6.4 Use of profit in community benefit societies
All the profits of a community benefit society must be used to benefit the community. This is usually achieved by retaining and reinvesting profit in the business activities of the society. Societies may also provide community benefits through non-business activities. This can be achieved using internal and/or external delivery mechanisms.
Internal delivery is where a society commits part of its trading surpluses to community benefit activities that are consistent with the objects of the society. This has the effect of reducing the net profit of the society. A society adopting this approach should therefore state in its annual accounts what proportion of revenue expenditure was devoted to non-trading community benefit activities.
External delivery is where the society donates profit to other organisations with the same or similar objects. Most societies will endeavour to do this in a tax efficient manner, so may choose to donate to charitable organisations.
Paying interest on share capital is an operating expense, not a profit distribution. However, a community benefit society can increase its profits by reducing the amount it spends on share interest. So, as a matter of good practice a community benefit society should make recommendations regarding share interest rates, and the use of profits, to members at an annual general meeting, following the presentation of the annual report and accounts. These accounts should state the net profits of the society, and propose what proportion of this profit should be reinvested in the society, used for the benefit of the community, or donated to other organisations with similar community objects.
As part of its annual report the society should explain how the proposed reinvestment, or use of funds, will benefit the community. The same applies to any proposed donations to other organisations. The annual report might use social accounting techniques, or other methods that help members understand how the society benefits the community.
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