How Could a Community Interest Company Meet Your Enterprise Needs?

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What is it?

A community interest company (CIC) is a non-charitable limited company set up with the purpose of benefiting a community or pursuing a social purpose. This differs to a regular limited company which is set up with the purpose of making a profit for shareholders. They differ to charities as charities are considered to be not for profit whereas CICs are not strictly not-for-profit and may deliver returns to investors.

CICs are a useful legal form because they provide the freedom of a limited company, and allow for the trading of products of services through contracts and for the holding of local assets. Charities on the other hand tend to rely more heavily on donations and funding. Some charities chose to set up a CIC to operate part of the charity, such as the charity shop.

How do I set up a CIC?

The setting up of a CIC is similar to that of setting up a limited company, which you may be familiar with. There are, however, certain requirements which differ from setting up a regular limited company. Specific legal implications of a CIC include the need to create a ‘community interest statement’ outlining the company’s plans, an ‘asset lock’ and a constitution that is drafted in line with the CIC regulations. 

An asset lock is a legal promise stating the company’s assets shall only be used for its social enterprise objectives and limiting the profits that can be given to its shareholders. You will also need to get the company approved by the community interest company regulator.

Furthermore, you will need to ensure that the company meets the ‘community interest test’. There are a range of purposes that will meet the test; including promoting causes such as the healthcare of a community or climate change programmes.

Even for those who are familiar with setting up limited companies, there may be parts of this process that are confusing. Our expert legal advisors are on hand to help guide you through the process.

Advantages and disadvantages of CICs

For those wanting to set up a social enterprise, there are various ways of doing so, including setting up a limited company, CIC, charity or co-operative, or to operate a sole trader of business partnership. It is useful to consider the advantages and disadvantages of a CIC when deciding how to set up your enterprise:

Advantages:

  • The asset lock ensures that the CICs profits will be used for its social objectives and not for shareholder profit. This can attract investment as donors will be reassured by this protection on the use of their investment. This lock will be contained in a clause of the CIC’s articles of association. It can be imperative to have a legal expert draft these articles to ensure they meet the needs of your enterprise and protect its interests.
  • CICs benefit from the same limited liability protection as regular limited companies.
  • A special feature of a CIC is that even if it is dissolved, its assets remain locked and must therefore be transferred to another asset locked body, like another CIC or charity. This protects the assets for use for a social/charitable purpose.
  • Setting up a CIC is quicker than forming a charity and CICs are subject to far less governance than charities. The governance of the CIC regulator is not as stringent as that of the Charity Commission (in England and Wales).
  • They can be established in the same ways as a limited company, either limited by guarantee or shares.

Disadvantages:

  • The CIC has to comply with the same formalities and ongoing compliance as a limited company, such as the formalities of incorporation, filing accounts, and maintaining the company register. CICs are also subject to further obligations, such as ongoing reporting to the CIC regulator.
  • Some donors may be more comfortable donating to charities due to their familiarity whereas CICs have less public awareness. This however is changing, with the number of CICs growing considerably.
  • Whilst charities benefit from a multitude of tax breaks and also discounted business rates, CICs do not. CICs must still pay corporation tax like a regular company.
  • The cap on dividends that CICs can give to shareholders is 35% of the company’s distributable profits in a year. This restriction may deter investors. The assets of the company as well as the profits are for social objectives, which creates other restrictions, for example assets of the company cannot be sold for less than their market value.
  • The CIC regulator can investigate and take action against CICs if they are not operating to serve the social enterprise objectives it was established for.

When deciding how to set up your new enterprise, you will need to weigh up these pros and cons, and there is a lot to consider. Our team of expert corporate legal advisors will take the time to understand your aims for the enterprise and how you want it to operate, in order to advise you on the best form the enterprise should take to meet your goals. 

If you require any more information, contact us on 0113 284 5000 or alternatively email Richard.Coulthard@isonharrison.co.uk

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