A community interest company (CIC) is an alternative limited company structure designed for non-charitable social enterprises. This type of company operates for the benefit of the community rather than its shareholders or members.
In this article, we provide an overview of the community interest company structure, discuss how it differs from an ordinary company and a charity, and explain how to set up a CIC in the UK.
About community interest companies (CICs)
Community interest companies (CICs) were introduced in the UK in 2005, under the Companies (Audit, Investigations and Community Enterprise) Act 2004.
Designed for social enterprises as an alternative to a charity or an ordinary company structure, CICs exist to benefit the ‘community’ or pursue specific social purposes. This is in contrast to other types of commercial businesses that generate profit for their owners.
Structurally, CICs are the same as ordinary limited companies. This means that they:
- must be registered at Companies House
- need a memorandum and articles of association
- must comply with company law
- can be incorporated as limited by shares or limited by guarantee
- can be set up as private limited companies (LTD) or public limited companies (PLCs)
- are legal entities that are distinct from their members (shareholder/guarantors)
- provide limited liability protection to their members
- trade and operate in the same way as other businesses, with the aim of making a profit
However, they must also operate in accordance with The Community Interest Company Regulations 2005 by:
- adopting a memorandum and articles designed specifically for CICs
- providing a ‘community interest statement’, setting out the CIC’s social objectives
- creating an ‘asset lock’- a legal promise stating that the company’s assets and profits will only be used for its social objectives
- seeking approval from the Office of the Regulator of Community Interest Companies (the ‘CIC Regulator’) to operate as a CIC
Not for profit
CICs are categorised as ‘not for profit’, but they can be more accurately described as ‘not for private profit’.
Community interest companies are businesses, and they need to generate profit to achieve their aims. It’s what they do with these profits that differentiates them from other types of businesses.
They can buy and sell goods and services, enter into commercial contracts, hire employees, and pay salaries to directors. But, they must operate for a social purpose, using their assets and profits accordingly.
Limited by shares CICs can also pay dividends to shareholders. However, the asset lock provisions include a statutory dividend cap of 35%. This is the maximum amount of distributable profits a CIC can issue to shareholders each year.
What does ‘community’ mean?
In the context of CICs, a ‘community’ can mean:
- the population or community as a whole
- the entire population of a specified area
- a definable section of a community
- a group of people who share a common characteristic that distinguishes them from other members of the community
The CIC Regulator expects a ‘community’ to be wider than simply the members of the CIC or their family and friends.
When you set up a CIC, you must have a clear picture of which community you intend to serve and how your activities will benefit them.
You can find out more about the meaning of ‘community’ on page 8 of the CIC Regulator’s online Information Pack.
Difference between a community interest company and a charity
CICs have greater freedom and flexibility than charities, specifically in terms of activities, profit distribution, and regulations.
In particular, CICs can engage in commercial trading activities by selling and buying goods and services. This is how they generate income and profits to achieve their social objectives. Charities, on the other hand, get the majority of their funding from donations and grants.
However, by virtue of their legal status, community interest companies are not eligible for tax relief from HMRC, even if their objectives are entirely charitable. Nor can they claim Gift Aid on any donations they receive.
If you set up a CIC, you won’t have trustees – directors and members will control the company. You can also alter your community interest statement as the company evolves, enabling the CIC to provide a more extensive variety of services.
Whilst charities and CICs are both ‘not-for-profit’, a community interest company can make a profit and issue dividends to shareholders – provided it uses its assets and profits to fulfil its social purpose.
Difference between a CIC and an ordinary limited company
Ordinary limited companies need only register with Companies House and comply with company law. CICs must register with both Companies House and the CIC Regulator, adhering to both company law and CIC legislation.
An ordinary company, whether limited by shares or limited by guarantee, is set up for the benefit of its owners. It can distribute all profits and assets to its members.
In contrast, a community interest company must use its assets and surplus income for the benefit of its social objectives. However, CICs can pay dividends of up to 35% of distributable profit to shareholders.
When an ordinary limited company is dissolved, it can distribute its remaining profits and assets to members. Whereas, when a CIC is dissolved, the asset lock provisions dictate that the company must transfer its assets and profits to another CIC or a charity.
What are the benefits of setting up a CIC?
A community interest company is one of the best legal structures for social enterprises. Providing the advantages of an ordinary limited company, setting up a CIC offers the following benefits:
- CIC members enjoy limited liability for company debts, meaning their personal finances and assets are protected
- Forming a community interest company is quicker and easier than setting up a charity
- CICs can be set up as private or public companies limited by shares or guarantee, whereas charities must be limited by guarantee
- The asset lock ensures that CICs use their assets and profits for social objectives, rather than for private gain. But, they can reward shareholders with limited dividends. This helps to attract and reassure investors and supporters
- If and when a CIC is dissolved, its assets must be transferred to another asset-locked body (e.g. another CIC or a charity)
Setting up a community interest company is a big decision, so it’s also important to be aware of the potential disadvantages of this structure.
- CICs must register with both Companies House and the CIC Regulator
- People are more familiar with charities, which means that some individuals may be less comfortable donating to, or investing in, a CIC
- Community interest companies do not benefit from the tax breaks and discounted business rates enjoyed by charities
- CICs have dual filing and reporting requirements for Companies House and the CIC Regulator
- Information about the company will be disclosed on public record
Weighing up these pros and cons will help you to make an informed decision. If a CIC isn’t right for your social enterprise, alternative options include a co-operative, an unincorporated association, a charity or charitable incorporated organisation (CIO), sole trader, business partnership, or an ordinary limited company.
How to set up a community interest company
To set up a CIC, you will need to form a company with Companies House and get approval from the CIC Regulator. The whole process can be carried out online.
