Why Form a CIC Company? – The Community Interest Test

The amount of people a social enterprise can reach is greatly affected by the type of organisation they choose. Their options come down to forming a registered charity or CIC company. Depending on the type of impact you want to have on the public good, a CIC may be the best option.

why form a CIC company?

But, why form a CIC company? That’s a great question. A lot of managers of charities and community organisations know how a registered charity works. But, they may not be familiar with what a CIC can offer them.

Fortunately for any organisations that want to become a CIC, that’s exactly what we’re going to cover today. We’ll discuss everything they ever wanted to know about community interest companies.

Let’s get going!

A Brief Definition of CICs

CICs have the ability to make revenue ( From Trading Income)

CICs are limited companies that social enterprises can use to form their company. People often compare them to Registered charities because they fall under the same realm but there are several key differences.

Think of a community interest company as a combination of charitable initiatives and a for-profit business. Unlike charities, CICs have the ability to make revenue. They can provide goods or services that they are able to charge for.

Most Registered charities don’t have the ability to make revenue . They rely on donations.

The revenue created from these goods and services will then go back into the CIC to fund their community outreach projects. This is where CICs differ from charities.

Registered charities don’t have the ability to make revenue. They have to rely almost entirely on grant funding and donations to make their projects possible. The ability CICs have to make cash within their own organisation can really broaden their outreach within the community.

community interest company (CIC)

A charity may have a project in mind but that project will stall due to a lack of funds or having to wait for funding approval. CICs don’t have that problem. If there’s a project they want to launch, they can go out and make the money to support that project on their own.

The only stipulation CICs have is that they need to serve a defined group within their community. This can be a demographic group or a particular geographic location. For example, a CIC may choose to support women business owners or low-income families in a certain housing project.

Why Form A CIC Company?

Why form a CIC company?

Many organisations wonder, “Why form a CIC company“? People see that the Registered charity model has worked for so long. As a result, their hesitant to try a different company structure.

But forming your community organisation as a CIC has definite advantages.

The Freedom of CICs

One area where CICs are more beneficial than charities is their flexibility. Founders of charitable organisations have to choose from a list of designated charitable causes when they form their organisations. CICs don’t have these types of limits imposed on them.

CICs are more flexible than charities

As mentioned above, the only rule CICs need to follow when it comes to their charitable cause is defining a specific group. There are some other requirements and criteria organisations need to meet in order to qualify as a CIC. But, once an organisation qualifies, they have a large number of outreach opportunities at their disposal.

CICs also give their management teams a lot of freedom with the day-to-day operations of the organisation. When a CIC is formed it runs as a company. The structure is more familiar to a lot of executives and, as a result, they have an easier time working within that framework.

CICs Offer Investment Opportunities

investment concept

This also provides some unique opportunities for CICs to receive funding. CICs “walk the line” between a charitable organisation and a for-profit business. One of their “for-profit” aspects is that they can receive funding from investors.

It’s an attractive opportunity for people who want to put their money to work in something other than banks or stocks. Investors can receive a respectable return on their money and also feel good about where their money is going.

Investors in CIC companies can also receive a dividend payout

Making a return on their money and funding the local public good? That sounds like a win-win!

Investors in CIC companies can also receive a dividend payout. If the founders of the company choose to limit their CIC by shares, investors are eligible to receive this dividend. But, this payout is subject to something known as the dividend cap.

Investors’ dividends have a cap of 35% of the company’s profits. This is to make sure that the CIC doesn’t drift too far in the direction of being a “for-profit” company.

CICs Offer Less Risk

CICs offer less risk than other

Another benefit of forming a CIC is that they offer less risk than other “more traditional” company structures. This is because CICs exist as limited companies. This is another aspect that makes a CIC organisation more attractive to investors.

Because the company is set up as a limited liability company, the amount of money investors can lose is limited. Unless there is evidence of fraud or some other serious wrongdoing, investors have protection if the company were to fail.

CICs Put the Community First

There are a lot of opportunities for Community Interest Companies

There are a lot of opportunities for CICs to cross over into the “for-profit” category of business. As a result, there are a lot of government criteria and protections put in place to make sure they serve the public good. Their books and charitable efforts are carefully monitored by the Regulator of Community Interest Companies.

One of the methods put in place to ensure they serve the community is the CIC Asset Lock. This is a fundamental feature of any CIC.

If an owner of CIC wishes to transfer assets out of the company, they can only transfer those assets to a few designated places. The assets can only go to another asset-locked organisation like a charity or CIC. The assets are also permitted to go to projects that will improve or benefit the community in some way.

The Community Interest Test

there are some criteria that need to be met when forming a CIC

There’s no denying the benefits that forming a CIC can offer. And, while it’s true there are very few restrictions when it comes to the causes a CIC can help, there are some criteria that need to be met when forming a CIC. These criteria are informally known as the CIC test.

The CIC test consists of 4 basic questions an organisation needs to answer when submitting their application to form as a CIC. Let’s take a look at each of them in more detail.

1. What Is the Purpose of the CIC?

find your purpose

This is a formal statement of the functions a CIC will provide. It should also state the projects the organisation is looking to engage in, as well as the sector of the community the CIC is looking to serve. Founding members of the CIC must submit this statement as part of the CIC36 form in their application.

2. What Activities Will the CIC Undertake?

What Activities Will the CIC Undertake?

This will describe the activities of the CIC in more detail. This includes the projects that the CIC will undertake. It also will mention the revenue-producing activities the CIC chooses to use to help fund future projects.

This is also an official declaration that the activities of the CIC are being carried out for the good of the local community. The statement will spell out, in detail, how the “public good” will be achieved through the CIC’s activities. This statement will then need to be signed by all of the CIC’s board members.

3. Who Will Benefit From These Activities?

Who will Benefit From These Activities?

This is an important part of the application when forming a CIC. The organisation needs to benefit a specific group of the local community. Examples we gave earlier were women in business and low-income families of a particular London borough.

If the group that stands to benefit from a CIC’s activities is too general, the application may not receive approval. CIC managers, volunteers, and board members need to get together and decide exactly who they want to impact with their efforts.

4. Your CIC Can’t Be A Charity

CIC also needs to be registered with Companies House

Founders of your CIC organisation need to make sure the organisation doesn’t border on becoming a charity. In addition to the CIC test being submitted to the Regulator of Community Interest Companies on a CIC36 form, the organisation also needs to be registered with Companies House.

It needs to be registered as a limited company and go through the standard application process for that kind of organisation.

Help Your Community Thrive

KG Accountants here to help you

So, why form a CIC company? Well, it’s one of the best options available to help your community thrive. Starting any social enterprise is great. But, people focused on really making an impact may want to maximise their efforts in their local community.

For that, you may want to consider forming a CIC. For more information and resources on what a CIC can do for you, contact KG Accountants. Companies can join our CIC membership to get information on even more opportunities are resources available in their specific industry.

Contact KG Accountants today!

Arrange a FREE initial consultation.

0207 953 8913

How we can help

Call us today on 0207 953 8913 or complete our enquiry form in order to book a FREE initial consultation.

Categories: CIC, CIC Company formations, cic formation, Community Interest Companies

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