Community Interest Companies (CIC)

Setting up a business requires a lot of research. Some of this research includes dictating your target market and deciding if the business is for the advantage of the community or strictly for profit-making.

Until you decide that, it is not advisable to start up a business. The type of company should be included in your business plan. In this blog post, we will see what community interest companies are. Let's get started.

What is a Community Interest Company?

CIC is a company created to contribute to the community through its assets or services. A CIC is mainly for the benefit of a community, a particular group of people or its members.

It is created just like every other private company. Instead of making personal profits, the company's profits are used to serve a community or group of people.

CIC can offer services to people or use their profits for the community's benefit. Either way, as long as you aim to serve the community, you can register your business as a Community Interest Company.

When applying for a CIC, you'll have to undergo a community interest test to prove that your aim is for the community to benefit and not for your benefit.

If the CIC coordinator is not satisfied with your community interest test, you will go through another community interest test.

A CIC can have the least number of directors and no maximum number of directors. With this, you can have as many as possible for your company and can even have a single director for your company.

What is an Asset Lock?

An asset lock is there to ensure that the company fulfils its duties of serving the community and uses its assets including lands, income and properties for the benefit of the community.

This helps to protect the company's assets from being achieved for personal gain rather than the sole purpose of creation which is community service.

An asset lock does the following:

• Ensure that a CIC only transfers its assets to a range of permitted transfers. These permitted transfers might include payment to another asset-locked account or for community aid.
• The company can transfer assets which are the selling off of the company's assets including shares to pay off the company's staff, directors or other paid services rendered to the company.
• If the company is dissolved in the future, all of its remaining assets must be transferred to another asset-locked account after it has successfully paid off all of the company's debt.
• If the company is allowed to pay its shareholders according to the article of association, the profits will be distributed to a maximum of 35% aggregate dividend cap of the total distributable profits of the company.
• Performance-related interest loans are subjected to a payment of 20% cap of the total loan payment.
• If any of these conditions are not met, the company will not be able to use its assets as it goes against the laws guiding the Community Interest Companies.
• It is essential to include at least one asset-locked account or body that will receive the company's assets upon dissolution and this information is included in the company's article of association.

Types of Community Interest Companies

There are two types of CIC depending on the structure and purpose of the company itself.

Limited by Guarantee (LBG): LBG is the only type of CIC that in the future can convert into charity.

Limited by Shares (LBS): LBS is a type of CIC whose members or directors can possess shares in the company and also transfer shares. This type of CIC cannot convert into a charity.

Types of Articles of Association of a CIC

Large membership: this is for CICs that have more members than directors

Small membership: this is for CICs that have more directors than members.

CIC limited by shares has an additional article of association.

Schedule 2: This limited by shares CIC can only pay dividends to specific asset-locked accounts or bodies or other asset-locked bodies approved by the CIC regulator.

Schedule 3: This is limited by shares CIC can pay dividends to those who are not asset-locked bodies. They can also pay to private investors and payment to a private financial investor is associated with a dividend cap cap.

Most CICs are limited by guarantee and are a small membership set of articles.

What Are the Requirements for Setting Up a CIC?

To set up a CIC, you need the following:

1. An asset lock for protecting the assets of the company
2. A community interest statement stating why you want to create the company, who you want to help with the company(the location you want to help people in and the category of people you want to help with your company), how you want to help these people and the way you will help them. Either through services, profits, or any discounted price for some goods or services.
3. Article of association: this explains all the rules and regulations of the company as well as laws guiding the successful operation of the company.
4. Memorandum of association: this can be created online. It is a legal statement that must be signed by all shareholders and/or guarantors.
5. A form CIC36 in PDF form
6. SIC codes. You just have to type in some words relevant to your company and it will show you options to choose from. You can have more than one SIC code. This code is a unique company code that will be used to access the company's information in the Companies House.
7. Confirmed details of your company. This includes the company's registered address, name and other vital information.
8. Correct details of each director (if only one director, then there should be only one detail). These details include full name, addresses, occupation, nationality, date of birth, and other personal information that can be used for electronic signature (such as mother's maiden name).
9. A credit card without any problems or a PayPal account that can be used to pay for the CIC registration.

Currently, the charge for a CIC registration is £27. But if you're paying through an agent, you will have to pay higher than that.

