Community Interest Companies – What do you need to know?

Community Interest Companies (‘CICs’) are designed with social enterprises in mind, offering a credible, regulated means through which to provide community benefit, whilst also maintaining the ability to trade and generate income. This flexibility is what makes the CIC an increasingly popular structure for socially oriented organisations.

This article seeks to provide an overview of the CIC structure’s key characteristics, the types of enterprises it suits, and some practical tips on the application process.

What is a CIC?

CICs are designed to act as a vehicle for social enterprises that intend to use their profits and assets for the public good, rather than for the benefit of private shareholders. The CIC structure is regulated to ensure that CICs genuinely use their income, assets and profits for the benefit of the community that they were formed to serve.

CICs may be limited by shares or by guarantee, though 87% of CICs opt to be limited by guarantee. CICs may be incorporated as a new company or converted from a pre-existing one. This article will focus on the incorporation of a new CIC but also provides information applicable to the conversion of an existing company.

What are the key characteristics of CICs?

Community Interest Test

To qualify as a CIC upon application, an organisation must pass the ‘community interest test’, as assessed by the Regulator of Community Interest Companies (the ‘Regulator’). This involves demonstrating that the CICs proposed activities are carried on for the benefit of the community, or a section of it.

Asset Lock

CICs are subject to an asset lock. This ensures that their assets and profits are primarily used for the benefit of the community and are not freely distributable. If a transfer is not at full market value, CICs may only transfer assets to other asset locked bodies or for the benefit of the community, which is subject to the Regulator’s approval.

Regulation

Even after passing the community interest test, the Regulator continues to oversee the activities of CICs. CICs must submit an annual ‘Community Interest Report’ which details how they have benefitted the community. Should the Regulator decide that a CIC is not compliant, they have powers of intervention.

Limited Distribution of Profits

CICs with a share capital can pay dividends, but only subject to caps. Currently, just 35% of profits can be distributed to shareholders as dividends.

Who should consider a CIC?

The CIC structure comes with credibility as a community focussed company, enhanced access to funding, and the protection offered by limited liability. Examples of organisations that could benefit from a CIC structure include:

• A direct welfare service to vulnerable people.
• An activity that generates profits used to support the community.
• A sports club providing free training and tournaments to children.

It is important to note that CICs cannot be used for political campaigning, or activities that only benefit members of a particular body.

The Application – Top Tips for Success

Applying to incorporate a CIC involves the usual Companies House process for incorporating companies, with a few key additions. Before starting the application process, you should:

1. Prepare a strong, concise CIC36 form

The CIC36 form is used to prove to the Regulator that your proposed activities pass the community interest test. It is essential that this form accurately addresses the community that you intend to benefit, as well as how the activity that you propose will benefit that community. Strong, clear drafting is essential here to convince the Regulator that your mission meets the community interest test.

2. Draft appropriate articles of association

Your articles need to reflect specific CIC statutory requirements, which include asset lock provisions. Model articles are a good starting point, but legal advice can be helpful in tailoring the articles to your company’s needs.

3. Plan for ongoing compliance

CICs have ongoing reporting obligations to the Regulator to show that they continue to meet the community interest test. Setting up systems early to track and document your organisation’s impact on the community will ease compliance.

4. Verify your directors at Companies House

All directors and persons of significant control must be ID verified before incorporating a new company.

Practical Takeaways

• Community purpose needs to be genuine and demonstrable.
• A well-prepared CIC36 form will significantly improve approval chances.
• Articles of association must be compliant with statute.
• Compliance habits should be built early.

At Clarkslegal, our specialists are well versed in advising on corporate structures and incorporating companies. If you’re looking to learn more about the CIC structure or require help preparing the documents needed to incorporate a CIC, feel free to reach out to our corporate team and we would be happy to have an initial chat to understand your requirements further.