Community interest companies (CICs) were introduced to provide a legal structure to encourage people to establish ventures that provide genuine benefits for their local communities, rather than being driven by personal profit.
A CIC is a specific type of limited company that trades commercially as a social enterprise and has clear social objectives, such as providing employment opportunities for people with disabilities.
CICs must be registered with, and are regulated by, the Office of the Regulator of Community Interest Companies and must pass a ‘community interest test’ before being approved. This test ensures that activities undertaken by a CIC provide benefits to the community.
New CICs can be set up either as private companies limited by shares or as private companies limited by guarantee. (A CIC limited by guarantee is a not-for-profit company.)
CICs that are limited by shares and that make a profit can distribute some of their profits to shareholders, subject to certain conditions. To ensure that CICs use their assets and profits for the benefit of the communities they serve, there are restrictions on the distribution of profits to shareholders, known as the ‘asset lock’. The dividend that may be paid to shareholders is capped at a rate set by the CIC Regulator.
What are the restrictions of setting up a Community Interest Company?
CICs are limited companies subject to general company law and registered with the Registrar of Companies. There are some restrictions:
- CICs cannot be formed by a political party or by any company controlled by a political party, or be engaged in political activities.
- CICs cannot be set up only for the benefit of members of a particular body or employees of a particular organisation.
- Charities cannot be CICs.
Potential CICs must also pass a ‘Community Interest Test’ before being approved. This ‘test’ ensures that work undertaken by a CIC benefits the community. The test is based on whether a ‘reasonable’ person would consider the company’s activities to be of benefit to the community. The CIC must continue to satisfy this test over time by verifying annually that it is still working towards the purposes it was originally set up for.
There are three forms of CIC:
- A private company limited by shares.
- A private company limited by guarantee. (A CIC limited by guarantee is a not-for-profit company.)
- A Public Limited Company (PLC).
CICs are required to have names ending with an approved designation. For Public Limited Companies, the designation is ‘Community Interest PLC’, while for other companies it is ‘Community Interest Company’, or ‘CIC.
CICs that are limited by shares and that make a profit can distribute some of their profits to their shareholders, subject to certain conditions. To ensure that CICs use their assets and profits only for the benefit of the communities they serve, there are restrictions on the distribution of profits to their shareholders by a process known as the ‘asset lock’.
The asset lock is designed to ensure the assets of the CIC are used for community benefit. If any asset is to be transferred out of the CIC, that transfer must meet one of the following requirements:
- It is made at market value.
- It is made to another asset-locked body (other CIC or charity) which is specified in the CIC’s articles.
- It is made to another CIC with the Regulator’s approval.
- It is otherwise made for the benefit of the community.
However, CICs can issue shares that pay a dividend to shareholders as a return on their investment, but this dividend is capped at a rate set by the CIC Regulator. There are three elements to the cap:
- There is a limit on the amount of dividend that can be paid on shares. This is 5% above the Bank of England base lending rate in relation to shares issued between 1 July 2005 and 5 April 2010, and 20% of the paid-up value of the share in relation to shares issued on or after 6 April 2010.
- The total dividend declared in respect of profits available for distribution is currently limited to 35% of the distributable profits.
- Unused dividend capacity can be carried forward from year to year to a limited extent. Currently the time limit is five years.
For further information about the asset lock and dividend cap, go to www.bis.gov.uk/cicregulator/guidance/chapter-6.
A CIC established as a company limited by guarantee cannot be converted into a company limited by shares once it is incorporated.
What are the advantages of setting up a Community Interest Company?
CICs provide an additional type of legal status for businesses with social objectives. The ability to incorporate using the traditional process for limited companies provides limited liability and increased flexibility.
CICs can raise additional capital through selling shares. The asset lock ensures that money invested in a CIC is legally tied to that company and its social objectives, and is used to benefit the community rather than individual shareholders. Those who fund CICs can therefore be confident that the assets and profits will be used for the purpose they were intended.
The familiar structure of shareholders and directors provides a tried and tested system of running and managing the company, while the ability to pay employees and directors enables the CIC to attract higher calibre individuals into the organisation.
What are the disadvantages of setting up a Community Interest Company?
CICs do not benefit from any special tax status and generally speaking they have the same status as any other organisation regarding tax concessions or grants. This may be a disadvantage in comparison with charities, which can be eligible for specific funding schemes and whose profits (subject to certain limits on turnover) may be exempt from income and corporation tax.
How do you register a Community Interest Company?
CICs must be registered with Companies House, and they need the same incorporation documentation as other companies doing so.
To register a CIC, the following incorporation documentation must be submitted to Companies House:
- Memorandum of Association.
- A printed copy of the Articles of Association.
- Form IN01 (Application to register a company).
- Form CIC36 (the community interest statement). Community interest statements are used to describe the CIC’s intended work, which must meet the community interest test.
- A cheque for £35.
The Memorandum and Articles of Association of the CIC must comply with certain requirements; go to www.bis.gov.uk/cicregulator/guidance/chapter-5 for details. Model Memoranda and Articles of Association for CICs that comply with these requirements can be found at www.bis.gov.uk/cicregulator/forms-introduction/consitution-guidance/model-constitutions.
To convert an existing company into a CIC, the following documentation must be submitted to Companies House:
- A copy of special resolutions to:
- Alter the company’s Articles stating that it is to be a CIC in the future.
- Alter the company’s Articles so that they comply with the requirements applicable to CIC Articles.
- Change the designation of the company to one of those recognised for CICs.
- Form NM01 (Notice of change of name by resolution).
- A printed copy of the company’s Articles, as altered by the special resolutions listed above.
- Form CIC37 (the community interest statement for companies converting to CICs).
- A cheque for £25.
If your organisation has charitable status you cannot register it as a CIC. However, with the consent of the Charity Commission or the Office of the Scottish Charity Regulator (OSCR), both of which regulate charities, you may convert to a CIC in the same way that an existing company can convert to a CIC. This does not apply in Northern Ireland, where charities may not re-register as CICs.
To access the documentation to apply to form a CIC or to convert from existing company or registered charitable status to CIC go to www.bis.gov.uk/cicregulator/forms-introduction/index.
What administrative obligations apply to a Community Interest Company?
CICs have the same obligation as limited companies to file annual accounts with Companies House.
CICs have an additional obligation to submit an annual CIC Report to Companies House (with a £15 filing fee).
CIC Reports must detail, as a minimum:
- The work the CIC has undertaken during the year to benefit the community.
- How the CIC has consulted its stakeholders.
- Dividends declared (or proposed) on shares and performance-related interest paid, and how these dividends have complied with the dividend cap.
- Information on the transfer of assets to another asset locked body; otherwise at less than market value for the benefit of the community.