For most business owners, the desire to ‘make a difference’ extends only to their bank account. But for those looking to champion a social cause, setting up a Community Interest Company (CIC) can be worth considering. In this guide, we’ll take a closer look at what CICs are, how to set one up and their pros and cons in comparison to other business types.
What are Community Interest Companies?
CICs are limited companies set up with the aim of meeting societal, charitable or community based aims. Regardless of their chosen objectives, CICs will fall under one of two types: limited company by share or limited company by guarantee.
With limited company by share CICs, equity in the business can be bought and sold by directors or outside investors. Though the value of dividends payable each year is pretty miserly (they’re capped at 35% of distributable profit), by share is still the preferred option for those who see personal financial gain as a priority.
With limited company by guarantee CICs, ownership of the business belongs to those who’ve staked their names as guarantors. As this type of company isn’t based around the holding of shares, no dividend payments can be ever be meted out; instead, all profits generated must be reinvested into the relevant social crusade.
Pros and cons of Community Interest Companies
CICs aren’t the only way to tackle social challenges: charities, standard-issue limited companies, unincorporated companies, litter-picking schemes
and vigilantes are all potential alternatives worth considering. To give you an idea of how CICs stack up against the competition, we’ve noted down a few of their key advantages/disadvantages in the section below.
Pros of CICs
- Proven commitment to your social cause. As it’s not possible to set up a CIC without an asset lock and articles of association (more on these later), CIC status gives outsiders extra reassurance about your company’s motivations and objectives. For limited by share CICs, a potential investor may be happier to take the plunge given the legal guarantees in place to determine how their money can be spent.
- Limited liability. If things go sideways, you’ll only lose the amount that you pledged upon directorship (by guarantee) or the value of your shares (by share).
- Compared with charities, setting up and managing a CIC is simple. It’s not simply a case of ”deciding” to set up a charity; hopefuls must pass a highly stringent application process in order to do so. Should the application be accepted, HMRC will still monitor goings-on with the kind of unhealthy suspicion usually reserved for room-temp pizza. Though CICs aren’t totally free of administrative burdens (e.g. annual reports to HMRC and the CIC regulator), the demands and expectations placed upon them are far less onerous than those charities must endure.
Cons of CICs
- Charities receive better tax treatment. Asset disposal, trading profits, donations – charities get relief on ‘em all. On the other hand, Community Interest Companies can’t catch a (tax) break; they’re charged the same rates as other types of limited companies.
- Charities tend to have an easier time finding funding. Even though CICs have protections in place to reassure investors how their money will be spent, many fat cats still opt to invest with charities instead. Whilst “the devil you know” seems like slightly inappropriate phrasing here, the concept is wholly applicable – as CICs will be uncharatered territory for most investors, the perceived level of risk can put some of them off.
CICs also have two notable drawbacks when compared with other kinds of limited companies…
- Restrictions on dividend pay outs. With CICs, dividend payments are capped at 35% of distributable profit. No restriction pay outs are in place for limited companies, making them a better choice for investors seeking maximum bang per buck.
- Structural rigidity – With limited companies, it’s often possible to switch to a different business type if circumstances necessitate it. But given the noble societal pretext on which Community Interest Companies are founded, it’s only possible to convert them to charities.
Still want to set up a CIC?
Luckily, it’s pretty easy. If you’ve got access to an internet connection and 27 British pounds, you can register your CIC online with Companies House.
If you don’t have an internet connection, but DO have 35 British pounds, a chequebook and a nearby courier service/homing pigeon/impeccable paper airplane marksmanship, you can return the CIC application forms by mail instead.
Whichever method you choose, your application will need to address 4 main topics:
- The ‘community interest statement’ (not to be confused with a community impact statement). With this, you should explain the benefits that your business will bring to the community and provide adequate assurance that any advantages will not be restricted to very limited groups.
- Draw up an asset lock. In essence, this serves as legal affirmation that your business will pursue the social objectives set out and restrict any dividends paid to shareholders (if operating as a limited by share company).
- “Create” the articles of association. These are the terms of engagement you’ll need to abide by once your business is off and running. So they don’t have to wade through scores of ill-conceived and omission-laden house rules, HMRC has listed a number of stealable articles of association on their website. Just fill in the gaps where necessary and you should be golden.
Quick note: Those filling in paper copies will also need to complete a memorandum of association. The template versions are literally less than 2 pages long, so it shouldn’t prove too much of a hassle!
- Gain approval from the CIC regulator. This’ll involve filling out ANOTHER form: the CIC36. If you complete the form online, HMRC will send it over to the regulator automatically.
If so, please get in touch! Whether it’s a case of weighing up your options or needing a little help to make your community interest statement totally rejection-proof, we’re here for any CIC queries you might have. Click on the link below to book your free call today!