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Charities and the law

Q&A: Setting up a Community Interest Company

Tom Pratt, a solicitor at Bates Wells and Braithwaite solicitors, looks in more detail at Community Interest Companies
Tom Pratt
 This article is over 8 years old

1. So, what is a Community Interest Company (CIC) and how is it connected with social enterprise?

CICs were developed to address the lack of a legal vehicle for non-charitable social enterprises across the UK. Available since 2005, there are now over 3,100. CICs vary in size from tiny community-based organisations to multimillion pound enterprises. Their areas of operation include physical well-being, radio and television, the arts, education, and health and social work.
Fundamentally CICs are normal companies. They can be established either as companies limited by guarantee (CLG), which around three-quarters are, or companies limited by shares (CLS). However, they have some unique and important additional features to safeguard their social mission.

2. What are these additional features?

A CIC has to carry out activities which fulfil a community purpose. This is defined when an application is made to set the CIC up. There are a huge variety of purposes which meet the so-called "community interest test". These range from promoting the healthcare of residents of a particular community to promoting climate change awareness programmes or reducing greenhouse gas emissions.
A CIC also has a "lock" on its assets. This prevents profits from being distributed to its members or shareholders other than in certain limited circumstances. It also means that all assets must be used for the community purpose or, if they are sold, open market value must be obtained for them and the proceeds used for the community purpose. In addition, if the CIC is wound up, its assets must be transferred to another, similarly asset-locked body.

3. I would have thought charities were the best vehicles for delivering social purposes. Can CICs be charities as well?

No. Charities can trade to pursue their public benefit purposes and many do so very successfully. However, being a charity is not the best route for many social entrepreneurs because of the basic rule of charity law that charities must in most circumstances have volunteer boards. A major advantage of CICs is that their directors can be paid a salary, which means that the founders of the CIC can retain strategic control of the enterprise by sitting on the board as paid directors.
At the same time, the asset lock and community purpose requirements ensure that the social mission is protected, and CICs are less heavily regulated than charities. This means that other organisations, including local authorities and other public bodies, may be more willing to contract with a CIC than a commercial company. As the social purpose is protected, CICs are also increasingly successful in attracting the kind of grant-funding traditionally restricted to charities, though the more traditional grant-givers may still be more inclined to support charities than CICs.
On the other hand, CICs do not currently benefit from any of the tax advantages that charities do.

4. How are CICs financed?

Both individuals and companies can invest in a CIC, subject to certain rules that regulate this. A CIC can be financed by loans or bonds, though there are limits on the amount of interest that can be paid if the CIC agrees to pay interest at a rate linked to the CIC's financial performance. A CIC that is a CLS can issue shares, but if the CIC buys back those shares only the capital paid for the shares can be repaid pound for pound, with no uplift. In other words, all capital gains on buy back will belong to the CIC and not to shareholders or members. However, there is no restriction on the price at which shares in a CIC can be sold to somebody else.
Where the CIC is a CLS, the payment of dividends is permitted within defined statutory limits, currently 5% above the Bank of England base rate. There will also be a ceiling of the amount of a CIC's profit that can be distributed by way of dividends, currently 35%. These limits are currently being reviewed by the CIC regulator.

5. This all sounds a bit restrictive. Surely a normal company would offer more flexibility?

It really all depends on your aspirations. If you intend to build up value in the company over time with a view to the shareholders or members extracting that value later, a normal company will be more appropriate. But the whole point of a CIC, and the major difference from a normal company, is that its assets are locked into the business to ensure that they are applied for its social purpose, subject to the limited profits which may be distributed. The price of the flexibility offered by a normal company is the lack of protection for the social mission, while the raison d'etre of a CIC is to strike a balance between the need to protect the social purpose while allowing reasonable remuneration for directors and a limited return for investors.

6. What are the protections for the directors and members/shareholders?

As with normal companies the CIC benefits from "limited liability". This means that the CIC will be liable for the actions of its directors and directors will not incur personal liability, except in certain exceptional circumstances (such as where the director has acted fraudulently, or continued to trade when the CIC has become insolvent). Shareholders will only be liable up to the amount of their contribution (where a CLS), and members only up to a nominal amount (usually £1) in the event it winds up (where the CIC is limited by guarantees).

7. Who regulates CICs? Are the reporting requirements the same as for normal companies?

CICs are regulated by the CIC regulator with what is intended as a "light-touch". This compares with the relatively "heavy" regulation of charities by the Charity Commission. However, the CIC regulator will respond to complaints from stakeholders and has considerable powers to act to protect the community interest.
As with all companies, CICs are required to file annual accounts and an annual return with Companies House. In addition, a CIC has to file a community interest report annually, which will explain how the CIC pursued the community interest and involved its stakeholders and will, if applicable, give details of payments to directors and any dividends paid.

