Whilst a traditional view of business holds limited companies as vehicles for profit and charities as vehicles for philanthropic endeavours, the introduction of Community Interest Companies (CICs) in 2005 has helped bridge these two very distinct types of entity. CICs operate as one might expect of a limited company whilst ensuring that profits are pumped back into the community for altruistic purposes. Below are five key things to know about the nature of CICs, how they differ from charities, and their focus on improving the conditions of the local community.
1) Community Interest Companies are a form of social enterprise
Community Interest Companies are a form of social enterprise which utilise the power of business to benefit their chosen community through the provision of services or the improvement of the local environment. Social enterprises operate with the interest of the disadvantaged at heart, and use private enterprise to generate funds for their cause.
2) Community Interest Companies are not charities
Whilst Community Interest Companies are a form of social enterprise and many have similar interests to charities or do similar types of work; they differ in a number of key areas. Community Interest Companies are a form of limited liability company and so, whilst they enjoy no special tax status, they are not subject to the strict regulations imposed on charities. This gives them greater flexibility in terms of their articles of association and structuring. As such CICs occupy a middle ground whereby their structure resembles that of a traditional limited company (with shareholders or members and directors, etc.) but their activity is primarily beneficial to their target community.
3) Profits and dividends in CICs
Although the articles of association generally offer flexibility, the primarily altruistic focus of CICs means that certain restrictions apply to ensure the social core of the companies aren’t compromised.
Profits: Most notable of these restrictions is the ‘asset lock’ which ensures that the CIC cannot transfer assets for less than market value unless it is transferring them to another CIC, charity, or if the transfer is for the benefit of the community it was set up to serve.
Dividends: Whilst the majority of a CIC's profits are pumped back into the community, it is permissible for a CIC to pay some dividends to its shareholders. There is a ‘dividend cap’ to maintain the community focus of the company and since October 2014 the cap has comprised of just one element: - There is a maximum aggregate dividend of 35 per cent of distributable profits.
These features ensure that community interest companies focus their profits on social enterprise without preventing existing shareholders from enjoying their success or discouraging potential investors from investing in them.
4) Designed to Ensure Transparency
Given the nature of CICs, it is important that they are properly regulated to ensure they’re acting in the interest of the community. As such, they must file an Annual Report each year explaining how they are achieving these ends and how they are engaging with stakeholders. This report is accessible via the public register and the CIC Regulator has the capacity to carry out investigations if a company is no longer acting in the interest of the community or complying with the asset lock.
5) Consistent Focus on Service to Community
The focus of a CIC is to serve. They are not driven to profit shareholders but to improve their target community. It is not possible for a CIC to convert into an ordinary limited company in order to extract profit but a CIC can convert into a charity, if it so wishes. The only way a CIC can cease to exist is via dissolution. Once dissolved, any surplus assets (after the settlement of debts and liabilities) must be transferred to another asset-locked body or to a charity or otherwise used for the benefit of the community.
If a CIC sounds like the type of company you’re wishing to set up, if you have further questions, or if you’re simply interested in finding out more, contact us here.