The CIC is a common choice of legal structure in the industry and the number on the public register is steadily growing. This blog post introduces some of the main attributes of the CIC system and the forms it can take.
What is CIC?
In 2005, CICs were introduced to tackle the lack of a legal vehicle for non-charitable social enterprises in the UK. They are known to offer greater flexibility in terms of their association and structuring of articles and are not subject to the stricter rules imposed on charities.
A CIC is a corporation registered with a corporation that is effectively a limited partnership with an additional layer of community interest and must comply with both the rules of the CIC and company law. Community interest is a fundamental concept of a CIC and to build one, you must pass the public interest review. This allows the CIC regulator to be confident that a rational individual can consider your aims to be wider in the community or public interest. You then report regularly to the regulator, telling them of what the business has done to help society.
A CIC oversight and monitoring is light touch relative to those placed on organisations, allowing CICs to focus intensively on their social objectives. They also face fewer trade constraints than a charity, meaning they may take a more entrepreneurial approach to achieve their objectives.
Resource lock is one of the key features of the CIC. This means the assets and profits must be permanently retained within the CIC and used solely for the benefit of the community, or transferred to another organization that has an asset lock itself, such as a charity or another CIC.
This has a permanent long term effect and asset lock cannot be removed from a CIC unlike with a company limited by guarantee.
Limited by guarantee or limited by share
A CIC can either be set up in two ways- limited by guarantee or limited by shares. There were 1109 CICs registered in Scotland as of 31st august 2019. Of these, 934 guaranteed limited and 175 shares limited.
As we can see from those statistics, most CICs are produced by guarantee as a company limited. This is a private limited company, regulated by Companies House but it has no shareholders, unlike a conventional company. Rather it has members who guarantee a financial sum in respect of the company's debt, usually a nominal 1. This model is ideally adapted for companies carrying on a non-profit initiative where no benefit-sharing is envisaged.
By issuing stock, some people may choose to collect money, in which case the CIC will be restricted by stock. A CIC limited by shares may choose to exclude dividend payments to any shareholder not explicitly defined in the asset lock or permits payments of dividends subject to a limit exposed and controlled by the CIC regulator (35 percent). Shareholders may be individuals, private companies or other asset locked organisations. If a CIC is set up to be a charity affiliate, a CIC would usually be limited as the sole shareholder by shares with the charity.
There are a couple of points you should consider before deciding to register as a CIC. Including:
- Lack of tax cuts against charities
- CICs allow for the payment of directors without giving away control
- For a CIC, the range of social goals allowed is wider than for a charity
- Dividend tax if it is a CIC share limited (35 percent)
- Likely, CICs cannot access as many funding incentives as charities
- CIC regulator has the additional reporting duty, however, there is a lower level of ongoing governance compared to a charity
- CICs are onerous to migrate under a separate legal system yet to file far faster than a charity.