Community Interest Companies (CIC)
Community Interest Companies (CICs) started in 2005. They are a legal form for those considering creating a social enterprise.
Since a slow start, they have grown considerably, both in number and activities. In 2018-19, 3,215 new CICS were registered. In comparison, in 2020-21, over 6,838 were registered, a 21% increase over the previous year, suggesting a growing interest in being a social enterprise in the Pandemic.
According to the CIC regulator in the UK as at the end of March 2022 there were 26,065 CICs on the public register a record growth of over 20% from the previous year. There was also a record number of companies converting into CICs. Over 80% of CICs are companies limited by guarantee, the structure that is best if you want to get grants.
Almost 20% are based in London, and across the UK, England dominates with 88% of the registered CICs. 25% of CICs, which were incorporated in 2005 when the model was launched, still exist though in 2021-22 twelve per cent of CICs were dissolved, a five per cent increase on the previous financial year.
The CIC legal structure can support anything from small local projects to multi-million-pound health services which used to be part of the NHS.
The regulator reports that health, education, sports and the arts are the most common sectors. However, they also continue to have more unusual applications, including Birth Networks, Accountancy Services, Arabic Language Schools, Boxing Clubs.
CICs are limited companies but they operate to provide a benefit to the community they serve as well as making a profit by trading. While they are not strictly 'not for profit', delivering returns to investors if the 'share' version, the primary purpose of a CIC is community benefit rather than private profit. Returns to investors must "be balanced and reasonable", and enough to encourage investment in the social enterprise sector while ensuring real community benefit is always at the heart of any CIC. A CIC "cannot be used solely for the financial advantage of a group of people, for political purposes, or the benefit of the employees, directors or members of a single organisation."
What you do as a CIC may be the benefit you offer, e.g. training or a welfare service or it may be that you use the profits you generate from commercial activity to fund activities in the community.
CICs can be a useful legal form for running local assets such as community halls and facilities, as well as for trading. You cannot be both a CIC and a charity, but a CIC can be a trading subsidiary of a charity, such as a charity shop. They are also used for collaborations with other charities with each having a shareholding in the CIC.
Here are some of the legal issues to think about with a CIC:
The primary legal structure for CICs is the limited liability company. They can either be incorporated as a new company or converted from an existing company. They can take one of three company forms
- a company limited by guarantee without share capital,
- private company limited by shares, or
- public company limited by shares.
A CIC's name must end in either CIC or Community Interest Company and not limited or ltd.
No going back
If you are converting from a company, you will not be able to convert back. The only routes if you want to change from a CIC are dissolving it or turning it into a charity and coming under the charity regulations.
The 'asset lock.'
The 'asset lock' ensures that the assets of the CIC (including any profits or other surpluses generated by its activities) are used to benefit the community. The 'asset lock' is a permanent step, which cannot be reversed. Practically this means:
- CICs may not transfer assets at less than full market value unless the transfer falls within a narrow range of permitted transfers such as to another asset-locked body or for the benefit of the community.
- If the CIC to pays dividends (other than to another asset locked body – essentially another CIC or a charity) these will be subject to a cap that limits the amount of dividend payable. A similar cap applies to interest payments on loans where the rate of interest is linked to the CIC's performance.
- On dissolution of a CIC, any surplus assets must be transferred to another asset locked body once all liabilities have been met.
The community interest test
A community is defined as anything from the whole population to a section of the community, which might be by area or need. When an application to be a CIC is made, you need to indicate how you propose that the company's activities will benefit your identified community. The success of your application will depend on your ability to convince the CIC Regulator that your company is eligible to become a community interest company because it will be 'changing the world' for the people you have identified.
The CIC will have to continue to meet this test throughout its life. A company will not satisfy the test if it carries on certain political activities, or if a reasonable person might consider that its operations are carried on only for the benefit of the members of a particular body or the employees of a specific employer.
CICs are required to produce an annual CIC Report detailing its activities and how these have benefitted the community. The Report plus accounts are submitted with a £15 fee to Companies House for the public to see. The Report must record the CICs activities and how it involved its stakeholders during the year. It must also contain additional financial information such as payments to directors and declaration of dividends. The 2018-19 annual report of the regulator can be accessed here. It includes some interesting case studies.
If you have found this useful and want to know more, we can help you decide if a CIC structure is right for you and help you with the setup.
Much of this information has come from Government guidance, and you can find more details here. Data on this page was correct as at August 2022.