When you want to set up a business that’s driven by social enterprise or community matters — not simply to make profit for shareholders — the Community Interest Company (CIC) is an obvious choice.
But it’s important to understand the advantages and possible downsides.
Here we explore the CIC to see what it is, how it works and whether it’s your best option.
What is a Community Interest Company?
The Community Interest Company (CIC) is a corporate structure that was first introduced in 2005. It is designed for social enterprises or not-for-profit projects and is structured like a normal limited company, so it’s limited by shares or by guarantee.
At heart, a CIC is shaped and driven by its community purpose, which is set out from the start in its constitution. It has a feature called a statutory asset lock, which makes sure that assets are only used for the benefit of the community, and dividends are capped at 35 per cent of distributable profits. This is the Maximum Divided Cap.
You can form a CIC with any number of members, and you can have a range of stakeholders, paid through dividends or performance-related interest. Importantly, dividends can only be declared by a resolution of the members and are subject to the Maximum Dividend Cap. This guarantees that a proportion of profits always benefit the community. For the same reason, there’s a cap on performance-related interest payments — currently 20 per cent.
Setting up a CIC is pretty straightforward and inexpensive. The formation and registration process is much the same as any limited company. When you start, the CIC Regulator must be satisfied that your constitution satisfies the ‘community interest test’ — in other words, your activities must clearly aim to benefit the community, avoid political campaigning and never aim to benefit members of a particular company.
Real commitment to social goals
If community is your focus, then a CIC can provide the right structure. This is because although the articles of association of any limited company can prescribe social aims, a CIC is clearly and wholly committed to a ‘communal cause’.
Access to a particular finance
Some forms of finance are only available to charities or community interest companies. The ability to access money through private donors, grants or community development finance is a good reason to consider forming a CIC.
The protection of limited liability
Limited liability offers a reassuring level of protection for the owners and managers of a CIC. There is also the advantage of protection for assets related to the social enterprise — a safety net that would not usually be available for unincorporated companies that are held in the names of individual people.
Simplicity and flexibility
The tried and trusted limited company structure, with directors and shareholders or members, is relatively simple to set up and run. Charities are notably more complicated. Having this familiar structure can make dealing with other organisations — such as government bodies — more straightforward.
Being a limited company provides a useful degree of flexibility too. Your CIC can be a private company limited by shares, limited by guarantee or a public limited company.
The range of possibilities
The CIC business model can incorporate a wider range of social aims than are allowed for charities. This is because the definition of community interest within the test applied to a CIC is broader than the Public Benefit Test for charities.
Naturally, the CIC will not suit everyone’s purposes. Here are some potential disadvantages:
The business of incorporation
Every CIC must be registered on Companies House, just like any standard limited company.
But there is more formal paperwork and approval that might put off some potential CIC start-ups. As a CIC you must also submit form CIC36, signed by all prospective directors, together with a payment of £35. A description of the proposed social purpose of the company must also be included. All this must be approved by the CIC Regulator.
A lack of tax breaks
Charities can claim tax relief on income, capital gains and profits. It means they can raise more money for the causes they represent. Another advantage is that charities tend to be eligible for a discount on business rates.
As a CIC you wouldn’t receive this range of tax breaks, which will potentially limit the amount you can raise for your social cause.
Limited access to funds
There is a range of grants and funding schemes that are open to charities, but not CICs. Many companies with a Corporate Social Responsibility (CSR) policy tend to favour charities for donations.
Lack of public awareness and prestige
Potential volunteers or donors may not be familiar with the CIC. For this reason, they might be more inclined to give their time, money and support to the more familiar charity, although this situation is steadily improving.
For the same reason, a CIC can lack the perceived prestige of a registered charity. Although this is largely down to subjective factors. For some, there is an inbuilt feeling of trust with a registered charity that inspires confidence.
Restrictions on assets and dividends
As we know, a CIC places restrictions and a cap on the payment of dividends and the use of assets. Only 35 per cent of a CIC’s yearly profit can be paid in dividends to company shareholders. Meanwhile the asset lock decrees that assets must be dedicated to benefitting your chosen community.
Both these measures are there for good reason, but could feel restrictive to potential shareholders, or if the social element is simply part of a wider business.
A CIC is not the only kind of business model if you’re looking to launch a social enterprise. Here are some alternatives:
CIC Limited by guarantee — this is the only type of CIC that can convert to a charity
Community Benefit Societies and Cooperatives — organisations that trade for the benefit of the community, or their members respectively
Charities — there are four legal formats for registered charities: charitable trusts, charitable companies and two types of Charitable Incorporated Organisation (CIO). The two types of CIO are the foundation model with no voting members, and the association, with voting members
Unincorporated charities — there are around 100,000 unregistered charities in the UK. They are quick and simple to set up, but some funders will only support registered charities
So, you’re looking to set up a business. Is the CIC the right approach for your social enterprise project? It’s really down to your individual corporate goals. Do you need easy and inexpensive set up? Do you prefer the familiarity of the limited company structure? Would you need the freedom granted by the CIC compared to being a charity? As with all major financial and business decisions, you may like to consult a professional adviser before making your move.
Find an expert financial adviser near you.