There are a many different types of company that exist, but not all of them are appropriate for all types of activity. The main corporate structures available to Councils are: Company Limited by Shares Company Limited by Guarantee Community Interest Company Community Benefit Society Limited Liability Partnership (LLP) The following paragraphs briefly describe each in more detail. Company Limited by Shares This is the usual legal form for profit-making private companies and is where shareholders buy shares that allow them to earn dividends from the company’s post tax profits. Most Council owned companies are set up as this type of company, with the Council being the main sole shareholder. They invest all of the equity in the company and therefore receive all the dividends once the company is profitable. The basic purpose and benefit of a limited company is that it creates a separate legal entity which limits the liability of the Council (or any other shareholder) if the company ever becomes insolvent. Company Limited by Guarantee This form of company has no shareholders so there is no distribution of dividends. Instead the company has Members who each guarantee to pay up to £1 towards the company’s debts. All surpluses are then re-invested in the company or the community. This is the most common form of company for not-for-profit social enterprises. It is therefore unlikely to be suitable for a private rented housing company, unless there is no intention to earn a return on the investment. Community Interest Company (CIC) A Community Interest Company is based on a conventional company model, either limited by shares or by guarantee, with two additional features designed to ensure that its activities are undertaken for the benefit of the community. Firstly, a CIC must submit to the Regulator on its formation a community interest statement that sets out the company’s benefit to the community. Secondly, the memorandum/articles of association must state that ‘the company shall not transfer any of its assets other than for full consideration’, except in cases where the assets are transferred to another asset-locked body such as another CIC or a charity, or the transfer is made ‘for the benefit of the community other than by way of a transfer of assets to an asset-locked body’. However, the regulations do make provision for the payment of capped dividends in the case of a CIC limited by shares. As a result, once again, if the intention is to provide uncapped dividends to the Council, or potentially dispose of any of the properties in the future to a non-charitable entity, then this structure might not be appropriate. Community Benefit Society This corporate form, which replaced Industrial and Provident Societies, has members rather than shareholders, and as a result there is no share capital and no distribution of dividends. These organisations are registered with the Financial Conduct Authority rather than Companies House. They can be charitable, which offers tax advantages, but are not required to be registered with the Charities Commission. As a result, this form of corporate structure would also not be appropriate for our purposes. Limited Liability Partnership (LLP) Where two or more parties are working together to achieve a common objective, with the aim of combining their resources and expertise, there can be tax advantages to forming a LLP rather than creating a company limited by shares that is taxed as a separate entity. For example, a Council could input land assets, whilst a private partner inputs equity capital and development expertise and staffing resources, to undertake a joint development producing homes for sale or long-term rent. Typically, the partnership would share profits from the joint venture proportionate to the value of their investment in the arrangement. Each partner is then taxed separately in relation to their investment in the LLP, rather than the company paying taxes on the profits in its own right. This is known as being tax transparent and would result in the Local Authority receiving its share of the LLP profits tax free, as it is exempt from corporation tax, although the return to the Council would still probably be less than it would be if it was the sole shareholder in a company limited by shares. The LLP structure can also make it easier to make changes to the partnership as it progresses, as opposed to issuing or selling shares in a limited company., although LLPs are still registered at Companies House and regulated like a separate company. Summary As you can see there are a number of structures that are available to Local Authorities. It is therefore essential that you seek legal advice to help you evaluate and recommend the most appropriate company type based on the strategic purpose you have chosen to pursue and the specific business activities, tenures, and delivery arrangements you intend to adopt. There is not necessarily just one suitable legal form in each case, and there will be pros and cons of each company option available to you.

For a Local Authority, setting up a commercial entity is a totally alien business and therefore it comes as no surprise that many local authorities lack the knowledge required to set up and operate their companies in the most successful, financially beneficial and tax efficient manner.

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