Community Interest Companies (CICs) are limited companies, with special additional features, created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage.
This is achieved by a "community interest test" and "asset lock", which ensure that the CIC is established for community purposes and the assets and profits are dedicated to these purposes. Registration of a company as a CIC has to be approved by the Community Interest Company Regulator who also has a continuing monitoring and enforcement role.
Advantages CIC rather than a Charity
The founder can retain control and still draw a limited salary. In a charity the management is through a board of trustees, the members of which are normally unable to draw any kind of payment for the work they do.
The 'asset lock' in a CIC ensures that assets must be used for the specified community purpose. This makes the CIC more appealing to traditional charity funders than a conventional company, but unlike a charity, the CIC can be run on a more commercial basis.
The regulation of CICs is less than a conventional charity so a CIC doesn't have to comply with Charity Commission reporting and regulatory requirements.
Where the CIC has share capital, limited dividends can be paid to shareholders as a return on their investment.
Disadvantages of a CIC over a Charity
The commercial basis of a CIC means they do not benefit from the tax exemptions available to charities. (A CIC can not also be a charity).
The 'asset lock' limits the extraction of profits and assets from a CIC, unlike a conventional company. However, this ensures that its social purpose is not diverted by management.
What is the 'Asset Lock'?
This is an essential feature of all CICs and is designed to make sure that the assets of the CIC are used exclusively for the benefit of the community. Any assets and profits (aside from those distributed in accordance with the rules on dividend capping) must be retained within the CIC and used solely for community benefit and at full value.
The only bodies to which assets are allowed to be transferred are other “asset-locked bodies” – i.e. those organisations which already have an asset lock. This means that assets may be transferred to charities, or to other CICs. The asset lock must be referred to explicitly as a provision in the CIC’s articles of association.
Staff and directors of a CIC can draw a salary but this must be within the provisions of the ' asset lock' i.e. it must not be disproportionately high in relation to the services being provided. This also applies to management or other service charges.
The asset-lock will not prevent CICs from using their assets efficiently in pursuit of community benefit; for instance, they will be able to use assets as collateral for finance. The Regulator is responsible for ensuring that the asset-lock is maintained, and stakeholders who believe that it is being breached may ask the Regulator to take action.
What is the Community Interest Test?
Most ordinary companies, even those that provide benefits to the community, are set up
and run mainly for the benefit of their own members and employees. However CICs are
different. As their primary purpose is to provide benefits to the community, rather than to
the individuals who own, run or work in them.
In the legislation, this core principle is set out as the “community interest test”. A company
satisfies the community interest test if a reasonable person might consider that its activities
(or proposed activities) are carried on for the benefit of the community.
All companies applying to be registered as CICs must provide the Regulator with evidence
that they will satisfy the community interest test. When the Regulator considers whether a company will satisfy the community test, she is taking a view about the likely course of its future activities, and what reasonable people might think of them. Once a CIC has been registered, it must continue to satisfy the test for as long as it remains a CIC. The Regulator may take enforcement action against a CIC if she forms the view that it no longer satisfies the test (see Chapter 11 of this guidance).
In order to determine whether your company satisfies (or will satisfy) the test, you need to
consider:
- the purposes for which it is set up;
- the range of activities in which it will engage; and
- who will be seen as benefiting from its activities.
activities and how they will benefit its community