04/08/21

A Guide to Setting Up a Community Interest Company

You might be interested in incorporating a community interest company (CIC) or converting your limited company to a CIC but there are some factors that you need to take into account. This is our guide to setting up a community interest company.

What is the difference between a limited company and a CIC?

A private company limited by guarantee is an incorporated association usually set up for non-profit making functions. These companies do not have a share capital so there are no shareholders. Instead, there are members who undertake to contribute a predetermined nominal sum to the liabilities of the company. In the event that the company is wound up, each member will be legally responsible for the contribution they had made. This is known as the “guarantee” and provides peace of mind to the members that form this legal entity. As these companies are non-profit organisations, if there were any profits, these would usually be re-invested to help promote the non-profit objectives of the company.

A community interest company, which was created by the Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE 2004), is a limited liability (either by guarantee or by shares) company designed for social enterprises that wish to use their profits and assets for the public good rather than to maximise profit. The specific aim for a CIC is to provide a benefit to a community by using its income, assets and profits for the community it is formed to serve. A CIC is also subject to the regulatory regime set out in the Community Interest Company Regulations 2005 as amended by the Community Interest Company (Amendment) Regulations 2009, The Community Interest Company (Amendment) Regulations 2012 (SI 2012/2335) and the Community Interest Company (Amendment) Regulations 2014 (SI 2014/2483) (the Regulations).

Is your company eligible to be a CIC?

A company will be eligible to be a CIC if it meets the following criteria:

  1. The articles of association (Articles) state it is to be a CIC and comply with the Regulations;
  2. The company name ends with the appropriate CIC endings e.g. “community interest company’ or “c.i.c”. Notably, it does not have “limited” in the company name.
  3. The Regulator of CICs (the Regulator), who is appointed under CAICE 2004, considers that the company purpose could be regarded by a reasonable person as being in the community or wider public interest – i.e. that the company satisfies the community interest test. Not all the activities carried on by a CIC need to have a direct benefit to the community, but it must show at least a contribution. For example, a sports club for staff will only satisfy the community interest test if it provides a wider community benefit by making its facilities available to the local community.

The benefits of a CIC

The main advantage of a community interest company is that, by its nature, it can demonstrate that it has a clear commitment to pursue social objectives. It does not have the stigma associated with a “limited” company. This is valuable to companies seeking grant funding or philanthropic investment as donors and investors are more likely to have confidence in the integrity of the company. This is also assisted by the ongoing regulation of CICs.

In addition, a main characteristic of a CIC, and difference to a company limited by guarantee or shares, is that they cannot simply transfer their assets to anyone at any price. The sale of its assets must not be less than market value unless transferring them to another CIC or charity that is specified in its Articles or consented to by the Regulator. This is known as “asset lock” and ensures that CIC assets are not sold at an undervalue. Instead, the assets are devoted to the benefit of the community and not for rewarding members or directors of the company.

The disadvantages of a CIC

There is a greater administrative burden to manage a community interest company compared with a private company limited by guarantee. In addition to filing the standard accounts and confirmation statement each year, CICs must also prepare and file an annual community interest report to show that the CIC continues to satisfy the community interest test and its activities continue to benefit the community.  Therefore, if the social objectives behind the company are only met on a part-time basis, it is important to weigh up whether the additional formalities are worth the extra time and costs involved.

Furthermore, although the position is improving and it is recognisable by the “CIC company name ending”, many people will not be aware of the CIC model and people may feel more comfortable donating their time and money to charities instead, so the benefit of a CIC over a company limited by guarantee is potentially minimal in this respect.

Directors/members may feel that the CIC asset lock is too restrictive as they cannot transfer their assets freely (as described above). As such, the legal framework of a company limited by guarantee may be more desirable to directors/members as the assets can be transferred freely, depending on the nature of the business.

It is also worth noting that the Regulator has powers of intervention, which include removing or appointing directors, transferring property or shares belonging to the CIC and taking action in the name of the CIC, whereas companies limited by guarantee are not subject to this additional supervision and regulation.

Procedure to convert to a CIC

It is possible for a limited company to convert to a CIC. One of the requirements is that the company will have to alter its Articles to comply with CAICE 2004 and the Regulations as well as state that the limited company is a CIC. A CIC can use specifically drafted Articles, although the Regulator does have prescribed form Articles. It is important to know that there are certain statutory clauses which are mandatory and cannot be amended unless the statutory requirements themselves change.

One of the mandatory statutory clauses is the “asset lock” (as discussed above) clause  which is designed to ensure the assets of the CIC are not given away for less than market value and used for the benefit of the community. Any provisions which are inconsistent with CAICE 2004 and the Regulations will be of no effect.

One important point to make is that although a company can convert into a CIC, once converted, a CIC cannot revert to being a limited company. Under s.53 of CAICE 2004, a CIC can cease being a CIC by a dissolution or conversion to a charity or a registered society.

Alternative to converting a private limited company to a CIC

As alluded to above, one of the primary reasons for converting a company limited by guarantee to a CIC company is to remove the stigma attached to a company with a ”limited” status that some misinterpret as being profit-making. However, although under s.59(1) of the Companies Act 2006 (CA 2006), almost all limited companies are required to have the word “limited” or “ltd” at the end of their name, a company can apply to the registrar to be exempt (s.60 of CA 2006) if certain criteria are met. The criteria for a company limited by guarantee are set out in s.62 of the CA 2006.

In order for the company to satisfy the exemption, its Articles must state that it:

  • has objects of promotion or regulation of commerce, art, science, education, religion, charity or any profession;
  • must spend its income on promoting its objects;
  • prohibits the payment of dividends to its members;
  • require all the assets, that would otherwise be available to its members generally, to be transferred on its winding up, either to another body with objects similar to its own, or to another body the objects of which are the promotion of charity and anything incidental or conductive thereto (irrespective of whether the body is a member of the company).

This may therefore be a less burdensome way of achieving the goal of protecting the not-for-profit reputation, without having to go down the formal conversion route to a CIC which would involve compliance with further regulations.

Summary

In summary, it is dependent on the business whether the additional regulations and requirements provide a tangible benefit or hinderance for the business. Becoming a community interest company is a commitment by a company which provides reassurance to stakeholders, as the asset lock and community purpose are regulated. It further provides a higher profile for social enterprises and non-for-profit companies. If you would like to discuss the process of incorporating a CIC or converting a limited company to a CIC, please contact our Business Team.

 

Kitsons Solicitors - Hannah Sellick

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    04/08/21

    About the author

    Kitsons Solicitors - Hannah Sellick

    Hannah SellickTrainee Solicitor

    Hannah is a Trainee Solicitor in our Corporate team

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