Community Interest Company (CIC)

A community interest company (CIC), like the vast majority of UK companies, is a limited company that operates to provide a benefit to the community or environment rather than simply make profits for shareholders. This means that liability for a CICs debts are limited. They were designed specifically for social enterprises and the structure supports activities from small local community projects to large-scale multi-million-pound services.

While any business can claim that they’re using their product/service for the greater good of the community, CICs, much like charities, are required to have and maintain a clear social mission. Implementing a CIC structure for your start-up assures the public, consumers and investors of your social objectives. More donors and investors may contribute financially to a CIC as they’re assured that their donation will go towards the social purpose of the business rather than used to pay shareholders.

Another fundamental aspect of CICs is that they must have an asset lock. The asset lock guarantees that the business assets are used to the community. If the CIC is dissolved, any assets will go to a similar CIC company and won’t be shared as profit.

They are formed under the Companies Act 2006 by a simple process of registration and are monitored and regulated by The Office of the Regulator of Community Interest Companies.

All CICs must be one or other of the two most common forms of company:

• A company limited by guarantee

• A company limited by shares

You should consider carefully the company form most appropriate for your proposed CIC. Once incorporated a company limited by guarantee cannot be converted into a company limited by shares (or vice versa).

Limited by Guarantee

A CIC may be incorporated as a company limited by guarantee or an existing guarantee company can be converted to a CIC.

In this company format members guarantee to meet the debts of the company up to a specific limit in the event of its failure. They have no further liability for the debts of the company beyond their guarantee. The company’s constitution sets out how people can become or cease to be members.

In practice each of the guarantors usually guarantees a nominal sum such as £1 but there is no reason why a principal supporter of the CIC should not in effect underwrite its activities by guaranteeing a larger sum.

A company limited by guarantee has been the traditional form of companies operating without the motive of making a profit for distribution to the members.

A CLG can be structured in two ways – by a small membership governing document or by a large membership governing document (articles of association).

Small membership articles should be used if all of the following apply to your CIC:

• It is limited by guarantee

• All the directors are also members of the CIC

• All the members are also directors of the CIC

Large membership articles should be used if all of the following apply to your CIC:

• It is limited by guarantee

• The CIC will have more members than it has directors

Limited by Shares

This is the most common form of capital structure for ordinary companies.

The company has a stated capital divided into a number of shares; for example a company may have a share capital of £1,000 divided into 1,000 shares of £1 each. Once a member has paid their full nominal value of a share to the company, the member has no further liability for the debts of the company. Where shares are only partly paid members may be required to pay the balance if called upon to do so by the company or liquidator.

The company raises capital by selling its shares to people wishing to become members (usually called shareholders). Potential members may also purchase shares from existing shareholders. The price paid may be more than the nominal value depending on the market for the shares at the time.

Shares:

The first important question for people wishing to form a CIC with share capital is whether or not they will want to pay dividends on the shares. Having made that decision they must ensure that they adopt the appropriate form of Memorandum and Articles (their governing document). The more detailed rights of members (such as voting at meetings and restrictions on transfer of shares and appointment of directors) will also be set out in the Articles.

The extent to which dividends can be paid is subject to a cap. The members must approve the declaration of a dividend by a CIC.

The extent to which shares may be bought and sold is governed by general company law, including the rules on public offers of share, and by the company’s Articles.

Public or Private:

The next important question you will need to decide is whether you want your CIC to be a public or private company.

The key difference between public and private companies is the transferability of shares. It is not about size or status; some very large organisations are run as private companies and some public companies are fairly small operations. Public companies are subject to different rules of general company law in various respects.

The vast majority of companies are private companies. A private company is prohibited from offering its shares to the public. In general, public companies are more heavily regulated than private companies. Unless you want to raise fairly large sums of money to pursue the CIC’s community purpose by a public offer of shares or possibly are looking for a large membership who can transfer shares freely, a private company is probably the best structure for your purposes.

A company can convert from being a public to a private company and vice versa.

A public company is established as such by its application for registration and Articles and, subject to compliance with the appropriate law and regulations, can make public offers of shares and its members can buy and sell the shares freely. Shares in a “listed” or “quoted” company may be traded on the Stock Exchange or other markets. However, not all public companies are listed or quoted. Detailed consideration of the rules governing public companies, let alone public companies that are listed or quoted is a wide subject beyond the scope of these notes and upon which professional advice is essential.

If a normal company goes into liquidation any surplus assets after payment of its debts and costs of the liquidation are usually paid to the members in proportion to their shareholdings. With a CIC such returns to members are restricted to repayment of the paid up value of the shares i.e. the amount paid to the company for the shares including any premium. Any further surplus has to be transferred to another asset locked body such as another CIC or charity.

CICs are also subject to restrictions on the redemption or purchase of their own shares and the reduction of share capital.

Advantages of a CIC

• The requirement to make a commitment to social goals assures the public, consumers and investors of your social objectives

• CICs can improve your access to finance by having social objectives

• They are quick and relatively easy to establish

• CICs are limited companies, which means the business is a separate legal entity to its members – limiting member and board liability

• The requirement for an asset lock ensures that any surplus assets will go to a similar CIC company or charity and won’t be shared as profit.

Disadvantages of a CIC

• Limited public knowledge – customer awareness can be quite low as CICs are less well-known business structures. This lack of understanding may impact how donors, investors, or volunteers are interested in the organisation. It can also cause complication when setting up a bank account.

• Limited access to funding – different legal structures are eligible to different types of funding, schemes and finance options. Have a CIC may limit what options you have regarding funding and support.

• Governance requirements – CICs must report annually to Companies House, HMRC and the CIC regulator. The regulator has the authority to investigate your CIC and take action if they have any concerns

• Cannot be converted – a CIC cannot be converted into another business structure. The company will have to be dissolved and the assets transferred to another CIC or similar or changed into a charity

• Fewer tax breaks – CICs have fewer opportunities for tax relief than charities that can claim tax relief in different areas. This is regardless of whether all their profits go towards social purpose. Business rates and taxes may also take a large chunk of money from the company income.

Most suitable for

CICs are perfectly designed for social enterprises and both small community projects and large scale organisations with social purposes at their heart.