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Company Law

Analysis - guidance - compliance

16 SEP 2014

Companies are not the only option for UK businesses

Companies are not the only option for UK businesses
The Co-operative and Community Benefit Societies Act 2014 has consolidated the legal framework for co-operatives and community benefit societies (formerly known as industrial and provident societies). The Act builds on some key legal changes and simplifies and updates the language of the legislation. It covers co-operatives and community benefit societies.

The society legal structure offers the benefit of corporate personality and gives members limited liability for business debts. However, registration as either a co-operative or a community benefit society depends on satisfying the FCA Mutual Societies Team that the organisation meets statutory requirements about its structure and nature. The FCA role is unrelated to its role in the financial services sector.

To register as a co-operative society, an organisation must meet the definition and principles of the International Co-operative Alliance [http://ica.coop/en/whats-co-op/co-operative-identity-values-principles] as applied by the FCA Mutual Societies Team [http://www.fca.org.uk/firms/firm-types/mutual-societies/industrial].

That involves demonstrating a community of interest among the members, not restricting co-operative membership inappropriately, conducting business for members' mutual benefit, giving members only a limited return on loan and share capital, distributing profits only on the basis of members' trade with the society, and not allowing votes based on capital stake. Co-operatives are owned and controlled by members with a stakeholder relationship other than investment – they may be consumers, employees or suppliers. Examples of co-operatives include the high street consumer co-operatives, agricultural co-operatives of farmer suppliers or buyers, and employee controlled worker co-operatives.

To register a community benefit society, the business must be run primarily in the interests of people other than members, provide limited interest on members' loans or any member shares, prohibit any profit distribution to members or distribution of surplus assets on dissolution. Some community benefit societies register as charities and these societies my include in their constitution a legally enforceable restriction on any asset distribution or conversion into a different legal structure. Housing associations are the biggest group of community benefit societies but the structure is also used by charities, community organisations and amateur sports clubs.

For both types of society, the registration conditions must continue to be met after initial registration. If they are not, the FCA Mutual Societies Team can cancel the society's registration.

The passage of the 2014 Act has highlighted the availability of this legal structure as an alternative to the use of registered companies where registration conditions are met.

Advantages of the society structure include:

• Assurance that the organisation is and remains a co-operative or a community benefit society, subject, in some cases, to the possibility of conversion into a company by a special majority of members

• Power to issue up to £100,000 of “withdrawable” shares to each member which can easily be bought back by the society as a means of exit for members

• Certain exemptions from Financial Services and Markets Act 2000 requirements when shares are issued

• The availability of relatively straightforward procedures for the merger with other societies or with companies

• Flexibility, subject to meeting the registration requirements, about the content of a society's constitution.

Practitioners should be familiar with this legal structure so as to offer a full range of choices to clients setting up a new business or looking at restructuring an existing business by using an employee buy out to resolve succession issues or developing a community service operation.
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