Business formats explained: Community Interest Companies (CICs)

Community Interest Companies (CICs) is the structure under which most social enterprises are registered. They have increased in popularity over the last few years as the social enterprise has impressed itself upon the public's imagination - but, if you wish to start one, be prepared for a rigorous approval process.

What are CICs?

  • The CIC office was opened in July 2005 to create a legal structure for non-charity businesses designed to benefit communities. CICs are like limited companies in that they're a separate legal entity from their owners, shareholders can take dividends, and they can be limited by guarantee or shares or it can be floated on the stock market, but as a CIC it will be subject to certain regulations.
  • CICs are not 'not-for-profit' organisations like charities. Like any other business, CICs aim to make a profit and pay all their employees salaries, but unlike ordinary businesses, the profits won't automatically go to the company's owners or shareholders - the idea is that they go to the community the company has been set up to benefit.
  • CICs are subject to an 'asset lock', which ensures the company's assets are used for the benefit of the community, rather than for the benefit of its shareholders. Essentially, it means if you transfer any of the business' assets - for example, you decide to sell the business's intellectual property - it must be retained within the company, used for the community purposes for which it was formed, or sold to another asset-locked body such as another CIC or a charity.
  • CICs are also subject to a dividend cap, which means dividends can only go back into the community, rather than, for example, private investors. The CIC regulator's Community Interest Companies 67-page briefing pack, though, notes that 'this is a detailed subject beyond the scope of these notes upon which professional advice should be obtained' - so if you're in any doubt, seek advice from your solicitor.

The community interest test

  • Under the rules for a CIC, a 'community' can be the population as a whole or a 'definable sector or group of people in the UK or elsewhere'. It needs to be a group any reasonable person would consider to be a genuine section of the community: 'my family' or 'users of Smarta' wouldn't be eligible.
  • A 'community' can denote the residents of a certain area, people with a certain disability, a certain vulnerable age group, or other vulnerable groups.
  • CICs can also be set up to encourage people into taking up a certain hobby or sport, help research something, to preserve a certain language or culture or to establish an institution.
  • For a full list, see the CIC regulator's briefing pack.
  • Before you can register your business as a CIC, it must satisfy the community interest test. For this, you will need to submit a community interest statement detailing the purposes for which it is set up, what activities it will engage in and who will benefit from its activities. The registrar will then determine whether your business sufficiently benefits the community for which it was set up.
  • You will then need to submit an annual community interest report to the regulator to ensure the business is still geared towards the community it was originally set up to benefit.

Checklist

  • A CIC must be set up to benefit a community
  • CICs can pay their employees but are subject to an asset lock and a dividend cap
  • The community it is set up to benefit must be 'genuine'
  • You will need to submit a community interest to ensure the business satisfies the community interest test
  • You will need to submit and annual community interest report

Resources

Smarta Formations 

If a CIC isn't right for you and you're interested in setting up a Limited Company, then check out Smarta Formations - the quickest and easiest way to set up a limited company.

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