Are you thinking of starting or running a Community Interest Company (CIC)? In this episode, we'll delve into the concept of Asset Lock in Community Interest Companies, and its importance, especially in the world of social enterprises.

Asset Lock in Community Interest Companies Defined

Asset lock, a safeguard that ensures funds received by a CIC are used solely for their intended community purposes, promotes transparency and prevents personal enrichment of directors or founders.

Implications for CICs

Now, let's have a look at the implications of asset lock for Community interest companies. CICs must effectively manage and retain assets to benefit the community. When transferring or selling assets, they need to meet strict requirements, including conducting transactions at fair market value and ensuring direct benefit to the community. Transfers to other asset lock bodies require consent from the regulator.

Incorporating Asset Lock

To ensure clarity and compliance, you should include provisions for asset lock in the Articles of Association. These provisions should clearly identify the beneficiaries, seek permission, and provide an explanation to the designated asset lock body

Asset Locked Body and Alternatives

While CICs are commonly recognized as asset locked bodies, it's worth noting that other organizational structures, like charitable incorporated organizations, can adopt asset lock principles. Nominating asset lock bodies in the Articles of Association is a best practice for smooth asset transfers.

Dissolution and Residual Assets

When it comes to dissolution, handle residual assets with care and inform the nominated asset lock body as a courtesy, ensuring continued community benefit.

Considerations and Compliance

Exercise caution when selecting asset recipients and avoid self-nomination. Regulatory approval is necessary for transferring or selling assets below market value to non-nominated asset lock bodies.

Conclusion

In conclusion, asset lock plays a vital role in safeguarding communities and ensuring accountability in CICs. Understanding its implications empowers CICs to fulfil their mission and make a lasting positive impact. Whether you're starting or running a CIC, embracing asset lock is a crucial step toward building a successful and socially responsible organization.

If you found this episode helpful, and know someone who might benefit please pass the word! The more people we reach, the more impact we can make together! And don't forget to stay tuned for more exciting episodes where we'll continue exploring essential topics. Thanks for listening and being part of our community! In the meantime Plan it, Do it, Profit!

If you want to see how we can help you with your social enterprise, accounts, tax affairs, budgeting or planning then contact us for an initial FREE chat.

If you are considering forming a community interest company or CIC, or you already have a CIC that you're running, then it's important that you understand the idea of an asset lock. In this week's podcast, I'm going to be explaining what an asset lock is, what an asset-locked body is, why we have that in the first place, and the general treatment of assets within a CIC.

Hi, folks. Welcome to another weekly podcast on I Hate Numbers. This is a podcast that has the mission to increase your financial awareness, help you in your business, make more money, save tax and time, plan it, do it, profit. Let's crack on with the podcast. A community interest company, typically is used in the context of social enterprise, is classified by most people as a not-for-profit organisation.

Now, that doesn't mean that it can't aspire to make profits. If anything, it should have as one of its key objectives in making surpluses, in making profits so it can sustain and grow and deliver its why. What we're talking about is those profits aren't necessarily there to benefit the founder, to benefit the directors, they're there to be ploughed back into the organisation to help sustain itself, build up its reserves, and deliver those services to the community that it's defined.

If we contrast that to a normal commercial company, one that's owned by the shareholders, then any profits that are generated after tax are, therefore, available for distribution to the shareholders themselves. So, there is a financial reward in addition to any salaries they're paying themselves. That concept does not exist in a not-for-profit body.

Those profits that are generated are used there to benefit the recipients, the audience, the clients that the CIC seeks to serve. In all other censuses, by the way, folks, community interest companies, and other models that fit within that framework, are businesses, and they have that in common with what I call commercial businesses.

Now, what is this idea about an asset lock? Well, the very idea of this not-for-profit is such that when it receives money through services it provides, grants, donations, funds provided by the selling of goods and services, then it is essential that those customers, those donors, those funders are assured that those funds are being used to meet the CIC’s aims, not to enrich the directors, not to enrich the founders of that organisation.

So, therefore, that assurances get provided by the idea of the asset lock. Those assets could represent machinery, plant, land, buildings, computer equipment, whatever it may be, those are locked within this corporate veil, and they're not there for the benefit of the individuals. Now, that's the idea of an asset lock. And again, it's there as much to provide assurance, but also money that's donated via trusts and foundations, through grants is effectively public money.

