In our November Senscot Legal blog post Annie is focusing on one of the legal structures available to social enterprises- the Community Interest Company (CIC). The CIC is popular choice of legal structure in the sector and the number on the public register is constantly rising. This blog post introduces CIC structure and the forms it can take and discusses some of its key features.
What is a CIC?
CICs were introduced in 2005 in order to address the issue of a lack of a legal vehicle for non-charitable social enterprises in the UK. They are known for offering greater flexibility in terms of their articles of association and structuring and are not subject to the stricter regulations imposed on charities.
A CIC is a company registered with Companies House and is fundamentally a limited company with an extra layer of community interest. By adding this layer, you become accountable to the CIC Regulator, and must comply with the CIC Regulations as well as company law. Community interest is the core value of a CIC and in order to set one up, you must pass the ‘Community Interest Test’. This requires you to satisfy the CIC Regulator that your purposes could be regarded by a reasonable person as being in the community or wider public interest. You then report to the regulator annually informing them of what the company has been doing to benefit the community.
The regulation and reporting for a CIC is ‘light touch’ in comparison to those imposed on charities, allowing CICs to focus intensively on their social aims. They also face fewer restrictions on trading activities than a charity, meaning they are able to adopt a more commercial approach in achieving their goals.
One of the key features of a CIC is the Asset Lock. This means that the assets and profits must be permanently retained within the CIC and used solely for community benefit, or transferred to another organisation which itself has an Asset Lock, such as a charity, or another CIC. This in practice means that the company cannot transfer its assets or profits outside the CIC for less than their full market value and if the CIC is dissolved, surplus assets must be transferred to another Asset Locked body.
This has a permanent long-term consequence and unlike with a Company Limited by Guarantee, the Asset Lock cannot be removed from a CIC.
Limited by Guarantee or Limited by Shares?
A CIC can be set up in either of two formats – Limited by Guarantee or Limited by Shares. As at 31st August 2019, there were 1109 CICs registered in Scotland. Of these, 934 were Limited by Guarantee and 175 were Limited by Shares.
As we can see from these figures, most CICs are set up as a Company Limited by Guarantee. This is a private limited company, regulated by Companies House, but unlike a conventional company it does not have any shareholders. Instead, it has members who guarantee a financial sum towards the company’s debts, usually a nominal £1. This model is best suited to companies running not-for-profit activities where no sharing of profit is contemplated.
Some people may wish to raise equity by issuing shares, in which case the CIC must be Limited by Shares. A CIC Limited by Shares can choose to exclude the payments of dividend to any shareholder not specifically named in the Asset Lock or allow payment of dividends subject to a cap imposed and monitored by the CIC Regulator (35%). Shareholders can either be individuals, private businesses or other Asset Locked organisations. If a CIC is being set up to be a subsidiary of charity, a CIC will usually be Limited by Shares with the charity as the sole shareholder.
There are a few points that you should consider before you decide to register as a CIC. These include:
- Lack of tax breaks compared to charities;
- CICs allow for directors to be paid without having to give away control;
- Range of social aims permissible are wider for a CIC than a charity.
- Cap on dividends if it is a CIC Limited by Shares (35%);
- CICs may not be able to access as many funding opportunities as charities;
- There is the additional reporting duty to CIC Regulator, however there is a lower level of ongoing governance compared to a charity;
- CICs are onerous to convert to another legal structure, but significantly quicker to register than a charity.
Is being a CIC for me?
Although becoming a CIC is an increasingly popular choice for social enterprises, just like any other legal structure it may not be appropriate for everyone and advice should be sought before setting one up. It is also imperative that you get advice on whether to adopt the Limited by Shares or Limited by Guarantee model as you cannot convert one to the other. Get in touch with us to arrange a free initial consultation to discuss the CIC and other available legal structures and which would fit in best with your activities.