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What is a CIC?
To put it simply, a CIC (or Community Interest Company) is a normal limited company with extra features to mark it out as a Social Enterprise. The key added feature is that CICs come under the regulation of the office of the CIC Regulator. The Regulator’s job is to make sure that the CIC is genuinely a Social Enterprise and is not abusing the trust that the public expects to put in a Community Interst Company. By putting the company under the Regulator’s scrutiny, the directors of a CIC can clearly demonstrate that the company is genuinely a Social Enterprise venture and not for private profit.
Limited by Shares or limited by Guarantee?
There are two major options for the format you can use when you register a CIC. Broadly they match the options available for a normal limited company (LTD) – that is, “private company limited by shares” or “private company limited by guarantee”.
The difference is in the way the company is owned.
A company or CIC limited by shares is owned by the shareholders, who may distribute the shares evenly OR unevenly between themselves. That means one person may have more voting power than another.
A company or CIC limited by guarantee does not have shares, but each Member/Director (also called a Trustee) agrees to put up a cash guarantee (usually just £10) which will be forfeited if the company fails. Each Member (or Trustee) has just one vote.
For a more detailed explanation read the article “CIC limited by Shares or limited by Guarantee?”
What is an Asset Lock?
Each CIC has a paragraph in its Articles of Association stating how the profits of the enterprise may be used. This ensures that the company is distinct from a regular commercial enterprise and is not simply a means of making private wealth for the owners. Many CICs include a statement dedicating the profits of the company to a specific Registered Charity. Others choose to support a different charity year by year. Yet others choose to contribute to other good causes that are not necessarily registered charities, but are definitely acting for the public good. If the CIC is not tying itself to one specific registered charity it must include a paragraph subjecting the company’s asset distributions to the scrutitny of the CIC Regulator.
Why not a Charity?
The obvious choice for registering a Social Enterprise may seem to be a charity. That was the normal solution in the past. But that was a past in which charitable works were provided by thelanded rich with time to spare for good causes… an out-of-date concept in the 21st century. Such people could afford to offer their services on a voluntary basis, so it was not a problem that the rules did not allow Trustees to take a salary. But, these days, most social enterprises are set up by people who have to take a salary for the work they do; their aims are charitable, but they can’t afford to work for nothing.
That doesn’t mean that Charities are outdated. Charities have advantages – especially with regard to their privileged tax status. But their tax advantages are offset by the need for closer regulation and more stringent accounting requirements (charity accounts must be audited).
These are the pros and cons:
In a Charity…
In a CIC…
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CIC is the obvious answer for an organisation that is starting small, growing gradually and needs to identify itself as “not for profit” to attract suitable funding.
Why go to the trouble of registering as a CIC?
A normal limited company can act in ethical, social and positively generous ways. It is up to the owners of the company to decide how they will use the funds that the business generates. But a normal limited company will not be recognised as “not for profit” and will not easily obtain Social Enterprise funding.
Equally, it is not obligatory to register a company to do work in the community interest. Private individuals can and do all kinds of good work on a voluntary basis. But, when it becomes a regular, growing activity, and especially if it becomes a full-time occupation, it is advisable to register for “limited liability” to avoid the risks of losing your own home or other property if something goes wrong with the venture.
Where can a CIC get its money?
CICs may be funded from sales or products or services or by contributions from private investors or funding bodies. If the CIC earns most of its income from sales of products or services it is usually best to form it as “limited by shares” (almost 75% of CICs are in that format – but that statistic may be changing as the number of registered CICs increases). Now that the concept is well established, most public funding bodies are willing to provide funding for CICs that cover activities that particular funding body is interested in supporting. A CIC may also obtain loans, much like a normal limited company (but there are limits on the interest that a CIC is allowed to pay).
Can a CIC pay dividends to its shareholders?
Yes – if it is a CIC limited by shares. But the CIC Regulator will be looking to see that any such dividends are “reasonable”. CIC dividend payments have been limited to 35% or the company’s profits; but this rule may be reviewed.