First introduced in 2005, a Community Interest Company (CIC) is a type of limited company that exists to benefit the community rather than for private profit.
In many ways, a CIC operates in the same way as a conventional company, with flexibility in borrowing and fundraising, as well as the ability to own assets and agree contracts in the name of the organisation. As a separate legal entity, a CIC continues to exist despite any changes in ownership or management.
In the context of CICs, ‘community’ is defined as a group or section of society, such as people living in a certain area or those facing a similar disadvantage. However, it’s expected that a CIC must benefit a wider group than those specifically involved in running the organisation. For example, a community bus service must cater for the whole local populace, not just those associated with the CIC. An advantage of setting up a CIC is that its definition of community interest is broader than for a charity, who must satisfy their own public benefit test.
Key considerations
A CIC offers a limited company structure that will be familiar to many people, where charities are notably more complicated and constrained by law. This can make dealing with other organisations simpler, alongside greater operational flexibility.
Consider:
- What activities you want to undertake and how they will benefit the community
- How and in what form your organisation will be funded
- Potential owners, managers, directors, shareholders, or guarantors
- What will happen to surplus profits
- Who is nominated as the asset locked body (so any assets owned by the CIC are passed on to benefit another community-based company or organisation) in your Articles of Association
- What reporting requirements you will have to comply with
CICs are not eligible for the same range of tax breaks as charities, who can claim relief on income, capital gains and profits. Additionally, charities might also benefit from more favourable business rates. If you are debating whether to establish a CIC or charity, it’s important you understand these financial differences and how this will affect your impact on the community you wish to serve.
If you wish to engage in political activities, a CIC structure will not be applicable.
CIC features
You can form a CIC with any number of members, with a variety of stakeholders, paid through dividends or performance-related interest. Unlike charities, CICs have no trustees.
A CIC must either be a company limited by guarantee or shares. Only CICs limited by guarantee can later be converted into charities. A CIC limited by shares can expand its operations by selling shares.
Once a CIC is registered, the only way to end the organisation is to dissolve the company entirely or to convert to a charity or Charitable Incorporated Organisation (if limited by guarantee and share capital is fully paid up). A CIC cannot become an ordinary company.
As actively trading businesses, CIC directors have the same duties as their conventional company counterparts and can be paid or unpaid. Some individuals will see the success of their organisation as sufficient reward. However, other CICs may choose to renumerate their directors to incentivise and ensure optimal company performance and potentially better serve their community. Director’s remuneration should always be reasonable and transparent.
There is a dividend cap which aims to balance encouraging investment in the CIC and the central purpose of benefitting the community. Dividends must be proportionate to the amount invested and profits made. The maximum aggregate dividend cap is no more than 35% of a CIC’s profits, ensuring that the remaining 65% of profits are reinvested back into the company or directed towards the community it serves.
As mentioned earlier, CICs have the same borrowing powers as other companies and generally can borrow and pay at normal commercial rates of interest to lenders. In some (rare) circumstances, interest payable on debts or debentures is linked to the performance of the CIC. The current performance related interest cap is 20%.
Setting up a CIC
To set up a CIC, you’ll need:
- A ‘community interest statement’, outlining what your organisation plans to do
- An ‘asset lock’ – a legal promise stating that the company’s assets will only be used for its social objectives, with strict rules on how assets can be treated, including limits to paying shareholders
- A constitution – establishing the responsibilities and powers of directors, members’ rights and liabilities, as well as social objectives
- Approval from the Regulator of Community Interest Companies
Registering a CIC with Companies House currently costs £65.
Reporting
The accounting requirements for a CIC are the same as ordinary limited companies.
However, a CIC must file an annual Community Interest Report (CIC34) with their accounts. This details the:
- Activities and benefit provided to the community
- Remuneration paid to directors
- Dividends paid
- Performance-related interest paid
- Assets transferred
- Any stakeholder consultation
Find out more…
Beyond this article, you may wish to consult the latest government information for some of the finer details.
Need some guidance?
If you want to make a difference but are unsure if a CIC structure would best suit your needs, or you already run a CIC and are interested in improving your operations, we can assist.
Please contact us and a member of our team will be happy to help.
