If you’re considering setting up a social Enterprise that will benefit the community-at-large, you have two choices – a community interest company (CIC) or a charity.
While both are designed to offer some benefit to others or the planet, they are very different in terms of funding, taxes, etc.
This is a short review of the differences that will give you some idea of which is best for your needs and vision.
There are a few things that you need to consider before you explore too far into which legal structure is best for your social enterprise.
- Long-term goals
- Plans regarding investment
- Succession and exiting the business
- Products and services you’ll offer
- Source of funding
The biggest difference
The largest difference between a CIC and charity is the source of funding.
A CIC will get most of its income from trade, selling something then reorienting the money into the social enterprise. A charity, on the other hand, will be almost entirely reliant on donations and grants. While a CIC might include grants in the funding mix, it will also have trading income and contracts to fund its activities. While there are CICs that rely on grants and charities that rely on trading income, but the above is the general rule.
Some points to ponder:
- Do you want to have to go out every year and ask for money in order to keep the doors open?
- Is there a product or service you can commodities and make money from?
- Do you mind that you’ll need to pay taxes on income received as a CIC and that your “charitable” work won’t legally be a charity?
Grants for CICs
CICs can accept grants and should when the situation warrants.
The first situation is when you’re first starting out. Asking for and receiving grants and donations will allow you to build the infrastructure and create a demand for your product or service. Otherwise, you might find yourself having to fund your social enterprise out of your own pocket (just another form of a grant).
The next situation is when the funding is a perfect fit. If, for example, your CIC operates in a specific region doing a specific job, a grant that is ideally suited to you is simply logical. The old adage, “Don’t leave money on the table,” applies here. If the cheque fits, pick it up and do good work with it.
Another situation where you’ll want to accept grants as a CIC is where you’re attempting to expand your service area, either with your product or with your social enterprise side. Like start-up funding, this will allow you to create a stronger, more effective social enterprise.
In a charity, the board members, or trustees, are expected to be all volunteer. In fact, it can draw scrutiny if any member of the board, including the chairperson is paid. While it’s allowable for trustees to be paid while they’re working for the charity, The Charity Commission would prefer a completely independent, all-volunteer board of trustees. Trustees can be reimbursed for things such as travel costs, but there are limits to the number of trustees who can be paid to work for the charity.
With a CIC, since the overall structure is the same as for-profit business, the board members can be paid. In fact, most often the Board of Directors will be people who work for the CIC. Founders can work for the CIC and be on the board so that they can maintain control of their creation. In a charity, the founder will usually have to choose one role or the other, work for the charity or be a trustee.
A CIC can have just one director, whereas a charity is expected to have a minimum of three, usually five, trustees. Even as a CIC, it’s wise to have at least three unrelated trustees on the board so that you can apply for grants and foundations.
Benefit to the Community
A CIC has to specify a community that it will benefit. This can be people, places, or things. Usually, it’s a fairly broad category of whatever the company will benefit, like an area of forest, a specific class of people, or some other definable group or thing.
The communities that can benefit from a CIC’s activities are not clearly defined by law, so it’s up to the CIC Regulator to determine the legitimacy of a community benefit. As long as there is one, they have generally accepted them.
There are a very specific set of charitable purposes, or objects, that a charity can service. At the time that it’s set up, the founders need to choose one of these or something very similar to meet the requirements of law.
The fulfillment requirements on charities are much more specific and restricted than they are for CICs.
If the object or purpose of the organization is not covered by the specific guidelines in charity law, you might find yourself forced to establish a CIC.
To Profit to Not to Profit
A charity cannot make a profit from its activities. In other words, even if they are reimbursed by the people participating, the charity cannot show any profit.
A CIC, by contrast is expected to turn a profit. There should be a surplus at the end of every reporting period that the CIC can show. The CIC is expected to put that surplus back into their core work, but they can also pay investors and owners.
In charity, there shouldn’t be excessive surpluses. The business model of a charity is a bit more hand-to-mouth with the expectation that income should match outlay closely. Any surplus is expected to be retained exclusively to support the organization in case of an economic slowdown. Charities will usually hold onto 6 to 12 months of operating expenses. Anything else that is retained beyond this surplus must be allocated to a specific future purpose, such as acquiring a new building or trucks.
This is an overview of the differences between CICs and charities. Within those designations, there subdivisions that one must consider based on the constitution of the organization and it’s final legal structure.
At KG Accountants , we provide a cost-effective, high value solution to meet all of your CIC and Charity needs. if you need help with your CIC or Charity then look no further!
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