Let's talk CICs: An overview of Community Interest Companies

A business structure that is perhaps often overlooked, if you are considering setting up a social enterprise, then there are in fact considerable advantages to operating as a CIC. 

What is a Community Interest Company (CIC)?

A CIC is typically a business formed to benefit a community, or with a view to pursuing a social purpose, rather than making a profit for shareholders. It still usually operates as a business, but with social objectives, and with the profits being reinvested as such.

A CIC is a company registered with Companies House and HMRC in the same way as a trading company, and in a way, is a hybrid between a charity and a company.

Normally no shares are issued, so there are no beneficial owners. Although, CICs can be set up with shareholders meaning dividends can be paid – currently capped at 35% of retained profits.

When CIC annual accounts are filed a CIC34 is also filed, which is a written report of the CIC’s results and objectives. This report is publicly accessible and must outline:

• the CIC’s activities and how it has benefitted the community,
• the CIC’s payments to its shareholders (if applicable),
• any paid performance-related interest,
• any assets it has transferred for less than market value,
• the pay or other compensation of Directors,
• and how it has consulted with stakeholders.

When setting up a CIC, what do members need to provide?

• A ‘Community Interest Statement’, explaining what the CIC 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 (if applicable).
• Furthermore, the potential CIC needs approval from the Community Interest Company regulator. You can complete your application to register a CIC online (at the time of writing, £27).

What are the main benefits of operating as a CIC?

• It can be seen as ‘not for profit’ and therefore may have access to alternative financing options to that of a standard company, such as donors, grants and community financing.
• It still runs as a ‘Limited’ entity, so there are not usually any personal guarantee or implications on the directors.
• On cessation the residual funds must usually be transferred to another CIC or charity.
• It is quicker to setup than a Charity and the annual compliance work is reasonably simple. Whereas, charities have to file with the Charity Commission, and have more red tape/ compliance regulations.
• Charities can downgrade to a CIC although may lose some tax advantages.
• A CIC can still convert to become a Charity, although it requires both regulators to agree to such a change.

What are the disadvantages of a CIC?

• The biggest disadvantage is they are subject to Corporation Tax on trading profits, and the rates and legislation are the same as a trading Limited company.
• Community funding may not be as widely available. Some donors prefer to donate to a Charity as they do not have members, providing peace of mind that donations remain entirely within the Charity, whereas CICs, could, pay dividends to shareholders; or pay its directors more easily.
• It cannot convert to a Ltd company.
• It cannot register for gift aid and has no exemption from taxes such as stamp duty, where as a charity can benefit from relief on property transactions.

Why may you choose a CIC over a charity?

• potentially less red tape and administration
• accountancy fees can be lower
• it can have a mix of trading and funding income more easily
• it has some scope to pay directors and dividends

Before setting up a business whether it be trading, not for profit, or a mixture, we recommend you seek professional advice. Price Bailey offer an initial no-obligation meeting to discuss how it may be best for you to move forward with your venture.

This article was written by James Elvin, a Senior Manager in our Business team. James has extensive experience supporting CIC owners and managers in achieving their goals, both regionally and nationally. If you have any questions regarding CICs, you can contact James using the form below.