A Community Interest Company (CIC) is a type of social enterprise that uses its profits to benefit the community instead of private shareholders. CICs are admirable organisations that are often set up to tackle social problems or to promote arts, culture, heritage, and the environment.
However, there is often confusion about what exactly a CIC is, and how it differs from other types of social enterprise.
In this article, we will explain what a CIC is, how it works, and why setting up a CIC may be the right choice for your business.
What is a Community Interest Company?
A Community Interest Company is an organisation which has been set up for the benefit of the community, rather than for private profit. CICs are ‘not-for-profit’ companies, which means that any profits made must be reinvested back into the organisation or used to benefit the community.
CICs can be either charities or non-charitable organisations, but all CICs must have a ‘social purpose’. This means that the company must be set up to tackle social problems, promote arts, culture, heritage, or the environment, or provide goods or services that are of public benefit
CICs are regulated by the Community Interest Company Regulations 2005 (as amended), which set out how CICs must be run. For example, the regulations state that CICs must be transparent so that all money is accounted for and can be shown to be for community benefits only.
CICs are also required to prepare an annual report and accounts, which must be sent to the regulator (Companies House in England and Wales, OSCR in Scotland).
How Does a CIC Work?
CICs are limited liability companies, which means that the owners are not personally liable for debts incurred by the business. This legal structure is similar to that of a traditional corporation, but with a few key differences. For example, CICs must have “asset locks” in place to prevent assets from being sold off for personal gain.
They also must operate for the benefit of the community, rather than for private profit. As a result, CICs are able to provide funding and resources to support social or environmental initiatives in their communities. This means that they often fill the gaps in government funding or resources so that vital services can be maintained.
Another key difference is that CICs are “user-led”. This means that the people who use the services provided by the CIC must have a say in how those services are run. This helps to ensure that the CIC is meeting the needs of its community CICs can be set up as either for-profit or not-for-profit organisations. For-profit CICs must reinvest any profits made back into the company or use them to benefit the community. Not-for-profit CICs do not distribute profits to shareholders but may pay salaries to employees.
CICs can be either companies limited by shares or companies limited by guarantee. Companies limited by shares are owned by shareholders, who elect a board of directors to run the company. Companies limited by guarantee are owned by members, who elect a management committee to run the company. Either way, the shareholders and members do not make any money from the CIC.
What Type of Directors does a CIC Need?
It is important to note that CICs must have at least two directors, who must be “fit and proper persons” with no restrictions on their ability to act as directors of UK companies. In practice, this usually means that they must be over 18 and have not been disqualified from acting as a director in the past.
CICs must also have at least one “community interest director” on their board – someone with experience working in or with the community that the CIC intends to benefit. This director must not be involved in any other capacity with the company (such as being an employee), and must not have any financial interests in the company beyond their initial investment.
What is the Community Interest Company Regulator
The Community Interest Company (CIC) Regulator is an independent body that oversees the operation of CICs in the UK. The Regulator is responsible for ensuring that CICs operate in the best interests of their communities, and they have a range of powers to investigate CICs and take action if necessary.
One of the main ways in which the Regulator carries out its duties is by reviewing the annual reports and accounts of CICs. These reports must include information on the activities of the CIC, its finances, and how it has worked to benefit its community.
If the Regulator has concerns about a CIC, they may carry out an investigation. This can involve interviewing members of the CIC, reviewing documents, and carrying out site visits. If the Regulator finds evidence of wrongdoing, they can take a range of enforcement actions, including issuing warnings, ordering changes to be made or even dissolving the CIC. This can be incredibly serious so if you are running a CIC, it is very important that you stay in regular contact with the CIC Regulator and report any potential issues as soon as possible.
What is the Dividend Cap?
The Dividend Cap is a limit on the amount of money that can be paid out to shareholders and is designed to ensure that CICs do not operate for profit. It is an important part of ensuring that CICs act in the best interests of the community, and not private individuals. Instead, any surplus profits must be reinvested in the company or used to benefit the community. The Dividend Cap is governed by the Companies Act 2006 and the Community Interest Companies Regulations 2005.
If a CIC breaches the rules of the Dividend Cap, it may be subject to investigation by the CIC Regulator. This could result in the company being wound up, and the directors being disqualified from running a company in the future.