8. What do I need to do to set up a CIC?

First of all you need to make an application to Companies House for a small fee, currently £35. The application will include form CIC36 which sets out the CIC's social purpose and the activities it will carry out to achieve it, its proposed governing document (the articles of association) and some administrative forms for each director. Provided there are no issues raised by the CIC regulator or Companies House, the CIC should be registered around two to three weeks from the application date. Unfortunately, it is still not possible to register a CIC electronically, which can speed up the registration process for normal companies.

9. Where can I get further information on CICs?

• Tom Pratt is a solicitor at Bates Wells and Braithwaite solicitors email mail@bwbllp.com
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Guidance

Community interest companies: benefits of a CIC

The benefits of a community interest company (CIC) compared to a charity or ordinary 'limited' company.
Published 2 August 2013
From:
Office of the Regulator of Community Interest Companies

Documents

Details

This leaflet gives an overview of the benefits of forming a community interest company (CIC), including comparisons with charitable and limited companies.
Published 2 August 2013








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Community Interest Company (CIC)

guarantee_1
A CIC (or Community Interest Company) is a normal limited company with extra features to mark it out as a Social Enterprise. The key added feature is that CICs come under the regulation of the office of the CIC Regulator. The Regulator's job is to make sure that the CIC is genuinely a Social Enterprise and is not abusing the trust that the public expects to put in a Community Interest Company. By putting the company under the Regulator's scrutiny, the directors of a CIC can clearly demonstrate that the company is genuinely a Social Enterprise venture and not for private profit.

Being recognised as a Social Enterprise

Any company can act in the community interest if the directors decide it should..but the only way a limited liability venture can gain recognition as a truly not-for-profit operation is to register as a Community Interest Company, a Company Limited by Guarantee or a Charity Limited by Guarantee. The CIC format (Community interest Company) is the most recent to be made available and has quickly gained popularity for small and medium sized not-for-profit ventures.
Charities must be established exclusively for charitable purposes, but a Community Interest Company can be established for any lawful purpose as long as its activities are carried on for the benefit of the Community.

Your aims as a CIC

Community Interest - Aims and Objectives

Our job in creating your CIC is to turn your ideas and plans into legal documents that will be accepted for formal registration as a Community Interest Company. Make notes on your vision, aims and intentions and tell us about it in plain English. We can offer suggestions, but it's your ideas that matter.
The constitutional documents for your CIC (called Memorandum & Articles of Association) must state the Aims of the organisation. Only you can say what you intend, but we have put together some examples to show how it is done.

Shares or Guarantee?

A Community Interest Company may be "limited by shares" or "limited by guarantee" and you must make that choice before ordering. It is not possible to convert from one to the other after the company has been registered. The difference between the two is the status of the owners or controllers. We have prepared a special article to help you choose between the two options, but here is a summary of the key issues:
In a CIC "limited by shares" the owners will each hold one or more shares, just as they would in a normal profit making business. They can have any amount of shares and can each hold a different number, thereby defining the degree of control or ownership that each of them holds. Each shareholder has as many votes as they have shares (e.g. 5 shares = 5 votes). They may receive a dividends capped at 35% of the CIC profits.
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Why not a Charity?

The obvious choice for registering a Social Enterprise may seem to be a charity. That was the normal solution in the past. But that was a past in which charitable works were provided by the landed rich with time to spare for good causes..an out-of-date concept in the 21st century. Such people could afford to offer their services on a voluntary basis, so it was not a problem that the rules did not allow Trustees to take a salary. But, these days, most social enterprises are set up by people who have to take a salary for the work they do; their aims are charitable but they can't afford to work for nothing.
That doesn't mean that Charities are outdated. Charities have advantages-especially with regard to their privileged tax status. But their tax advantages are offset by the need for closer regulation and more stringent accounting requirements (charity accounts must be audited).
These are the pros and cons:
In a Charity…
in a CIC…
Trustees may not take a salary for being Trustees
Directors can take a salary              
The Charity may not “permanently trade”, which means it is not suitable for selling goods or servicesThe company can trade much like a normal business                             
Certain tax concessions are allowedThere are no tax concessions for CICs
All charities must have their Accounts auditedAccounts do not have to be audited unless the company’s annual turnover exceeds £5.6 million

PLC

Why Register a CIC

A normal limited company can act in ethical, social and positively generous ways. It is up to the owners of the company to decide how they will use the funds that the business generates. But a normal limited company will not be recognised as "not for profit" and will not easily obtain Social Enterprise funding.
Equally, it is not obligatory to register a company to do work in the community interest. Private individuals can and do all kinds of good work on a voluntary basis. But, when it becomes a regular, growing activity, and especially if it becomes a full-time occupation, it is advisable to register for "limited liability" to avoid the risks of losing your own home or other property if something goes wrong with the venture.

