To continue our series of blog posts summarising the common forms of social enterprises, here we look at what community interest companies are, what they do and the advantages and disadvantages for a social enterprise to adopt this form.
A community interest company (“CIC”) is an increasingly recognised and popular form of non-charitable social enterprise. As with all social enterprises, they are asset locked businesses with social objectives – in other words, they use their profits and assets for the public good rather than being driven by the need to maximise profit for shareholders.
CICs vary in size from small community-based organisations to multimillion pound enterprises. They tackle a wide range of social and environmental issues and have freedoms which allow them to be more innovative than the charitable sector in many ways. CICs are relatively easy to set up (or can be converted from an existing company), with all the flexibility and certainty of the company form, and limited liability for its members and directors, but with some special features which ensure that they work for the benefit of the community. They can be established as companies limited by guarantee (which the majority are) or companies limited by shares.
- Social purpose safeguards
CICs have the following important features that safeguard their social mission and help to build public confidence:
- Their objectives must benefit the community
- CICs cannot carry on certain political activities or activities only for the benefit of members of a particular body or employees
- CICs have an asset-lock so that their capital assets and all capital growth are kept within the CIC or are used for the CIC’s community purposes. Any transfer out must satisfy specific criteria
- There are restrictions on dividends that can be paid by CICs. The general rule is that only 35% distributable reserves can be distributed unless the CIC member is another asset-locked entity
- CIC directors’ pay must never exceed a reasonable level and details must be transparent
- There is a cap on the amount of performance-related interest that CICs can pay on a loan
- These enterprises are regulated by the CIC regulator, which has powers to protect the community interest. CICs are also required to file a community interest report, in addition to an annual return and accounts, explaining its pursuit of the community interest and involvement of stakeholders, payments to directors and any dividends paid.
- What does a CIC do?
In terms of activities there are few restrictions, as long as the CIC benefits the community (see above). The following are a few examples of the different business models CICs (as with social enterprises more broadly) may use to operate their businesses for social impact, though many will do a combination of these. We have added a real life example for each:
- Run trading enterprises to support deprived communities in the UK and abroad, e.g. Scotcash – a provider of affordable loans and other inclusive financial services to disadvantaged individuals who have difficulty accessing mainstream sources, to break the poverty cycle. A further example is Change Please – a mobile coffee and barista service, which gives its profits to organisations that work with the homeless and offers training to the homeless to become baristas
- Carry out commercial trading and use its profits to pay for activities which directly benefit the community, e.g. Ninety – an insurance consultancy that gives 90% of its distributable profits to a range of charitable projects
- Benefit the community more directly, such as by offering public services or providing international fair-trade type distribution systems for the benefit of overseas producers, e.g. Epic CIC – delivering youth support and play services to children and young people up to 19, and those with lifelong learning difficulties or disabilities up to 25.
There are some clear advantages for impact ventures or social enterprises to become a CIC. They are quick, cheap and easy to set up and the CIC model provides assurance to stakeholders, since the asset lock and community purpose are enshrined. Setting up as a CIC can also give the enterprise a higher profile with a growing network and voice within the impact arena. Other advantages include:
- Transparency of operation through the annual CIC report
- Permanent statutory clauses, which cannot be removed, such as the asset lock which ensures that assets are used for the benefit of the community and other clauses which ensure that members retain control
- Continuity of purpose – once a CIC is incorporated it will continue providing benefit to the community until it is dissolved or converted into a charity. If it is wound up, any residual assets (after satisfying any creditors), will be transferred to another asset-locked body, such as a charity or another CIC
- Limited liability for members and directors
- Flexible company form – the structure, governance and membership can be tailored to the needs of a particular CIC and the company form is familiar to the business community
- Access to equity (a CIC can issue shares albeit that the return to shareholders is limited) as well as debt markets (loans and bonds)
- Social Investment Tax Relief can be available to investors
- Access to community development finance and grants
- CICs do not have the restrictions on commercial trading that charities do, except that profits must be applied to community benefit objectives
- Directors of CICs can be paid and are not subject to the same ‘voluntary’ regime as charity trustees, which can help with recruiting individuals to the board (fostering diversity) and are an option for founders who need to be paid.
CICs are subject to the normal tax treatment of a commercial company, but are sometimes competing with charities that can do things in a more tax efficient way. Public awareness of CICs is not yet to the level of commercial companies or charities and, in relation to the latter, can mean a lower level of public trust and confidence, but this is reducing as awareness and the value given to social impact increases.