And therefore, to give that extra level of satisfaction, that extra level of assurance those public funds are being used correctly, the asset lock reinforces that. An asset lock has permanent long-term consequences. So, it's really vital that those who run CICs, those who are looking to form CICs, are fully aware of its implications.

Now, having looked at the idea of an asset lock, let's summarise the key features. Now, a CIC, for example, must use its assets, must keep those assets, and it has to be used for community purposes for which it was formed. Now, if for any reason, those assets are transferred out, outside of the CIC where they're sold on,

or given to other organisations, then it must satisfy any of these following requirements. Those transfers or sales must be at the full market value, and that's the market value at a hands off transaction. Now, selling something at the full market value means that ultimately the CIC still retains the value of those assets that have been transferred. If those assets are transferred to another asset-locked body,

more of that in a few moments, then it has to be to one that's been specified in the articles of association of the CIC. It's got to be made for the benefit of the community. It's not there to enrich the founders, and it's got to be made to another asset-locked body with the consent of the regulator.

Within this restriction, that's essentially the asset lock. Now, I mentioned earlier that the askers of association should ideally include a condition about the asset lock, who the beneficiary is, normally seek their permission. If for any reason you haven't got that in the articles, more of that later, then you can have them amended.

So, what is an asset-locked body itself? Now, a CIC, as I mentioned earlier, is classified as an asset-locked body, but there are other organisational structures that can also be classed as asset-locked. These are typically a charity, a charitable-incorporated organisation. That is a charity nonetheless, by the way,

but it means that it only has to submit its documents to one regulator, that’s the Charity Commission. It cannot either be a permitted register to society or if for any reason it's a body outside of the United Kingdom, then it can be so. Now, it's quite possible, by the way, to nominate more than one asset-locked body,

and that nomination by good practice is normally reflected in the articles of association of the CIC. Though I mentioned earlier about the inclusion within the articles of association of your designated organisation, your designated asset-locked body that you will donate or transfer those assets to,

again, it's normal good practice to seek permission or to certainly clarify with that entity that they're being so known. No, it may be a situation that the CIC decides to cease activity. It could be a voluntary dissolution, it could wind up. It may be that you found that you've actually achieved your objectives,

your purposes and the CIC no longer is needed, and therefore it's going to be dissolved. Now, if you have nominated an asset-locked body within your articles of association, then there's no major issue, and they will be the recipient of any residual assets that you have after you've paid off any debts outstanding.

These assets can still then be retained to benefit the wider community. And again, you don't have to notify the nominated asset-locked body, but it's good practice to notify them as common courtesy. Be careful, folks. When you do nominate an organisation or an individual to be the recipient of your assets and your articles, you must be careful not to nominate a director.

You cannot nominate yourself. And if you wish to nominate a body that's outside of the United Kingdom, then you need to provide more information and proof to the regulator that the body is an equivalent body to that of a charity, CIC, or Permitted Registered Society. Now, as a side note, or a footnote, if you want to call it that. If for any reason you are transferring or selling any assets below the market value to those bodies, to any asset-locked body, which isn't in itself nominated in your articles, then you need to have that approved by the regulator.

There is a slight variation in this theme. You could be a CIC that has a share structure and, therefore, you will be paying dividends subject to the cap to those recipients. And therefore, that is a particular situation whereby you can have assets transferred where those dividends are actually paid out.

Folks, let's summarise where we are. We have the idea of an asset lock. Again, it's a feature of CICs, but it's also a feature of charities, CIOs, register societies, and those equivalent bodies outside of the United Kingdom. The asset lock is there to protect the community that you are looking to serve.

It’s looking to preserve and give accountability to public funds that are made, and it's there as an assurance to those funders that any funds provided ought to be used for the benefit of the audience that you’re looking to serve, the client base that you have, those people in need that you've been set up to serve in the first place.

If you don't actually have a nominated body within your articles, you can by all means, amend your articles. Folks, I hope you found this podcast useful. I hope you got some value from that. If you did, I'd love it if you could share it. Let me know what your thoughts are. If for any reason you need support on your own CIC, if you need any assistance in terms of modifying those articles or in any sort of planning matters as such, then let me know.

There's contact details in the show notes and in the meantime, plan it, do it, profit.