Where can a CIC get its money?

CICs may be funded from sales of products or services or by contributions from private investors or funding bodies. If the CIC earns most of its income from sales of products or services it is usually best to form it as "limited by shares" (almost 75% of CICs are in that format - but that statistic may be changing as the number of registered CICs increases). Now that the concept is well established, most public funding bodies are willing to provide funding for CICs that cover activities that particular funding body is interested in supporting. A CIC may also obtain loans, much like a normal limited company (but there are limits on the interest that a CIC is allowed to pay).

Can a CIC pay dividends to its shareholders?

Yes-if it is a CIC limited by shares. But the CIC Regulator will be looking to see that any such dividends are "reasonable". CIC dividend payments have been limited to 35% of the company's profits; but this rule may be reviewed.

FAQs

PLC img8 PLC_img4

1.  Can a CIC obtain public funding?

That depends on the policies of the funding body concerned; but CICs have been around long enough now to be recognised by most experienced funding bodies.  A CIC cannot seek contributions from the general public.

2.  Can a CIC buy and sell goods or services?

Yes.  A CIC can run much like a normal business provided it acts responsibly and reasonably.  Its actions are subject to scrutiny by the CIC Regulator.

3.  Can a Charity buy and sell goods or services?

A charity is not allowed to “permanently trade”.  This means it can run a temporary fund raising event but not run price list of items permanently on sale.  Many charities get round this problem by setting up a separate company (CIC or Guarantee) that dedicates its earnings to the charity.

4.  Can we pay our executives and directors?

For charities and companies limited by guarantee it is not permissible to pay salaries to trustees.  This rule can be circumvented in certain special cases.  For instance, where a trustee serves as part of his or her official position (e.g. a church or religious leader, a mayor or council leader).  In some cases, this means that the person who founded the organisation and its main driving force cannot be on the board of Trustees.
For CICs there is no such restriction provided the salaries can be shown to be reasonable (this is subject to scrutiny by the CIC Regulator).

5.  How long does it take to register one of these companies?

There is a difference in processing time between the different types.  The slowest is the Community Interest Company (CIC) because it has to pass through the normal Companies House procedures AND be checked by the CIC Regulator’s office.  Furthermore, CICs cannot be formed electronically.  We have to submit documents by post.  So it can take up to four weeks to complete the process.
On the other hand, companies limited by guarantee (whether or not they are to be charities) can be registered electronically.  Because they need special documents they are not quite as fast as regular limited companies, but they are normally processed in one or two days.

6.  Is it faster, or better, to form a regular LTD first and then convert it to a CIC?

No, it is not.  CIC conversion takes about as long as forming a new CIC and, of course, it increases the cost.  There is also a risk that you will end up with the wrong structure, because most LTD formations default to the “limited by shares” format, which may not be the right format for your CIC.  Take the time to think through the options and discuss it with an advisor if you need help.  It is better to get the right solution slowly than to rush into the wrong result.  You can convert a “limited” into a CIC; but, if you know from the outset that it is a CIC you require, it is best to order a CIC from the start.

7. What are the protections for the directors and members/shareholders?

As with normal companies the CIC benefits from "limited liability". This means that the CIC will be liable for the actions of its directors and directors will not incur personal liability, except in certain exceptional circumstances (such as where the director has acted fraudulently, or continued to trade when the CIC has become insolvent). Shareholders will only be liable up to the amount of their contribution (where a CLS), and members only up to a nominal amount (usually £1) in the event it winds up (where the CIC is limited by guarantee).

8. Who regulates CICs? Are the reporting requirements the same as for normal companies?

CICs are regulated by the CIC regulator with what is intended as a "light-touch". This compares with the relatively "heavy" regulation of charities by the Charity Commission. However, the CIC regulator will respond to complaints from stakeholders and has considerable powers to act to protect the community interest.
As with all companies, CICs are required to file annual accounts and an annual return with Companies House. In addition, a CIC has to file a community interest report annually, which will explain how the CIC pursued the community interest and involved its stakeholders and will, if applicable, give details of payments to directors and any dividends paid.

9. What do I need to do to set up a CIC?

First of all you need to make an application. The application will set out the CIC's social purpose and the activities it will carry out to achieve it.  Provided there are no issues raised by the CIC regulator or Companies House, the CIC should be registered around two to three weeks from the application date.
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