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What Is A Community Interest Company & How Do You Set One Up?

Community Interest Company

Anyone who has ever started their own business or nonprofit organisation knows that it is no easy task. Not only do you have to deal with the day-to-day operations of your company but you also have to worry about raising funds and meeting all the legal requirements. This is where a community interest company (CIC) can be a potentially lucrative option. A CIC is a type of social enterprise that is specifically designed to benefit the community, rather than private shareholders or investors. As a result, a CIC can be an attractive option for entrepreneurs and philanthropists who want to create positive change in their community. 

In this article, we will explain exactly what is a community interest company, how to set one up and some of the financial and funding considerations CICs need to be aware of.

What is a Community Interest Company?

A Community Interest Company (or CIC) is a company that is designed for social enterprises that want to use their proceeds and holdings to benefit society. This type of company was introduced in the UK in 2005 and can offer several benefits compared to traditional companies. The CIC scheme is designed to deliver a dynamic legal form for enterprises that put their desire to do good ahead of making a profit

CICs occupy an important place in company law – they are a mechanism that allows a company to show clear intentions to provide community benefits, while also reaping the perks associated with being a limited company. There are currently more than 15,000 Community Interest Companies registered in the UK.

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Why Were Community Interest Companies Created?

Prior to 2005, many companies that did not have charitable status experienced difficulties ensuring that their assets were secured for public benefit. There was no easy, distinct path for social enterprises to safeguard their assets besides applying for charitable status but a community interest company fulfils this need. 

What Are Some Notable Community Interest Companies?

Chiltern Rangers

Chiltern Rangers CIC is an award-winning CIC that works with community members in the Chilterns area to deliver functional habitat management of the local woodlands, grasslands, commons, streams, and ponds in the Chilterns area.

4R’s

Established in 2013, The 4R’s CIC aims to “recover, recycle, reuse and reduce” furniture and white goods that are headed to landfills with the intention of reducing carbon dioxide emissions that pollute the environment. 4R’s recycling setup has to date processed 180 tonnes of unwanted goods while also educating young people on the importance of recycling.

The Eco Larder

Serving the city of Edinburgh and surrounding areas, The Eco Larder CIC is a Zero Waste Supermarket with the goal of preventing single-use plastic waste from entering the landfill while raising awareness on how to live a zero-waste lifestyle. In July 2018, they crowdfunded £22,000 which helped them to open their first store. The store gives customers the chance to complete a full shopping experience with zero packaging or plastic. The Eco Larder has also garnered support and funding from Scotland’s social enterprise development agency, Firstport.

What are the Benefits of Setting Up a Community Interest Company?

There are many benefits to setting up a CIC, including:

  • The positive impact on the community: CICs are required to have a clear community focus, which means that any profits generated by the company must be reinvested back into the community. This can help to create jobs, improve services or support local organisations.
  • Accountability and transparency: CICs are subject to stricter accountability and transparency rules than regular businesses, which can help to build trust with the community.
  • Tax relief: CICs can claim certain tax reliefs, such as exemption from corporation tax or business rates relief. This can help to make the company more financially sustainable in the long term.

Regulations Are More Relaxed For CICs

Differences between a Community Interest Company and a Charity

CICs and charities are both types of organisations that exist to serve a community or public interest. However, there are some fundamental differences between the two. 

For one, CICs are businesses, whereas charities are not. This means that CICs can generate income through activities such as trading, investment, and fundraising whereas charities rely on donations and other forms of giving to support their work.

Secondly, CICs must distribute any surplus income they make to their community or cause, while charities are not required to do this.

Finally, CICs have more flexibility in how they are governed and managed than charities. For example, CICs can be trading ventures that benefit from limited liability and (if limited by shares) can distribute shares and yield dividends. This offers comparative freedom for the day-to-day operations of the CIC, as long as applicable caps and regulations are followed.

It is possible for a charity to form a CIC subsidiary company. For instance, a charity may choose to set up a subsidiary to operate a charity shop and pass a portion or the entirety of profits to the charity that owns it. 

What is the Community Interest Test?

The community interest test is the primary differentiator separating community interest companies (CICs) from other not-for-profit organisations. To be granted CIC status, an organisation must satisfy the regulator that its goals could easily be considered by a reasonable person to be in the interests of the community or wider public good. The company must also confirm that its provided benefits are accessible and not limited to an unfairly restricted group.

To allow the regulator to make this ruling, applicants for CIC status are required to make a Community Interest Statement on form CIC36 or CIC37. On this form, the company indicates why they believe they satisfy the test. 

