Background on capital in a ltd

[eteb3]

Can anyone recommend any reading on how capital works in a ltd?

Long story short, I'm looking at possibly forming a plc to take investment to be put into social enterprises. But I'd want some way to connect a given share class to a particular project, and write off those shares (and only those) if that project fails.

Or maybe people can give their thoughts here?

Thank you.

PS - reason for equity shares is that these are Muslim projects, and the capital will be from Muslims, so loan finance isn't acceptable.

 

[Rawlinson Pryde]

You may not want to be a Plc, as the company will require an Audit adding expense.

 

[eteb3]

the company will require an Audit adding expense.

Thanks. I realise - any idea what an audit for a small plc would be? I hope we may be able to secure one pro bono, at least while it's small.

The difficulty is there is no other way of offering shares to the public, that I can see. Could well be I've missed something though.

 

[Scalloway]

A charity I am treasurer of needed an audit because of a spike in income and its annual fee went from £500 to £5,000. An audit is not cheap.

 

[eteb3]

Flippin' 'eck!

 

[Gyumri]

https://www.mercer.com/en-jo/solutions/investments/sharia-compliant-investing/

 

[Ziggy2024]

Could you not have a CIC with the investments ringfenced for the particular projects?

 

[Daybooks]

A PLC is a whole new ball game with regulations and terminology to understand that you may quickly want to reconsider. I doubt there are any good books to be had on "how to create a PLC in five easy steps" - you will need a suitably qualified accountant with requisite skills amongst many others and many months of hard work ahead. Finding the right people to assist won't be easy either; the good ones will want a lot of money and rightly so.

 

[Bobbo]

A charity I am treasurer of needed an audit because of a spike in income and its annual fee went from £500 to £5,000. An audit is not cheap.

Presumably the £500 you were previously paying was for an independent examination? That frankly was a bargain!

 

[eteb3]

Thanks all for these responses. I certainly hadn't appreciated the steep cost of audits!

(I still have some hope that a plc with <£500k on the balance sheet, and no operations except investment, might get it more cheaply than a charity with >£100k income. But maybe I'm being naive?)

A PLC is a whole new ball game with regulations and terminology to understand

My understanding is that most of the complexity is in listed companies, and there's no requirement for a plc to list. An unlisted plc is not that very different: requires two directors not one; one secretary not none; closer regulation of meetings; must have an audit. So like a private company, but a bit more stringent. But I'm happy to be corrected on that.

I'll grant you the prospectus regulations are a chunk to bite off, but smaller offers of shares seem to be largely exempt.

Could you not have a CIC with the investments ringfenced for the particular projects?

You'd hope, but a CIC is a private company and so cannot offer its shares (or other securities) to the public.

https://www.mercer.com/en-jo/solutions/investments/sharia-compliant-investing/

We're pretty expert in the sharia requirements (TLDR: no interest, only profit.) Since the only way of distributing profit is through shares, the challenge is offering those to the public lawfully.

 

[Scalloway]

Presumably the £500 you were previously paying was for an independent examination? That frankly was a bargain!

We get the benefit of my excellent bookkeeping keeping costs down.

 

[Ziggy2024]

You'd hope, but a CIC is a private company and so cannot offer its shares (or other securities) to the public.

I didn't suggest issuing shares....

It does seem as though I misunderstood the purpose of this though in that you seem to want a return whereas I assumed with the social enterprise angle and the comment about 'writing off the shares' that this wasn't the objective. This is the reason I suggested CIC.

I'll therefore bow out quietly. I only briefly looked at Islamic finance when I did my exams many moons ago!

 

[eteb3]

you seem to want a return whereas I assumed with the social enterprise angle and the comment about 'writing off the shares' that this wasn't the objective

People will often support a social enterprise with interest-free loans, but for large amounts or long-term projects they often want at least protection against inflation. Easy to do if the CIC/etc can pay interest, exceptionally difficult if it can't. Plus a loan is subject to repayment, and if it's the major source of capital you can't take risks with it.

Thanks for your thoughts. Glad to hear Islamic finance is on someone's curriculum

 

[eteb3]

Incidentally, on the topic of raising capital, charities and community benefit societies are exempt from the new restrictions on issuing mini-bonds. So for some social enterprises those may be attractive.

 

[Gyumri]

We're pretty expert in the sharia requirements (TLDR: no interest, only profit.) Since the only way of distributing profit is through shares, the challenge is offering those to the public lawfully.

There are some limited exceptions - for example if you offer shares to existing customers or visitors to your premises.

Otherwise after looking at this in detail some 15 years ago in relation to mini bonds I can to the conclusion that the nanny state wants to assume that every man and his dog needs protection. Of course they are free to gamble as much as they want on the horses but not if they wish to invest in private companies.

Ironically it is private companies which can offer returns far exceeding what can be achieved by simply buying publicly traded shares. The stock market is just another form of gambling but it's a mug's game just like horse racing.

 

[eteb3]

We get the benefit of my excellent bookkeeping keeping costs down.

@Scalloway is it easy in a few lines to give some tips on what excellent book-keeping looks like to achieve that? Very possibly not, but it'd be useful if so.

I dare say you are aware, but for posterity: the Commission can exempt a charity from the audit requirement if the increase in income really is a spike, and will revert to normal the following year.

 

[Scalloway]

My first requirement is having the bank account in the books recncile exactly to the balance on the bank statement. Banks can make mistakes but it is a long time since I saw one that had not been corrected.
I guess getting it right first time is the next. This comes from understanding what is going on. When you make a payment match it to a creditor, don't get expenditure counted twice. The same goes for income and debtors.
Don't have strange entries that have no obvious explanation.
As for your second point we are regulated by OSCR, the Scottish charitable regulator. Neither our regular accountants nor the auditors were aware if such a situation existed here.

 

[eteb3]

Thanks very much for that. Sounds like basic hygiene is enough, which hopefully we're on top of.

Neither our regular accountants nor the auditors were aware if such a situation existed here.

I had a look for the audit provisions, and it looks like OSCR has no power to exempt from audit in the way the Charity Commission can. Assuming the governing legislation is The Charities and Trustee Investment (Scotland) Act 2005 (I think it is), there's been only one amending order, and that's not relevant:
https://www.legislation.gov.uk/primary+secondary?title= Charities and Trustee Investment (Scotland)
Amendments in the Charities (Regulation and Administration) (Scotland) Act 2023 aren't relevant, either.

Bit of a gap in the legislation - though there are probably greater mercies from having such a massively simpler body of charity law north of the border.