The Community Interest Company (“CIC”) is a new form of company which is available for social enterprises wishing to use a corporate vehicle.

The CIC entity will be of particular interest to:
community businesses,
co-operatives,
regeneration initiatives,
social traders and
environmental projects.

Any social business which has primarily social objectives, and which is driven not by the desire to maximise profits for shareholders and owners, but whose surpluses are reinvested in the business or community may consider the CIC format if the charity medium is not an option.

In the past non-charitable social enterprises predominantly opted for one of the following forms:

1. the company limited by shares or by guarantee; or

2. the industrial and provident society (co-operatives or societies for the benefit of the community).

The CIC is now an additional option for:

a) new social businesses who may wish to incorporate using this form;

b) existing social businesses who are incorporated as limited companies (including potentially those with charitable status) but may wish to convert to CIC status; and

c) charities who wish to operate trading activities (for example a charity shop).

Key features of a CIC

A CIC must exist exclusively to provide benefits to a community, or a specific section of a community. The CIC has the flexibility of the familiar company structure and access to a range of financing options, which can still be attractive to those working for a social purpose.

Its key features are the “asset lock” tying in the assets for the benefit of the community and the “community interest statement” which describes the CIC’s social purpose.

Asset Lock

A CIC’s assets must be used for the benefit of the community. This means that:

a) assets must not be transferred at less than full market value unless they are transferred to another asset locked body (such as another CIC or a charity);

b) dividends (which a CIC may constitutionally permit) to non-asset locked bodies will be subject to a cap;

c) on dissolution any surplus assets must be transferred to another asset locked body.

Community Interest Statement

To register your vehicle as a CIC the Regulator must be convinced that you satisfy a community interest test. The CIC must satisfy this test throughout its existence and will be required on an annual basis to supply the Regulator with a report setting out what the CIC has does to pursue the community interest and to involve its stakeholders during the year.

To register as a CIC you must first incorporate either as a company limited by shares or by guarantee and provide additional documentation sufficient to convince the CIC Regulator that your organisation passes the community interest test – i.e. the further business activities that you intend to undertake will be carried out for the benefit of the community or a section of it.

Other features of a CIC

• Limited liability;
  
  
• A CIC may not be a charity and so does not have to pursue exclusively charitable objectives, nor is it subject to regulation by the Charity Commission;
  
  
• A CIC may engage in a wide range of trading activities (save for political activities);
  
  
• A CIC’s directors, unlike charity trustees, can be paid (though never more than is “reasonable”);
  
  
• A CIC which is a subsidiary of a charity may pay its surplus profits up to its parent charity using Gift Aid;
  
  
• CICs are subject to regulation by the CIC Regulator who has professed to operate a “light touch regulatory regime”. It is hoped that the regulation regime will encourage trust and confidence in the CIC format which will make it a more attractive recipient of grants and donations than an unregulated not-for-profit company;
  
  
• CICs may pay dividends to shareholders (subject to the constitution adopted by the CIC and subject to a dividend cap);
  
  
• A CIC, as any other company, will be able to borrow and pay normal commercial rates of interest to lenders. As with the payment of dividends performance related interest is subject to a cap; and
  
  
• A CIC may mortgage its assets to a lender in a wider way than an unincorporated association, partnership or sole trader can. A CIC may give a “floating charge” over its assets.
  
  

Advantages

This is a bespoke limited company structure introduced specifically for use by social enterprises, with a secure “asset lock” and focus on community benefit.

As with the more established limited company structures members’ liability is limited to the amount unpaid on shares or by guarantee.

The activities of the CIC can benefit those who own and run it but its activities must benefit the wider community as well. A community interest company (if set up as a company limited by shares) does have the option of issuing shares that pay a capped dividend to investors. This cap is set by the CIC Regulator to protect the asset lock. This does, of course, present an additional opportunity to attract investment.

Disadvantages

A CIC does not have charitable status and does not get the tax benefits of a charity. The CIC may, however, become a charity but only if it ceases to be a CIC.

As you would expect the CIC is subject to the same regulation as a limited company but is subject to additional regulation by the CIC Regulator to ensure the community benefit. Together with annual accounts, you must present an annual community interest company report for public record which must show what the CIC has done during the year to pursue its pre-specified community interest and to involve the individuals or groups with a particular interest in the CIC.

If you require any further information specifically on the CIC legal structure and the procedures for incorporation or conversion please do not hesitate to contact Mark Fergusson by completing the on-line enquiry form or e-mailing him direct at maf@llw.co.uk.