If you have this all in place, then you can successfully apply for the CIC registration.

Setting up a CIC

Setting up a CIC is a straightforward process and once you have the correct documents and pass a community interest test, you're on your way to having your own company.

The easiest way to apply for a CIC registration is through the online method on the company's house website.

Before applying, you'll have to

• Choose the type of company you want; by shares or by guarantee at the Companies House.
• Register for Corporation Tax with the HMRC
• You have to receive approval from the Office of the Regulator of Community Interest Companies (CIC Regulator) to be able to form a CIC.
• You will have to create a Government Gateway user ID and password for your new company to be able to fully function as a CIC.

Below are the steps involved in setting up a CIC online

A Company Name

Before applying for a CIC, you will have to come up with a unique name for your company alone.

This name must be unique and no other company should bear the name or else the company's house will reject your application.

Also, you must include CIC at the end of your application to signify that you're applying as a CIC or else the application will also be rejected by the company's house.

Application

Secondly, you'll have to apply for registration of your community interest company online.

The Companies House online application is open for registration of private companies that are limited by guarantee or by shares and even public limited companies.

Below are some of the information required on the CIC36 form(form for registration of a CIC company)

• Chosen name if the company is written in full (with CIC at the end of the name).
• Type of company (limited by shares or by guarantee).
• Main business activities.
• Registered office address of the business
• Type of article of association that will be used by the company.
• Correct details for every director of the company (and details of the secretary if there's one)
• Details of each member of the company
• Statement of capital if the company is limited by shares.
• Statement of guarantee if the company is limited by guarantee.
• Details of people with significant control over the company.

The above information is the standard for application of a CIC registration at any Companies House.

Fill out the CIC36 Form

To apply for a community interest company, you must use form CIC36 to provide a community interest Statement. This statement includes all the activities of the company.

• What the company wants to achieve
• The company's activities will benefit the community.
• The difference between your company and a company that's not a CIC but a profit-based company. You must provide the aspect your company will serve the community and differ from other commercial companies.
• What the company intends to use its profits for.

If your company satisfies the community interest test and meets the criteria for a CIC company, the CIC regulator will contact you to proceed.

If your company does not meet the criteria, your application will be rejected by the CIC regulator and you'll have to undergo another community interest test.

Memorandum and Articles of Association

The memorandum of association together with the articles of association constitute the Constitution of your Community Interest Company.

The memorandum is a document of confirmation that the founding members (also called subscribers) wish and agree to form the company and become members of the company.

If you're setting up a company limited by shares, then each of the founding members will take at least one share.

The article of association includes all the key information about the community interest company and the rules that govern the company.

This information includes:

• The powers bestowed upon the directors and each member of the company.
• The processes necessary for the holding of company meetings.
• The procedures for decision making.
• How to issue and transfer shares.
• The liability of its members.
• The provision of an asset lock.

The CIC also provides a constitution model which you can use as long as it contains all the necessary information required by your company.

When you're applying online, you will have to upload the article of associate and the memorandum.

Submission of Application

Before filing the CIC registration application at the Companies House, you must first observe the following

• Make sure all the details you entered on the form are correct with no form errors.
• Upload a filled and signed version of the CIC36 form in PDF format.
• Upload your chosen article of association in PDF format.
• Use your credit card to pay the company formation fee (£27) but if you're doing this with an agent, it'll cost more.

After completion of your application for CIC, the Companies House will go through the form and if it meets the standard of the Companies House, the Companies House will send it to the CIC regulator for review.

Do you Need Help Forming a CIC?

Incorpuk offers a range of fast and efficient online company formation services, that allow you to register a business structure of your choice quickly. To get started, kindly contact us here.

Do Community Interest Companies Make Profits?

CICs make profits but they use their profits for the benefit of the society rather than for their shareholders.

Although CIC limited by shares can pay their directors, investors and even employees. These profits distributed to its members must not be more than 35% of the company's annual profit. 65% of the company's profit should be donated to the community.

What You Need to Do as a Successfully Registered CIC

Even if a CIC is created for community development, they also pay taxes like other limited liability companies.

After a successful registration, a CIC company should:

• Send a CIC annual account and report to the Companies House and the CIC regulator.
• Send an annual confirmation statement to the Companies House.
• VAT returns for HMRC(only if applicable).
• PAYE returns to HMRC (only if applicable).

