt a statutory asset lock. This means that any assets acquired by the Bencom cannot be transferred to its members if it is dissolved or converted into a company. On a solvent liquidation or dissolution or a conversion, all assets will be required to be transferred to another asset-locked organisation. The recipient can be designated in the rules of the Bencom at the outset or by special resolution. Once a statutory asset lock has been agreed and implemented it cannot be removed.
- How does a Bencom raise finance?
Much like a company, a Bencom can raise finance from many sources, including from public and private sector funders and from individuals. A feature of Bencoms is that they are exempt from the restrictions on financial promotions so they are free to advertise to potential investors, which makes it particularly attractive as a legal vehicle for community financing. However, all other restrictions on regulated activities will apply in the usual way.
So what are the main sources of finance for a Bencom?
Traditional equity finance
- A Bencom may issue withdrawable share capital, giving it the ability to raise equity finance.
- The level of coupon on the equity must be set at a level which is not, in itself, an incentive. The coupon paid to shareholders is treated as interest and as cost of capital, a necessary expense to attract investment.
- The level of withdrawable share capital for an individual must not exceed £100,000, there is no restriction on the investment by another registered society.
- As noted above, the Bencom exemption from financial promotion restriction means that Bencoms are particularly attractive as community finance vehicles. We find that social enterprises that trade successfully within their local communities are able to tap into a pool of local investors who know, trust and are willing to support the enterprise. For example, the Bencom pub mentioned in part 1 has recently reopened its share offering, because so many punters expressed an interest in investing.
Traditional debt finance
- Bencoms have a legal personality so debt finance may be more attractive than for, say, trustees of an unincorporated entity (who are ultimately on the hook for liabilities the unincorporated entity cannot meet out of its own assets). If the Bencom is a charity, then it must ensure that repayment terms are compliant with charity law requirements.
- Similarly to a company, a Bencom can obtain a loan, overdraft or revolving credit facility with an institutional investor or bank.
- A Bencom can issue debt securities to raise money. Investors will purchase these and the Bencom will promise to pay the amount borrowed at a future date with interest.
- A Bencom may be able to access grant funding, although this will depend on the funder’s eligibility criteria and grant funding is often conditional on charity status.
- What are the advantages and disadvantages of a Bencom legal structure?
In exploring what a Bencom is and how it works we have covered some clear pros and cons to this legal structure, and it certainly will not be a fit for all social enterprises.
Some of the advantages of this legal structure are as follows:
- A wide range of finance options are accessible, which includes grant funding, debt finance and equity finance.
- There is growing popularity for community share offers as individual investors’ appetite for investing in socially conscious businesses grows.
- A charitable Bencom is exempt from the restriction on financial promotion. This means they are free to advertise to potential investors, providing that they demonstrate good practice relating to consumer protection responsibilities.
- Any changes to a Bencom’s rules must be FCA approved so investors can be sure their investment is contributing to a social purpose.
- It can be charitable or non-charitable, giving it flexibility to achieve its community focused purposes even if they fall outside of the relatively narrow limits of charity law.
- A Bencom has the potential to obtain a charity tax status with HMRC and enjoy tax reliefs and advantages.
And what about the drawbacks of forming your social enterprise as a Bencom? Some of these could include:
- Community shares are withdrawable subject to the terms and conditions in the society’s rules and share offer document. For smaller shareholders this encourages investment, because in a company it can be challenging to sell a minority shareholding. However, withdrawing shares could cause a liquidity issue for a Bencom (since it involves the Bencom reimbursing the member’s investment) so Bencoms may wish to place a limit in its rules on how much investment can be withdrawn in any one year. The downside is that this could put off potential investors if they cannot withdraw their investments on demand.
- Withdrawable share capital is legally limited to £100,000 per member, unless the investor is another society. This limits the bigger institutional investors, unless the investment can be structured as an investment from another society.
- Members may invest varying amounts but, because the usual position is for each member to have one vote irrespective of the size of their shareholding, larger shareholders may be deterred.