As with setting up any other company, you need to consider the different types of community interest companies (CICs), their advantages and disadvantages, and the restrictions and freedoms that come with each type of CIC.
In this blog, we want to give you a quick introduction to the concept of CICs versus charities, the different structures that are available, and a short list of the things you’ll need to set up your CIC.
Understanding the Nature of a Community Interest Company (CIC)
A Community Interest Company, or CIC, integrates the elements of both a limited company and a charitable organisation. Instead of advancing the interests of private shareholders, a CIC uses its profits and assets for the betterment of the community. Initiated in 2005, the number of CICs recorded on the public register as of March 2021 was nearly 24,000, reflecting an increase of over 6,000 compared to the previous year.
Choosing between a CIC and a Charity
While establishing a CIC is significantly more straightforward and less subject to the extensive bureaucracy typically associated with charities, it is important to note that a CIC does not receive the substantial tax relief granted to charities, such as Gift Aid.
Choosing Between a CIC Limited by Guarantee and a CIC Limited by Shares
The decision between a CIC limited by guarantee and a CIC limited by shares is crucial. A CIC is a particular kind of limited company that requires registration both at Companies House and with the CIC Regulator. They offer some unique benefits that appeal to entrepreneurs:
It constitutes a separate legal entity, meaning it stands apart from its shareholders.
Its owners are legally liable for its debts only up to the extent of their investment or commitment.
What is the difference between limited by guarantee and limited by shares?
A CIC limited by guarantee (LBG) is a company without share capital and, thus, cannot distribute dividends. Its owners agree to cover the company’s debts up to a defined limit in case of insolvency, beyond which they have no further obligation.
A CIC limited by shares (LBS) contains a specific capital amount divided into shares. Once a shareholder has fully paid their shares’ nominal value to the company, they bear no additional liability.
There’s also the choice to establish either a private or public company. While private companies cannot offer shares to the public, they face less regulation compared to public companies. However, businesses can switch from one form to another as their needs change over time. Note that CICs limited by guarantee can only be private entities.
One key issue for CICs limited by guarantee is their inability to issue shares to private investors, posing a fundraising challenge. This is one reason why several not-for-profit organisations opt to form a CIC limited by shares.
What do you need to set up a CIC?
In order to establish a CIC, several key components are required:
- A “community interest statement,” which outlines your business’s intended operations.
- An “asset lock”, a legally binding assurance that ensures the company’s assets will be devoted exclusively to its social goals and places a cap on the funds it can distribute to shareholders.
- A constitution, which can be crafted using the model constitutions provided by the CIC regulator.
- Approval from the community interest company regulator. Your application must be forwarded to them for consideration.
The CIC regulator provides comprehensive guidance on how to set up a CIC.
If you’d like to explore creating a CIC more, give us a call at 0207 953 8913 or complete our enquiry form in order to book a FREE initial CIC consultation.
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