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:

  1. Community companies cannot make any distributions of funds or pay any dividends to its shareholders.
  2. Community companies cannot make loans to directors or shareholders.
  3. There is a ‘lock’ on the disposal of assets of the community company.
  4. 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.

3. The ‘lock’ on disposing assets of the company

Before deciding to register a community company it is very important to understand the asset-lock, because it has long term consequences.

Sometimes companies will want to dispose of an asset that it no longer wants or needs. For example, if a tuna company no longer needs a fishing boat, because it has decided that it will only process tuna, rather than fish for it, then it might sell the boat.

If a community company wanted to make this decision, then it should be one that the community agrees on first. The community should also be comfortable that the best possible price was found for the boat. So the Companies Act requires that 75% of the shareholders agree to the sale, and that it is sold for its market price.

All members of the community would also need to be notified before any decision is made to sell an asset.

These protections ensure that the community is happy with the decision, and that the full value of the sale stays within the company.

The ‘lock’ only applies to assets which are outside of the ordinary course of business. So if there are assets, such as canned tuna, which are produced everyday, then it would not make sense to require the community to be informed, and for shareholders to vote every time a can of tuna was sold.

Community companies may also include stricter rules on the disposal of assets in its rules if the community wishes. For example, it may want to specify particular assets which can’t be sold, or it may want to ensure 100% of the shareholders agree to the sale.

4. Directors must prepare a report on the activities of a community company each financial year

Every financial year, the directors of the company must provide a report to the community and to the registrar (this can be done online on this website) outlining for that year:

  • Remuneration (such as salaries or other benefits) received by directors
  • How the company’s activities benefitted the community
  • What consultations were undertaken with the community
  • What, if any, assets were disposed of by the company.

If the directors do not provide this report, then every director will be liable for an offence under the Companies Act and can be fined.

The report will be made available to the public through the company registry.

Are there any limits to how much a director can be paid in a community company?

It is up to each community company to decide how much it will pay its directors. The rules of the community company will determine how directors are paid, and would typically require that the shareholders approve of the director’s remuneration.

The directors must also report to the registrar each year how much they are being remunerated, and this information will be publicly available.

Does a community company have to involve the community?

Community companies are encouraged to involve their community as much as possible in the activities of the company, and the directors are required to report to the registrar every year on their involvement with the community.

This information will be made publicly available.