Once upon a time, the roots of enterprise were deeply woven within communities. A business existed to benefit its place of origin as much as it did to enrich the world outside of its limited borders. This spirit remains today, though it has taken on some different forms.
Numerous legal structures exist for enterprises to establish their own metrics for profit and community value. For those looking to build a non-charitable social enterprise, the cic company formation carries a lot of perks.
Entities such as the CIC Association keep tabs on more than 10,000 CICs currently in operation. While some operate are simple, obvious, community embedded business, others are more dynamic. A CIC structure isn’t all upsides, there are restrictions to any legal structure so it pays to gather additional information.
The following will elaborate on the benefits, the downsides and the important considerations that need to be made regarding starting a CIC.
Community Interest Company Overview
Of course, starting a CIC isn’t as simple as checking a box. It requires dedicated planning and, importantly, passing several requirements to register the company.
Like any other formal company, community interest companies produce a product or service and offer them at a price. The key difference is in how they use profits and how the internal operations of the company provide for the community in which they reside.
Providing opportunities and employment to locals is a common form of engagement. They’re also expected to meet with an independent office, the CIC Regulator, to keep up on this community promise.
Finally, trading and company assets undergo both specific requirements and special restrictions.
Understanding the CIC Regulations 2005 and the Companies Act 2006 helps to guide a group or individuals forming a new CIC.
Why Form a CIC?
Opportunities for acting ethically and creating positive social value exist for any company. Many standard companies have dedicated charities or specific outreach programs built-in.
Why bother going the CIC route and dealing with the formal framework?
One answer is to gain access to benefits and regulatory breaks (more on that in the next section). Another is to gain access to specialized Social Enterprise funding and grants such as these.
The biggest reason, though, is to to make a formal commitment to work within and for the community. Many companies are quick to promise community action for good press, but few get held to the fire to make good on such statements.
A community interest company can’t continue to exist if it fails in its stated goal. These stakes are important to founders and compel them to innovate and participate.
Versatility of CIC Formation
A CIC isn’t limited to one option within the structure. When forming a CIC, a board determines if the organisation will be limited by guarantee or by shares.
Limits by guarantee require that profits get reinvested in the company or used to meet the social objectives laid out by the company. One or more guarantor is appointed under this structure. These guarantors repay losses for the company if it is wound down.
Limits by shares benefit from public trading and the accrual of value within shares held by the board and members. The board chooses to reinvest profits into the company or into further shares. In the event of the CIC being wound down, shares lose their acquired value.
What are the Main/Key Benefits of Forming a CIC?
Recruitment of talented personnel is one of the most commonly toted benefits of a CIC. Unlike a charity, a CIC can compensate employees with a salary comparable to similar roles in the market. This brings in people who care about their community and have the skills to make an impact.
In addition, CICs have limited liability that extends to members, directors, and shareholders. These protections provide peace of mind and allow an organisation some latitude in taking risks.
Unlike charities, which have tight regulations and constant oversight, CICs get a lighter touch. This aids them in responding with confidence in a rapidly changing business environment.
These advantages in personnel, leeway in oversight, and liability protections blossom when coupled with a focus on social objectives. Communities are keen to cooperate when they know they will receive dividends from the exchange.
The funds acquired and used to start a CIC benefit from Asset Lock. This provides an enforceable bond of trust with a community which can rest assured cash directed into a CIC won’t suddenly depart from the community.
Understanding The Community Interest Test
To register as a CIC, an organisation needs to pass the community interest test. This test is a formal, but loosely structured, evaluation that requires a demonstration of the proposed value to the community.
This includes a concise mission statement to affirm the alignment of values. The test is conducted by a CIC Regulator appointed through the Office of the Regulator of Community Interest Companies.
The Regulator requires an explanation of how the CIC’s profits will be made available to the community. It’s key that handling of the benefits not be so restrictive in wording that they only provide limited benefits to a small subsection of people.
A Regulator is asked to look at the provided information with a reasonableness guideline. That is, if a reasonable person would consider the organisation to be working for the community good. In addition to the written Community Interest Statement, the article of association for the CIC must follow appropriate legal language.
Features and Benefits of “Asset Lock”
The Asset Lock restricts conditions for transferring assets. It also requires the reasons for a transfer clear certain criteria. The idea behind the feature is to prevent the assets from leaving the community they were intended for.
- Transferring assets out of a CIC requires that the value of the assets retain full market value.
- Assets are transferred by consent of the Regulator.
- Assets benefit the community through the trade.
Any singular or combination of the above must be satisfied to transfer assets. Assets in Asset Lock can also be transferred to another Asset Locked organisation as listed in the Articles of Association for that CIC.
Furthermore, accounts under Asset Lock can be used to secure other funding as collateral.
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How we can help
There are numerous benefits of creating a community interest company but it isn’t always the best choice. When looking to use start-up capital and to push an innovative idea while helping the public, it’s an excellent choice.
To get started on establishing a CIC or for other financial guidance contact KG Accountants for more.