The role of social enterprises - organisations using the power of business to bring about social and environmental change - is increasing all the time. Often stepping in to provide community services that have been curtailed by public spending cuts, they find new ways of generating funds to support the disadvantaged.
Social enterprises operate in a variety of forms:
- companies limited by guarantee or by shares
- Community Benefit Societies
- unincorporated associations.
The community interest company or "CIC" was introduced in 2005.
We have witnessed CICs become increasingly popular over the last couple of years with annual registrations rising from just under 1,300 in the year to March 2010 to nearly 2,500 in the year to March 2015*. This may be surprising to some given that CICs, unlike charities, enjoy no special tax status.
So why do people choose CICs?
The CIC model is aimed at people who wish to carry out some activity that will directly or indirectly benefit the community. The model is not as restrictive or as heavily regulated as a charity.
Being a form of limited liability company, CICs have a number of familiar features. The members' liability can be limited by shares or by guarantee and management of the business is the responsibility of the board of directors, who may or may not be the same people as the members.
The majority of CICs formed since 2005 are limited by guarantee, the traditional model for companies with philanthropic aims. But over the last couple of years we have seen an increasing trend towards CICs limited by shares. This suggests that people are becoming more comfortable with the concept of combining community benefit with a modest return for investors.
Forming a CIC
CICs are relatively quick and easy to form. Though there is currently no facility for electronic incorporation, the application process involves the filing of one set of documents at Companies House. This is automatically passed to the CIC Regulator and the registration process usually takes no more than a few days. Contrast this with the registration of a charitable company which first requires the incorporation of the company by the Registrar of Companies and then a second application to the Charity Commission for registration as a charity, this latter procedure often taking weeks or months to complete.
There is also less restriction on the purposes of a CIC than a charity, whose objects must be exclusively charitable. A CIC must satisfy the "community interest test" by showing that a reasonable person might consider that its activities are being carried on for the benefit of the community. Not all of the activities carried on by a CIC need directly benefit the community but everything a CIC does should somehow contribute towards benefiting the community it is set up to serve. However, political activities are specifically excluded.
The "asset lock"
The articles of association for CICs can be flexible, provided they contain a few key restrictions, the most notable one being the "asset lock". This provides that the CIC cannot transfer its assets (including any profits or other surpluses generated by its activities) for less than market value unless transferring them to another CIC or charity or if the transfer is for the benefit of the community it was set up to serve. The asset lock protects the assets of the CIC and ensures that the assets and profits of the CIC will be devoted to the benefit of the community and not for rewarding shareholders and directors.
There is an exception for CICs that wish to pay dividends to their shareholders, which is permissible provided such dividends do not exceed the "dividend cap". Since October 2014, the cap has had two elements:
- 1. a maximum aggregate dividend (which is currently 35 per cent of distributable profits); and
- 2. an ability to carry forward unused dividend capacity from year to year to a limited extent (currently the limit is five years).
The cap on the maximum dividend payable per share was removed in October 2014, having come to be seen as complex and restrictive, and both preventing existing shareholders from sharing in the success of the CIC while simultaneously discouraging new investors from investing in it.
There is no possibility of a CIC circumventing these restrictions by converting into an ordinary company. A CIC can only cease to be such by dissolution. In this case any assets it owns after settlement of all its debts and liabilities will be transferred to another asset-locked body (which may be named in its articles or otherwise approved by the CIC Regulator), or by converting into a charity, in which case its income and assets will protected from distribution to members by charity law.
A CIC must file a CIC Annual Report with its annual company accounts every year. It explains how the CIC continues to meet the community interest test and that it is engaging appropriately with stakeholders in carrying out its purposes. This report appears on the public register. The CIC Regulator may carry out investigations or take action against a CIC if concerns are raised that it is no longer serving the community it was set up to benefit or is operating in breach of the asset lock.
In conclusion, public recognition of its community purposes is an important factor for a social enterprise. This encompasses promoting its services to its stakeholders, dealing with its customers and suppliers or fundraising in general. Registration by the CIC Regulator provides public acknowledgment of the organisation's community purpose. This, together with the asset lock and on-going reporting requirements, help give the public confidence in the organisation's integrity. And in its ability to deliver on its promises to the community, whilst avoiding the onerous regulatory burden and inflexibility of a charity.
*source Companies House statistics