Thinking of starting a social enterprise or becoming a Community Interest Company?

Becoming a charity may be the solution if you are looking to do something for the benefit of your community however there are other routes that may be a better fit. Community Interest Companies (CICs) are one example which are not well publicised despite being around since 2005. With the introduction of the “Big Society” concept CICs should become more common place.

So what are CICs?

CICs are essentially a limited company and can take any format that a company can. For example it can be limited by guarantee or be public or private companies limited by shares. The difference is that they are established for the benefit of the community as opposed to their members or shareholders.
For this reason they are suited to social enterprises or organisations that trade with a social purpose. A village shop is often quoted as an example; however, there is no limit to the type of enterprise. Other examples include art galleries, youth centres and care homes.

A lot of people will be familiar and comfortable with how companies operate and the responsibilities associated with being a director. This is not always the case with the more onerous responsibilities associated with running a charity and being a Trustee. They also have an additional advantage in that the audit requirement is the same as for any limited company and whereas Charity Trustees cannot be paid a fee the Directors of a CIC can (although this should not be an excessive amount).

Charities must be set up for a charitable purpose and where trading is to be performed, this usually has to be through an additional trading subsidiary of the charity. In this respect CICs are a simpler solution.

It is true that Charities have additional tax advantages and will be more applicable for those that wish to advance a charitable objective for the public benefit. However these added benefits come with additional legislation. CICs will be more applicable to those that wish to do good in the community via more of a social enterprise or where the funding is not received largely by private donations. It should be noted that the demonstration of community benefit is less onerous than the public benefit attached to charities and hence it will be less restrictive for some types of business.
What counts as a community?

A community can be a community or population as a whole or a definable sector or group of people in the UK or elsewhere. The acid test is what a reasonable person would consider to be a community.

How do you ensure it is for the benefit of the community?

The legislation imposes certain conditions on CICs so that it can be demonstrated and provide confidence to stakeholders that they are for the benefit of the community and not the members or shareholders. These take the form of an asset lock, a cap on dividends that can be paid to shareholders and additional reporting requirements.

What is an asset lock?

An asset lock is designed to ensure that all the assets are for the benefit of the community. This includes any profits or surpluses generated by its activities. Any transfers out of the CIC must be;

• for full consideration
• to another asset locked body specified in the articles of association (commonly another CIC or charity)
• to another asset locked body with the consent of the regulator
• for the benefit of the community

In addition on winding up the payment to shareholders (where they have them) will be restricted to the value of their paid up share capital and any surplus would need to be transferred to another similar asset locked entity.

What is a dividend cap?

CICs can pay dividends to its shareholders; however, the cap ensures that the assets and profits are mainly used for the benefit of the community. The cap comes in three forms being;

• A maximum per share of 20% of the paid up value for shares issued on or after 6 April 2010 (5% above Bank of England base rate prior to this date)
• A maximum of 35% of distributable profit
• The ability to carry forward unused capacity by 5 years

These are the current conditions and could be varied in the future. In addition there is nothing to stop CICs imposing stricter criteria in its articles of association.

What are the additional reporting requirements?

As well as filing the accounts at Companies House a Community Interest Company Report (CIC34) is also filed, this currently costs an additional £15. These will also be copied to the Regulator. The Regulator as well as approving a registration also has a monitoring and enforcement role.

Is a CIC right for me?

Before deciding on an appropriate entity professional advice should be sort to ensure that the advantages and disadvantages of different entities are considered. Streets together with our network of trusted professionals have the skills and specialisms required to assist local not for profit and third sector organisations. If you have a community project or venture in mind please contact us for an initial no fee consultation to discuss the potential options available.