Special rules for community companies
Because the company exists to benefit a community, there are some special rules to protect the community.
What are the special requirements of a community company?
In addition to the requirement that the community satisfy the community interest test, there are four basic rules of a community company that make them different from regular companies. The reason for these rules is to ensure that the community is protected and actually receives the benefits from the activities of the company. They are:
Community companies cannot make any distributions of funds or pay any dividends to its shareholders.
Community companies cannot make loans to directors or shareholders.
There is a ‘lock’ on the disposal of assets of the community company.
Directors must prepare a report on the activities of a community company each financial year.
The next parts look at these requirements in some more details.
1. No distributions or dividends to shareholders
A dividend is a way for a normal company to pass on the profits of the company to its shareholders. For a community company, since the shareholders are people who represent the community, it would not be fair to make a distribution to those individual people. Instead, of distributing the profits this way, the profits are kept within the company, and are used to benefit the community as a whole.
2. No loans to directors or shareholders
Making a loan to a director or a shareholder is another way individuals have been able to take a company’s capital outside of the company. Often the loan is paid back to the company, but sometimes it is not. This is another situation where someone might personally benefit from the money a company makes, rather than having the community as a whole benefit.