Pros and Cons of a CIC

Every business model has its advantages and disadvantages. Here we will explain the advantages and disadvantages of starting up a Community Interest Company.

The Pros of Starting a CIC

1. Access to Restricted Finance

Some forms of funds or finance are only accessible to charity organisations and community interest Companies.

This is because their sole aim is to contribute to society in various ways rather than for personal gain.

Some of these restricted finances include; money obtained from applied grants, funds obtained from donors, or funds mainly for community development.

2. Commitment to Community Development

If you're interested in contributing to the well-being of people in a particular community or people with a particular problem, then a CIC company is what you should opt for.

A limited company can also design its articles in a way that will favour the community.

But a Community Interest Company will have all its operations dedicated to helping people or contributing to society in one way or the other.

3. Dynamic

A CIC is a very simple, dynamic and flexible company structure. Compared to charity, a CIC is easier and more flexible to start up and continue.

Knowing a CIC will help you if you're willing to change your company to a charity in the future (only a CIC by guarantee can change into a charity).

Also, the structure of a CIC is similar to the structure of private and public limited companies as well as Government organisations.

If you can manage a CIC, then handling other forms of companies or government companies won't be that difficult and new to you.

4. Wide Range of Possibilities

A CIC has a wider range of possibilities compared to a charity organisation.

The terms applied to a community interest company during the community interest test have a broader range of possibilities and flexibility compared to the charity organisation

A CIC can run as a company, either a private limited company limited by shares or by guarantee, or it can run as a public limited company.

A charity can only remain a charity organisation as long as it has been successfully formed.

5. Protection of Limited Liability

The structure of a limited liability helps to protect the directors, owners and managers of a community interest company.

There is also safety for the company's assets (an asset lock). This asset will not be released to any personal account but rather to a community account with an asset lock.

This is to protect the assets from being taken for personal reasons or gains.

What are the Cons of Starting a CIC?

1. Registration

The CIC is registered like a limited company but with lots of paperwork compared to other limited companies.

This paperwork includes the article of association, memorandum of association, the CIC36 form and other essential signatures from the directors.

This lot of paperwork sometimes might discourage people who want to create a community interest company.

2. Tax Rates and Discounts

Charities are eligible for a discount in business sales when having a business transaction with other companies and businesses while a CIC cannot have that discount.

A charity can have a tax relief on their income, profits and capital gain helping them to raise more money.

A CIC company does not receive tax relief and pays all taxes which will eventually reduce the amount of money that is raised.

3. Access to Funds is Limited

Unlike charities, community interest companies are limited to certain grants, donations and funding schemes.

Many companies with a Corporate Social Responsibility (CSR) policy often tend to favour charities more than CIC in terms of donations.

4. Inadequate Public Awareness

CIC lacks public awareness compared to charities. Volunteers and donors tend to find it difficult to familiarise themselves with CI Companies.

Even with great improvement in public awareness of community interest companies, some volunteers or donors will prefer offering their money or services to known charities rather than CICs.

5. Restricted Assets

CICs restrict their assets and dividends and also have a cap on the payment of dividends.

They also have a restriction on the use of their assets. According to the rules, only 35% of a CIC's annual profit can be paid to shareholders. 65% is fully for community service and development.

The asset locks enable the company's assets must be used for community development and interest.

Even if you want to do something that regards using the assets and transfer to a personal account, there will be restrictions so you'll have to transfer to another asset-locked account or a community development account.

Both the pros and cons of the community interest companies are for the benefit of the community although some seem as a setback to the rapid progression of community interest companies.

CIC vs Charity Organisation

It is essential to note that CIC is different from charity. While charities are not companies and are not registered in the Companies House, CICs are registered like a limited company.

A CIC limited by shares can convert into charity but a charity organisation can not become a company.

A charity has access to various forms of grants and donations while a CIC's access to some funding is limited

Conclusion

A community interest company is a company created with the sole aim of serving the community through its profits, services or income. A community interest company is applied using the CIC36 form which is only used for the application of a CIC. The CIC is created like every limited liability company but with a community interest test making sure you serve the community with your company. Do you have any questions on CIC or company formation in the UK? Kindly contact Incorpuk today.