What is a Community Interest Company (CIC)?
A community interest company is a relatively new type of company which was established by the United Kingdom government in the year 2005 under the Companies (Audit, Investigations and Community Enterprise) Act 2004. The intention of introducing the community interest company was to serve the purpose of social enterprises who want to use their profits and assets for the public good and they provide benefits to a community or a specific section of a community.
Community Interest Company is regulated by the Community Interest Company Regulations 2005. Its main aim was to serve a social purpose rather than to make a profit. It has the flexibility of the familiar company form and access to a range of financing options and it is the best option for those who are working for a social cause or purpose. Available since 2005, there are more than 3,100 Community Interest Companies in the United Kingdom and they vary in size from being a tiny community-based organization to multimillion pound enterprises. Areas of operation of a community interest company include physical well-being, radio and television, the arts, education, and health and social work. Fundamentally community interest companies are like any other normal companies and can be established as companies limited by guarantee (CLG) or as companies limited by shares (CLS). Mostly, community interest companies are limited by guarantee. However, it is the purpose or the intent which make them unique and different from their counterparts.
How to Set Up a Community Interest Company (CIC)?
Formation and registration of a community interest company (CIC) is similar to that of any limited company and it is a single process. While registering for a community interest company, you have to decide if it is going to be a company limited by shares or a company limited by guarantee and it must comply with the Community Interest Companies Regulations and Company Law.
New organizations can register by filling the Form IN01 and memorandum and articles of association together with a form CIC36 signed by the directors, explaining their community credentials to the Registrar of Companies i.e. The Companies House for England and Wales, or the Registrar for Scotland with fees of £35. However, if you want to change your already existing company to a community interest company, you can do so by passing resolutions which make the necessary changes to its name and to their Memorandum and Articles of Association. Once you have made the necessary changes, you need to submit the modified documents to the Registrar of Companies with fees of £25 and a form CIC37. Once you have submitted the relevant documents, the Registrar of Companies will verify the same and if passed the verification process, the same will be passed to the Regulator of the Community Interest Companies, to determine if the company satisfies the community interest test.
However, one must make sure that the community interest companies cannot:
- Be politically motivated.
- Be set up to serve an unduly restrictive group.
- Be a charity.
- Carry out unlawful activities.
A community interest company can be funded both by the individuals and the companies; as far as they follow the norms and the regulations and it can be financed by loans or bonds, though there are limits on the amount of interest that can be paid. In case it is limited by shares, but if it buys back those shares only the capital paid for the shares can be repaid pound for pound, with no uplift. In other words, all capital gains on buy back will belong to the community interest company and not to the shareholders or members. However, there is no restriction on the price at which shares in a community interest company can be sold to somebody else. Also, in the case of a community interest company limited by shares, the payment of dividends is permitted within defined statutory limits, currently 5% above the Bank of England base rate. There is also limit on what amount of its profits can be distributed by the way of dividends which is regulated and monitored by the community interest company regulator.
What are the Features of a Community Interest Company?
Community Interest Company has following features, such as:
- 1. The Asset Lock: It is an essential and a unique feature of all community interest companies wherein it is ensured that its entire assets are used exclusively for the company for the benefit of the community it is set up for.
- 2. The Dividend Cap: This is an essential feature of a community interest company limited by shares, a dividend cap is set up to ensure that a balance is achieved between the providing an attractive investment opportunity and making sure that the majority of the profits made are applied exclusive for the benefit of the community it is set up for. The dividend cap has two elements:
- Maximum Aggregate Limit: The maximum aggregate dividend limit is calculated with reference to the company’s profits; specifically the aggregate dividend must not currently exceed 35% of the distributable profits of the community interest company. However, the Regulator, in consultation with the Secretary of the State, holds power to change the terms of dividend cap as and when required.
- Ability to Carry Forward: In case there is a surplus of dividend capacity in a given financial year, a community interest company has the flexibility to carry it forward up to five years subsequently.
Why Incorporate a Community Interest Company?
The main aim behind setting up a community interest company is to serve a social cause or purpose and they are designed specifically so that an individual, or a group of individuals, can set up a limited company in order to benefit the company. However, the philanthropic nature of these companies may make them quite similar to the charities; however there are certain key features of the community interest company make them different from the charities. Having a community interest company makes it easier for its directors to derive remuneration from the enterprise than it would have been the case with the charities. Also the community interest company are able to have a much more commercial value and can also benefit from some of the advantages of limited companies such as limited liability and the ability to issue shares and pay dividends which provides relative freedom in terms of the day-to-day running of the community interest company, provided that the regulations and norms are adhered to.
What are the Benefits of a Community Interest Company(CIC)?
Having a community interest company has its own share of advantages, such as:
- 1. The Asset Lock: This is an essential feature of a community interest company and it ensures that its entire assets are used exclusively for the benefit of the community. Any assets and profits are retained within the company and they are further utilized for the community benefit or for the social purpose. However, there are certain cases where assets could be transferred, but only to the other asset-locked bodies – i.e. to those organizations which already have an asset lock, which implies that assets could be transferred to charities, or to the other community interest companies.
- 2. It provides continuity of purpose: Once a community interest company is incorporated, it will continue to provide benefit to the community until it is dissolved or converted into a charity. And in case, it gets dissolved at any stage under the Insolvency Act 1986, any residual assets, after getting confirmation from its creditors, will be transferred to another asset-locked body such as charity or another community interest company.
- 3. The community interest company is quick, easy and inexpensive to set up and specifically designed for the social enterprise.
- 4. The community interest company provides limited liability for its members.
- 5. It uses the company form that can be tailored to a specific organizational structure, governance, or membership and it could be anything from a co-operative providing benefit to a wider community to a single member company.
- 6. It is easy to expand a community interest company limited by shares by selling its shares.
- 7. A community interest company can take advantage of a company’s risk-taking feature by accessing the debt markets for loans and bonds.
- 8. A community interest company may find community development finance institutions a valuable source of funds.
- 9. It is well understood by the business community.
- 10. As compared to other charitable company, Community Interest Company has greater flexibility in terms of activities, no trustees and no trustee control, fewer reporting and administration requirements.
- 11. As compared to an ordinary company, a community interest company has added advantage such as:
- Asset lock, which is inexpensive and easy to set up.
- Statutory provisions that prevent its members to remove the asset lock by the special resolution.
- Transparency of directors’ remuneration and use of assets.
- It has legal protection from demutualization and windfall profits being paid to directors and members.
- It has timely checks by the community interest company legislation.
- A regulation to ensure the community interest company maintains its asset lock and provides benefit to the community it was set up to serve.
How to Contact CIC Regulator
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