Are you looking to make an impact in your local community? If you are, we want to take a second to thank you. Helping to improve the community you live in, and make the world a better place than you left it, is a noble undertaking.
You probably already have an idea of what kind of initiative or cause you want to commit yourself to. But, have you thought about how you’re going to structure your community organisation?
In the UK, you have two choices: a registered charity and a community interest company.
What is a community interest company? That’s a great question. It will help you to learn more about it so you can decide which structure will help you impact your local community in the biggest, most long-lasting way.
And, that’s exactly what we’re here to do. We’re going to educate you on everything you need to know about Community Interest Companies. If giving back to the community is something that you’re passionate about you’re going to want to read this article.
So, stick around with us and bring out your pen and pad. We’ve got a lot of information to cover so you’re going to want to take notes.
Let’s get going!
What Is a Community Interest Company?
So, what is a community interest company? A community interest company, or CIC, is an organisation’s goal to make an impact in the local community. They are typically focused on a particular geographical area or group of people.
For example, a CIC might choose to help Women in Business in the UK or a particular borough of the London suburbs.
CICs are a fairly new tool for individuals to use when setting up their social enterprise. The CIC structure was established in 2005. It’s seen as a way for organisations to use their profits and assets for good in the local community.
These organisations typically have more flexibility than a registered charity but there are specific rules and regulations that govern both. The best way to think of a CIC is a mix between a charity and a profitable private company.
Benefits of a Community Interest Company
CICs have their own unique niche when it comes to social enterprises. They are a good fit for people who want to benefit the community but don’t want to form a traditional non-profit organisation. These companies differ from charities in that they don’t need to rely on donations and fundraising.
A CIC can apply for grant funding in certain cases. But, most of the time they can use the profit from goods or services they provide to fund charitable initiatives.
Another benefit of a CIC is the scope of charity work they can do. Registered Charities have to choose from a list of “charitable causes” when they register with the Companies House in the UK. CICs, on the other hand, can state almost anything (within reason, of course) as their charitable cause or initiative.
The fact that CICs are part “for-profit” gives them advantages over a charity. Not only can they generate their own revenue, but they are also a great source of jobs in the local community. That means they’re helping the local community on two fronts. They’re providing jobs to its residents and also funding projects that help improve the local environment.
Generally, the money generated by the CIC gets put back into the community. But, being partly “for-profit”, a CIC has stakeholders. Some of the revenue generated can also serve to pay stakeholders a return on their initial investment in the company.
This makes CICs a more enticing opportunity for investors than your standard charity. The result is another funding source from investor capital.
What Is ‘the Community’?
In order to register as a CIC, an organisation has to fit certain criteria. These criteria are established in The Companies Act 2004.
One of the criteria CICs must follow is establishing the community they’re going to serve. In the eyes of the law, ‘The Community’ must be larger than the members of the CIC. It also needs to be bigger than the number of employees that work for the CIC.
According to the law, a group of individuals make up a section of the community if they meet one, or both, of two specific qualifications. First, they should share a readily identifiable characteristic (i.e. people of a particular race or gender). Second, other members of the community can’t share this characteristic in common.
Some examples would be CICs that serve women, youth, or low-income neighbourhoods within a particular borough.
Types of Companies That Can Be CICs
Only particular types of companies can become CICs. Generally, these companies are limited companies. They can be limited in one of two ways.
CICs can either be limited by guarantee or limited by shareholders. Some CICs elect to be limited by shareholders because they can distribute shares in the company as a way of raising equity, and thus capital, in the company’s reserves. If the company chooses to be limited by shares, it must register as a PLC.
If a CIC chooses to use shares to raise equity, and pay dividends to investors, they need to be mindful of the dividend cap. The dividend cap puts a limit on the amount of dividends CICs can pay to investors. The cap limit is 35% of the company’s profits.
There is also a limit on each individual share. Each share in the company cannot return more than 5% above the base rate. This base rate is set by The Bank of England.
When Is a CIC Appropriate?
You might be wondering when it’s best to structure your organisation as a CIC. Unfortunately, the answer isn’t “black and white”. CICs can benefit a lot of organisations of varying sizes and initiatives.
It’s also possible for an existing charity to convert to a CIC when necessary. This may be a good move for charities that use trading to increase their revenue. If they are investing financial resources to grow their capital, they may want the separation that a CIC provides.
Once they convert to a CIC, they will be able to clearly distinguish their work to do social good and their work to make a profit. This can be an extremely valuable separation for some charitable organisations.
There are also a lot of unincorporated organisations doing charitable work throughout the community. People see a way they can improve the community and they jump in with both feet. They may not take the time to think about structuring an organisation before taking action.
Incorporating as a CIC is a way that these unincorporated organisations can protect their assets. At the same time, forming a CIC will protect the Board Members, Directors, and volunteers who are running the organisation as well.
If an organisation is deciding between becoming a registered charity or a CIC, they may want to consider the tax implications. CICs receive no special tax benefit while charities are eligible for multiple tax concessions.
Your goals as an organisation, whether you’ll be holding real estate, and whether or not you want to pursue trading activities, are all important factors in deciding which social enterprise structure is right for you.
How Is A CIC Registered?
CICs are registered through the same process as a normal company. An application must go through your local division of Companies House. The process starts by submitting the application to the registry of your appropriate local jurisdiction.
For example, let’s say you’re looking to set up a CIC in Northern Ireland. If that was the case, your application would need to go through the registry for the Companies House in Belfast. If you were looking to do the same in Scotland, your application would be submitted to the registry in Edinburgh.
Once your application is submitted to the appropriate division of the Companies House, it will then pass on to the CIC Regulator. The Regulator for the UK is located in Cardiff.
It’s important to note that CICs cannot be registered electronically. All applications must be submitted in paper form.
In addition to the typical business application, you’ll need to add a CIC36 form. This will include your community interest statement.
What Is The Community Interest Statement?
The community interest statement is an official statement included in your application. It needs to be signed by all of the directors of your CIC to meet your community purpose requirements.
The community interest statement is part of your application to state the fact that your organisation is being formed for the good of the community. All of the directors are signing to attest to the fact that the good of the community is more important than profits.
Companies House and the CIC Regulator will ask you to describe, in detail, your proposed community activities. This is to ensure that your organisation does, in fact, plan on making an impact in the local community.
Let KG Accountants Help
If you started this article wondering, “what is a community interest company?”, we hope that we’ve put your mind at ease.
We need people like you to help make our local communities better for the generations after us. Our team at KG Accountants would like to help in any way that we can.
If you need accountancy for your CIC, contact us today. We also offer membership to our CIC bulletin. It will give you access to grants and funding opportunities to help you maximise your impact.
0207 953 8913