What is the Asset Lock?
One key feature of a CIC is its asset lock, which helps to ensure that the company’s assets are used for the benefit of the community.
The asset lock prevents the company from selling off its assets or using them for anything other than its stated purpose. This means that, even if the company is wound up, its assets cannot be sold off to private investors. Instead, they must be transferred to another organisation with a similar purpose. This helps to protect the company’s assets and ensures that they are used for the benefit of the community.
The asset lock is governed by the CIC Regulator, who has the power to impose restrictions on a CIC’s assets if they are not being used in line with its charitable objectives. In practice, this means that a CIC must be very clear about how its assets will be used and what restrictions are in place on their use. The asset lock is an important protection for a CIC and helps to ensure that it delivers on its promises to the community.
The History of Community Interest Companies in the UK
Community Interest Companies (CICs) were established in the UK in 2005 in order to enable organisations which did not have charitable status to use their assets for the benefit of the community. When they were established, it was agreed that CICs are required by law to have a “general community interest statement” which sets out their purpose. To ensure CICs certain tax and legal benefits, it was also agreed that they should be subject to special regulations regarding their governance, financial reporting and accountability.
The main reason for the creation of CICs was to help fill the gap between charities and businesses, by providing a legal structure which allowed organisations to pursue social or environmental objectives without being restricted by profit-maximising motives. Since their inception, CICs have become an increasingly popular choice for businesses and organisations looking to make a positive impact on society. There are now over 26,000 CICs registered in the UK, covering a wide range of categories including social enterprises, housing associations, sports clubs and environmental groups.
What are the Similarities and Differences Between Charities and Community Interest Companies?
There are a number of similarities and differences between UK charities and community interest companies (CICs). Both are legal entities that can be used to pursue a charitable or social purpose, and both are subject to regulation by the Charity Commission.
However, there are some key differences between the two. Charities must have a charitable purpose as defined by law, while CICs must have a “social purpose” as defined in their governing documents. Charities can only use their resources for charitable purposes, while CICs can use their resources for any lawful purpose.
Charities must be controlled by trustees who act in the best interests of the charity, while CICs must be controlled by directors who act in the best interests of the company.
Finally, charities can only distribute their income and assets to other charities, while CICs can distribute their income and assets to any person or organisation. These differences mean that each type of entity is better suited to pursuing different types of objectives.
How to Set Up a Community Interest Company
If you’re interested in setting up a CIC, there are a few things you need to know.
First and foremost, you’ll need to develop a clear mission and purpose for your company. What need will your CIC be filling in the community? How will it benefit the people who live there?
Once you’ve answered these questions, you’ll need to draft articles of incorporation and submit them to the CIC Regulator. The Regulator will review your application and determine whether or not your company meets the criteria for registration.
If everything is in order, you’ll be issued a Certificate of Incorporation and your CIC will be officially registered! This means that you can start raising funds, recruiting members, and carrying out your mission in the community.
From there, it’s up to you to start making a difference in your community. CICs are an excellent way to use business for good so identify what your local community needs and get started on making a positive impact today!
Converting a Regular Business to a Community Interest Company
If you’re thinking of setting up a community interest company (CIC), you may be wondering whether it’s possible to convert an existing business into this type of legal structure. The answer is yes, it is possible to convert a regular business into a CIC in the UK. However, there are a few things you need to consider before making the switch.
First, you’ll need to ensure that your business meets the criteria for becoming a CIC. This includes having a clear ‘social or community purpose’ and being limited in terms of the distribution of profits or assets. You’ll also need to draw up new articles of association and submit these to the Registrar of Companies.
Once your application has been approved, your business will be converted into a CIC and will be subject to the same regulations and restrictions as any other CIC.
While there are some benefits to converting your business into a CIC, such as gaining access to certain types of funding, there are also some drawbacks to consider. For example, you may find it harder to raise investment capital as a CIC than you would as a regular company so before making the switch, be sure to weigh up all the pros and cons carefully.
A Community Interest Company is a legal entity that is formed for the purpose of carrying out activities that benefit the public or community in some way. If you have an idea or cause that can help people and make a real difference, then setting up a CIC could be the perfect way to do it.