Community Interest Companies (“CICs”) are a relatively new form of company specifically designed to cater for the needs of social enterprises. They are often, misleadingly, described as being “not for profit”. A more accurate account would be that they are businesses designed to make profits for community purposes, as opposed to for the benefits of directors and members. Like all business structures, CICs are subjected to a degree of regulation and there are a number of formalities to be satisfied in order for CICs to be recognised, and continue to be recognised, as such. When regulation is discussed it must always be remembered that first and foremost a CIC is a limited company and therefore must conform to company law generally.
Why form a CIC?
CICs benefit from:-
- transparency of operation;
- statutory clauses that cannot be removed such as the Asset Lock;
- continuity of purpose;
- a speedy and easy set up;
- the ability to tailor the enterprise to complement the needs of individual businesses;
- a structure that is specifically designed to meet the needs of social enterprises;
- members’ limited liability;
- funding opportunities including access to the debt markets; and
- growth potential through the selling of shares
It is important to recognise at the outset that a CIC cannot be a charity and does not benefit from as favourable tax treatment as charities do.
To form a CIC the following documents need to be lodged at Companies House (the “Registrar”):-
- Memorandum and Articles of Association which must comply with Section 18 of the Companies Act 2006 and part 3 of the Community Interest Company Regulations
- Form IN01 (application to incorporate)
- A Community Interest Statement on Form CIC36
- Payment of £35
It is worth noting that the Registrar is unable to incorporate a company as a CIC unless and until the Regulator of Community Interest Companies (the “Regulator”) has decided that the applicant is eligible to become a CIC and has notified the Registrar of this decision.
Appointed by The Secretary of State for Business, Innovation and Skills, the Regulator’s powers stem from The Companies (Audit, Investigations and Community Enterprise) Act of 2004. The Government has determined that the Regulator employ a “light touch” approach to regulation; encouraging the development of the CIC brand, providing assistance to CICs, and maintaining trust in CICs generally.
Fundamental Features of CICs
- The Community Interest Test
CICs are to be set up for the benefit of a community as opposed to individual directors and members of the CIC. To ensure compliance in this respect, the legislation introduced “The Community Interest Test”. The Community Interest Test is an objective one and is satisfied if it is considered that a “reasonable person” would consider the purpose of the CIC to be for the benefit of the community. Companies applying to be registered as CICs must provide evidence that the Community Interest Test will be satisfied. A “community” for this purpose can be as wide as the population as a whole or as narrow as a particular group of individuals, provided they share a common characteristic which differentiates them from other members of the community. The community referred to in the CIC should be wider than simply the members of the CIC, as this would not provide the public benefit envisaged. To aid the Regulator’s decision, applicants must supply the Registrar with a Community Interest Statement on incorporation. In order to determine whether a company will satisfy the test, one should consider:-
- the purposes for which the company is set up;
- the range of activities the company intends to participate in; and
- who (which community) will be seen to benefit from the activities.
It is important to note that there are two types of activities that cannot (as the legislation currently stands) satisfy the Community Interest Test. Firstly, political campaigning (or activities intended to support political campaigning) cannot satisfy the test. Secondly, activities in which the sole beneficiaries are the members or employees of a particular body or employer cannot satisfy the test where there is an absence of any wider community benefit.
- The Asset Lock
The term “Asset Lock” refers to provisions in the legislation designed to ensure that the assets of a CIC are used only for the benefit of the community when held by the CIC and also when transferred out of the CIC. In this respect a transfer can only occur where either (a) full consideration has been received so that the value of the assets is retained; (b) the transfer is made to another CIC previously named in the original CIC’s articles of association (something to consider when drafting articles for incorporation); (c) with the prior consent of the Regulator the transfer is made to another asset locked body (either another CIC, a charity, a permitted industrial and provident society or a body established outwith the UK which performs a comparable function); or (d) the transfer is otherwise made for the benefit of the community. Despite these restrictions, it is recognised that the Asset Lock should not be viewed as a bar to trading. At their heart, CICs are companies and normal trading conditions apply. It would be entirely appropriate, for instance, for a CIC to deplete its asset base in order to meet financial obligations.
- The Dividend Cap
A Dividend Cap is prescribed by the legislation and aims to strike a favourable balance between encouraging investment and protecting the assets of the CIC for the community benefit for which it is set up. There are three types of caps on dividends restricting the total amount that can be paid out to stakeholders.
- Annual Community Interest Company Report
The Community Interest Test subsists throughout the life of a CIC and regular checks are in place to ensure that individual CICs do not deviate from their obligations as they age. The directors of CICs are responsible for the preparation and delivery of an Annual Community Interest Company Report. This should be submitted to the Registrar at the same time as the accounts are filed. A copy will also be passed to the Regulator for review. The remuneration of directors, how the CIC has benefited the community, and the involvement of stakeholders in the CIC’s activities are mandatory inclusions in this respect.
A CIC ceases to be a CIC when either it is dissolved or it is converted into a charity. In each case the Regulator will ensure that the correct procedure has been followed.
Sources of Finance
CICs benefit from a wide range of credit options. Trading income, grants, asset-based lending, employee share ownership schemes, charges on assets (either by way of a mortgage (charge over fixed assets) or by way of a floating charge (charge over fluctuating asset base)) provide examples. There are a variety of financial institutions which are keen to support CICs. There are also Government-backed investment funds (Adventure Capital Fund and Futurebuilders) and Community Development Financial Institutions, all of which are known supporters of CICs.
Click here to view the table for Principal Differences between CICs and Charities
Would a CIC suit you and your business?
CICs provide a particularly attractive business structure for social enterprises. The Community Interest Test, the Asset Lock, the Dividend Cap and the Annual Community Interest Company Report endeavour to maintain the community benefit aspect of the enterprise whilst creating a business worth investing in. In terms of finance generally, CICs have been seen to secure the interest of various financial institutions and government-backed bodies, whilst the underlying limited company ensures wide-ranging funding opportunities including access to the debt markets. Whilst conformity to regulation is mandatory in certain respects, the “light touch” approach prescribed in the legislation and implemented by the Regulator promotes both flexibility in, and the commercial viability of, the CIC structure.