Community interest company (CIC) – What is a CIC?
Introduced in 2005 in the UK, a community interest company is a type of company designed for social enterprises that want to use their profits and assets for the public good.
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As a business, a CIC reinvests its surpluses to achieve its social objectives, rather than being driven by the goal of maximising profit for its shareholders or owners.
In order to register as a CIC, a business must apply to Companies House with a statement of its social objectives along with a legal declaration that its assets will only be used for these purposes. Therefore, there are strict limitations as to the amount of dividends or performance-related interest a CIC can pay its members or investors.
How to set up a community interest company
Community interest companies are intended to be easy to set up and have a similar structure to other companies. However, unlike for-profit companies, they also have special features to ensure they work towards benefitting the community.
To set up a CIC, you need to provide:
- A ‘community interest statement’, explaining what your business plans to do.
- An ‘asset lock’, namely a legal promise that states the company’s assets will only be used for its social objectives and strictly limits the amount of money it can pay shareholders.
Furthermore, your company needs approval from the community interest company regulator.
You can complete your application to register a CIC online. Since March 2019, online registration costs a reduced fee of £27.
Community interest companies and regulation
Given the nature of community interest companies, it is necessary that they are regulated to ensure that they operate in the interest of the community. Every year, they must file an Annual Report with the CIC Regulator that explains how they are achieving their social goals and engaging with their stakeholders.
This report is publicly accessible and must outline:
- The CIC’s activities and how it has benefited the community
- The CIC’s payments to its shareholders
- Any paid performance-related interest
- Any assets it has transferred for less than market value
- The pay or other compensation of directors
- How it has consulted with stakeholders.
A community interest company can be investigated by the CIC Regulator if it is no longer acting in the interests of the community or does not comply with the asset lock.
A CIC is designed to improve its target community. It is not driven by profit. Therefore, it is not possible for a CIC to convert into an ordinary limited company to be able to extract profit. However, a CIC can convert into a charity, if desired. However, there are some important distinctions between the two types of companies.
The difference between a community interest company and a charity
Community interest companies and charities are both legal structures that can be used to set up a social enterprise. The choice between whether you wish to set up a CIC or a charity depends on a number of factors.
Firstly, unlike charities, which are typically reliant on grants, donations and fundraising for a large proportion of its income, a community interest company is usually not dependent on these alone. A CIC receives income from a variety of sources including contracts, trading income and grants.
Consequently, whilst charities commonly deliver time-limited projects that are dependent on trusts and foundations for money, CICs possess products and services that they can trade independently from other funding or grants that they receive.
Secondly, it is possible for a community interest company to make a profit or have surplus, whereas a charity is considered as ‘not-for-profit’. It is expected that a CIC reinvests its surpluses to achieve more of their social objectives, but they can also pay a proportion of their profit out to owners or investors in the form of dividends.
Since October 2014, a ‘dividends cap’ has been in place to maintain the community focus of the company. Under this cap, the maximum amount of dividends that a CIC can pay out is 35 percent of its distributable profits. If the CIC does not use up its entire dividend capacity in a given financial year, it is possible to carry the unused capacity forward for up to five years subsequently.
Charities, however, are far more limited in how they can use their surpluses and the money must be spent on specific things. For example, it may be expected that a charity’s extra money is used to purchase a new building. Charities cannot pay out surpluses to the trustees.
Possibilities and Adaptability
Thirdly, philanthropic entrepreneurs who wish to do good in a form other than charity, may be enticed by the possibilities community interest companies offer. CICs are specially identified with social enterprise and therefore some individuals may feel this is more fitting than charitable status.
Moreover, CICs offer the possibility to work for community benefit with relative freedom and allow owners to identify and adapt to social circumstance whilst still maintaining not-for-profit distribution status.