Some individuals believe that social enterprise is the future of business. There may be some basis for that argument given the resilience these types of organisation have shown during the economic challenges of recent years. As campaigners continue to petition the government for more favourable regulations for the sector, the KG Accountants blog continues its in-depth look at community interest companies (CICs). First launched in 2005, there are now more than 15,000 CICs in the United Kingdom and this company model is a useful vehicle for philanthropic entrepreneurs setting up a social enterprise.
As we discussed in the first article in this series, a community interest company is a hybrid of a limited company and a charity. Essentially, it is a limited company with a social mission.
CIC owners can run their business with the relative freedom of the familiar company framework without worrying about the extra layer of governance required of a charity.
According to the 2017 State of Social Enterprise Survey produced by Social Enterprise UK, 22 per cent of social enterprises in the UK are community interest companies. Of these, 11 per cent were CICs limited by guarantee, five per cent CICs limited by shares while six per cent were unsure.
Philanthropic entrepreneurs setting up CICs may be undecided about whether to set up a CIC limited by guarantee or limited by shares. This is a very important consideration, because once it is formed, you cannot switch between the two. In this article, we shed some light on the distinctions between these two types of CICs.
Deciding between a CIC limited by guarantee and limited by shares
As mentioned earlier, a CIC is a type of limited company which must be registered at Companies House as well as with the CIC Regulator. These have a number of unique characteristics that make them attractive to entrepreneurs. Among them are:
- It is a distinct legal entity – this means that it exists as a separate person rather than on behalf of its shareholders.
- The owners are only legally responsible for its debts up to the amount they have invested or pledged.
Limited by Guarantee vs Limited by Shares
A CIC limited by guarantee is a company which has no share capital and cannot pay dividends. The owners agree to meet the company’s debts up to a specific limit if it was to fail. Beyond that, they have no further liability for the company’s debts.
In a CIC limited by shares, the company will have a stated amount of capital which is divided into a number of shares. Once a shareholder has paid the full nominal value of his or her shares to the company, he or she has no other liability.
There is also an option to form a private or a public company. Unlike the latter, private companies are forbidden to offer shares to the public. However, public companies are more heavily regulated. The good news is that companies are free to convert from one to the other as their needs evolve. CICs limited by guarantee can only be private companies.
One fundraising challenge faced by CICs limited by guarantee is that if private investors wish to invest in the company, they cannot issue them with shares. This is one reason why a number of not-for-profit companies may choose to be formed as a CIC limited by shares.
CICs and the Dividend Cap
One advantage of CICs limited by shares is that dividends can be paid to shareholders. This can make a CIC an attractive investment proposition. However, given the social mission of a CIC, the amount of profits paid out to shareholders is capped at 35 per cent by law. The remaining 65 per cent of distributable profits must be reinvested back into the company or used for the community it serves.
However, dividends are not capped if a CIC’s shareholders are all asset-locked bodies (that is, organisations with a charitable or community purpose).
Conclusion
Just to reiterate, CICs limited by guarantee cannot be converted to one limited by shares and vice versa. Make sure you get professional advice before making a final decision.
Find out more by visiting the website of the Office of the Regulator of Community Interest Companies.
The importance of legal advice
The decision to form a community interest company should be taken very seriously, because once it is set up, the only way out is to dissolve the company and cease to exist or convert the CIC into a charity. All assets will need to be passed on to a nominated charitable organisation. It is therefore strongly recommended that an individual gets legal advice before forming a CIC.
At KG Accountants we provide a cost-effective, high value solution to meet all of your CIC needs. if you need to register a new CIC then look no further!
All our CIC fees are fixed.
By giving you a fixed and competitive price, we can take the worry away when it comes to running your CIC; allowing you to concentrate on running your organisation.
Arrange a FREE CIC initial consultation.
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