Follow the six steps outlined below to set up a community interest company in the UK.
1. Choose an official name for your CIC
When you set up a company, you must provide a name that complies with company name rules and is not being used by an existing company
If you are registering a private company, you must include ‘Community Interest Company’ or ‘CIC’ at the end of the name. Welsh companies can use the prescribed Welsh language equivalents. If you are setting up a public company, the name ending should be ‘Community Interest Public Limited Company’ or ‘Community Interest PLC’.
Ideally, you should choose a company name that is appropriate to your business and conveys something about your social cause.
Ensure the name is available as a domain name for your company website, and check the UK trade marks register to avoid infringement.
2. Determine who your directors and members will be
To set up any type of company, you need at least one director and one member. The same rule applies to community interest companies.
The members own and control the company, whilst the directors are responsible for the day-to-day management and running the business in a way that satisfies CIC regulations.
Directors and members can be the same people, so you can set up a CIC as an individual or with a group of people.
3. Write a community interest statement
A community interest statement is like a mission statement that explains what your CIC intends to do, and how.
This includes information about your company’s social objectives, the activities you plan to carry out, who these will help, how the company will benefit the community, and how profits will be used.
You will provide your community interest statement on form CIC36, which you must complete alongside your company formation application.
The CIC Regulator will use the information on this form to decide if your company satisfies the community interest test and is eligible for CIC status. Therefore, it is important to take your time when writing the community interest statement.
4. Create an asset lock
A key feature of CICs, the ‘asset lock’ is a legal promise stating that your company’s assets will be used to achieve its social objectives. This includes profits and any other surpluses your CIC generates.
You must explicitly reference the asset lock in your community interest company’s articles of association.
If you set up a limited by shares CIC, the asset lock must also include a dividend cap of no more than 35% of distributable profits.
This cap provides an effective balance, enabling you to attract investment and issue limited dividends to shareholders, whilst ensuring that at least 65% of all profits are used for the CIC’s social purpose.
You should also specify an asset-locked body (i.e. another CIC or a charity) as a recipient of your CIC’s assets in the event of the company being wound up or dissolved.
5. Establish your CIC’s constitution
Your CIC’s constitution consists of a memorandum of association and articles of association. You will need to choose your articles before setting up a company, but the memorandum will be created automatically if you form your CIC online.
The memorandum of association confirms the names of the CIC members who are setting up the company. If the CIC is limited by shares, the members (shareholders) must each agree to take at least one share in the company.
The articles of association set out the rules of the CIC, including the company’s social objectives, asset lock provisions, the responsibilities and powers of directors, and members’ rights and liabilities. Essentially, it explains how the CIC must operate.
Unlike ordinary limited companies, CICs cannot adopt model articles from Companies House. Instead, the CIC regulator provides model constitutions for CICs.
You can use these model versions in their entirety, or you alter the templates accordingly to meet the unique needs of your social enterprise.
6. Register a community interest company with Companies House
When you have all of these requirements in place, you are ready to register a community interest company online with Companies House.
To do so, you will need to:
- Create a Government Gateway user ID and password for your company.
- Complete Companies House form IN01 (application to register a company). This must include your company name, legal structure (e.g. private/public, limited by shares/guarantee), registered office address, details of directors and members, and any issued share capital.
- Complete form CIC36 (application to form a community interest company). This form must include detailed information on your company’s intended activities, which the CIC Regulator will use to determine whether the company is eligible to become a CIC.
- Upload your community interest statement, CIC constitution, and any other supporting documentation.
- Pay a registration fee of £27 by card or PayPal.
Once you have submitted your application to Companies House, it will be sent to the CIC Regulator for review.
If the Regulator approves your registration as a CIC, Companies House will issue a certificate of incorporation. In the majority of cases, applications are approved within two working days.
Alternatively, you can set up a CIC by post. It will cost £86 and can take up to 15 days to process.
The Office of the Regulator of Community Interest Companies provides more comprehensive guidance on setting up a CIC.
Can CICs pay dividends to shareholders?
If you set up a limited by shares community interest company, you can pay dividends to shareholders in accordance with the asset lock provisions stated in your CIC’s constitution.
Any dividends payable to shareholders will be subject to a statutory dividend cap. Currently, the cap is set at 35% of a CIC’s distributable profits.
Can I fundraise through a community interest company?
You can fundraise through a community interest company, but not as effectively as a charity. CICs are not entitled to the same tax reliefs as charities, such as Gift Aid.
The reason for this disparity is that CICs primarily generate income from trade, whereas charities depend on donations, fundraising, and grants.
Reporting requirements of a CIC after company formation
Once your CIC is registered, you will have a number of important statutory obligations to fulfil for Companies House, HMRC, and the CIC Regulator. These include:
- Filing annual accounts and a confirmation statement with Companies House each year
- Submitting an annual Community Interest Report to Companies House, which is copied to the CIC Regulator. You will file this alongside your accounts
- Preparing annual accounts and a Company Tax Return for HMRC each year
- Filing VAT Returns with HMRC if your annual turnover is above £90,000 or you voluntarily register for VAT
- Completing PAYE reports for HMRC if you pay directors’ salaries and/or have employees
You will also need to register your company for Corporation Tax and pay any tax due to HMRC each year. Despite being not for profit, community interest companies are commercial enterprises and must pay tax on their profits.
Wrapping up
We hope this post has been informative and clarified the purpose, benefits, and requirements of a community interest company.
It is an effective and increasingly popular structure for social enterprises, particularly those that wish to enjoy more freedom than charities, attract investment, and issue dividends to shareholders.
If you are thinking about setting up a CIC, we recommend that you consider your options carefully and seek specialist advice before making your decision.
Please leave a comment below if you have any questions about this topic or limited companies in general.