Restrictions on Forming a Community Interest Company

Restrictions regarding the formation of a community interest company are as follows:

  • A charity is not allowed to retain its charitable status to be a CIC. Should a charity wish to become a CIC, it would be required to relinquish its charitable status.
  • Companies whose activities solely benefit the members of a particular body or the employees of a particular employer.
  • Political parties and pressure groups, or any additional companies owned and/or controlled by them are not eligible to become a community interest company. 
  • A charitable company that is registered in Northern Ireland is not eligible to apply for CIC status.
  • A current organisation that is not a limited company. Shall they wish to become a CIC, they must form a company first. It is most practical to form a new CIC and then the current organisation can transfer any liabilities and assets to the CIC. 
  • While a CIC can work with local politicians to further their community goals, political parties are not permitted to become CICs, nor are they allowed to form CIC subsidiary companies.

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What Funding can a CIC Get?

Thanks to their special legal status, community interest companies are able to access funding that would not be available to other types of businesses. They can apply for a wide range of funding, including government grants, philanthropic donations, and investments from social impact investors. 

In order to be eligible for funding, community interest companies must demonstrate that they will use the money to further their social purpose. For example, a community interest company that runs a food bank might use its funding to purchase supplies or pay rent.

Community interest companies can also generate income through trading activities. However, any surplus must be reinvested in the company in order to further its social purpose.

In addition, because CICs are considered to be ‘social enterprises, they may be eligible for specialised Impact Investing funds. Ultimately, the amount of funding a CIC can access will depend on the nature of the project and the needs of the community it serves. 

Ultimately, there is a wide range of potential sources of funding available to CICs, which makes them an attractive option for those looking to set up their own social enterprises.

What is an Asset Lock?

Asset locks are an important way of safeguarding social enterprises from being taken over by private interests. Asset locks are arguably the most important distinguishing feature of a CIC, and are what sets them apart from other types of companies.

For an enterprise to be eligible for CIC consideration, an asset lock is an essential requirement. Asset locks are devised to ensure that the assets of a CIC are used solely for the benefit of the community. Any holdings and financial gains (except for those distributed in compliance with the standards on dividend capping) must be preserved and used exclusively for community benefit.

A CIC is only eligible to transfer assets to other “asset-locked bodies” meaning that assets may be moved to charities or to other CICs. The asset lock must be mentioned expressly as a provision in the CIC’s articles. Also, the asset lock does not prevent CICs from using their assets in the best interests of community benefit such as collateral for finance. 

What is a Dividend Cap?

If a CIC exists as an enterprise limited by shares, a ‘dividend cap’ is required to be put in place. This serves the purpose of ensuring that a balance is met between offering an appealing investment opportunity (often crucial in encouraging and maintaining the financial support required to operate the CIC) and ensuring that the majority of the profits made are utilised for the community benefit. The dividend cap has two essential parts:

  • An aggregate boundary on the entire declared dividend
  • Capability to transfer forward unused dividend capacity

Maximum aggregate limit

The maximum aggregate dividend limit is measured with reference to the enterprise’s profits. Explicitly, the aggregate dividend must not presently surpass 35% of the distributable profits of the CIC. The regulator, in conference with the government, has the capacity to alter the terms of the dividend cap. This happened in October 2014 when the 20% cap on dividends per share (determinable with acknowledgement to the paid-up value of a given share) was eliminated. Should a CIC not use its dividend capacity in its entirety in a financial year, then they have the ability to carry forward all unused capacity for up to five years subsequently.

Take Care Of Your Local Environment

Who Controls a Community Interest Company?

In an identical way to a private company or a charity, a community interest company is controlled and governed by individuals who are appointed to its board and by its shareholders or members. Individual CICs can determine the exact structure that is put into place. CICs are urged to involve stakeholders and must report to the Regulator on how they have done so.

How are Community Interest Companies Regulated?

CICs are regulated by an independent statutory office-holder called a regulator. The regulator’s primary duties are as follows:

  • to examine all applications to form a CIC.
  • to ensure CIC compliance with its legal obligations.
  • to take necessary action where egregious infringements occur.

The regulator also plays a vital role in:

  • the advancement of CICs as a new company type
  • providing assistance and direction to CICs, as well as to those considering forming a CIC, and to business professionals acting as advisors to CICs.

CICs have an equivalent relationship with the regulator as standard companies have with Companies House. The active type of regulation which is often necessary for charities is not required for CICs. 

Nevertheless, the regulator has the power to investigate any complaints from stakeholders and has the authority to act if it is found that a CIC is not operating in the best interest of the community or that the profit/asset lock is being neglected. The regulator also has the ability to change directors or wind up a company.

Final Thoughts

Community interest companies are a fantastic way to set up and run a business which seeks to generate profit for a good cause. It is important to remember that CICs are still businesses and as such, require careful planning and management in order to be successful. However, the benefits of setting up a community interest company greatly outweigh the negatives. Now that you know what a community interest company is and how to set one up, perhaps it is the right time for you to help your local community by forming your own CIC.

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