Community Interest Companies (CIC) - A viable alternative to Charity Formation?

Community Interest Companies (CICs), through the Community Interest Companies Regulations 2005, came into force on 1st July 2005. CICs were introduced as a legal structure designed for social enterprises and community-focused businesses. CICs are essentially limited companies which operate to provide a benefit to the community they serve. The purpose of a CIC is primarily one of community benefit rather than private profit.

CICs – In Brief

A CIC operates in the same way as any other company. It has all the well understood characteristics of a limited company such as a separate legal identity, the ability to enter into contracts and own assets in its own name, as well as flexibility in borrowing and fundraising. The separate legal identity means that a CIC will continue to exist despite changes in ownership or management. The directors can be paid or unpaid and have the same rights and duties as any other directors.

Slow Adoption

Although CICs were introduced in 2005, for several reasons, it took time for them to gain traction. Some of these reasons include:

1. Limited Public Awareness

Many people were simply unfamiliar with the concept of a CIC, potentially leading them to favour more established structures like charities for donations or investments.

2. Scaling and Investment Challenges

CICs were not always seen as the ideal structure for businesses seeking rapid growth or large-scale funding.

3. Complexity of the Model

Some found the legal and regulatory aspects of CICs to be complex, especially when compared to simpler business structures.

4. Commissioning and Regulatory Constraints

In some cases, local authority procurement processes were not designed to accommodate the specific needs of mission-led CICs, thus creating hurdles in securing contracts and funding.

5. Workforce Challenges

The social enterprise sector, including CICs, has faced workforce challenges, such as low pay and limited professional development opportunities, which can contribute to high turnover and hinder growth.

CIC’s Growth in Popularity

However, despite these challenges, CICs have continued to grow in popularity, particularly as more people recognise the benefits of a legal structure that balances social mission with business principles. The CIC Regulator continues to work towards streamlining the process thereby making it easier for companies to convert to CICs and manage their reporting requirements.

For these reasons, CICs have, in more recent times, emerged as a viable alternative to the creation of charities and, indeed, professional advisers when discussing charity formation should consider CICs as an option for clients.

Charities v CICs – A Comparison

While both charities and CICs share a social mission, CICs operate with more flexibility in terms of commercial activities, profit distribution, and regulation, allowing for a more business-oriented approach.

Here is a more detailed comparison:

1. Purpose

Charities: Exclusively for charitable purposes, requiring a public benefit test.

CICs: Designed for community benefit, but not restricted to charitable purposes, operating under a Community Interest Test.

2. Activities

Charities: Primarily focused on delivering services and benefits to the community, with restrictions on commercial trading.

CICs: Can engage in commercial trading and generate income through various business activities.

3. Profit

Charities: Cannot distribute profits to individuals; all income must be used to further charitable aims.

CICs: Can distribute profits, but with limitations and an "asset lock" to ensure community benefit.

4. Tax

Charities: Enjoy tax advantages (e.g., Gift Aid, business rates relief).

CICs: Not eligible for most charitable tax reliefs.

5. Regulation

Charities: Subject to stricter regulations and oversight from the Charity Commission.

CICs: Regulated by the CIC Regulator and Companies House.

The Future of CICs

Organisations that have opted for CICs over charities have often referenced the flexibility of the structure, commercial focus that enables revenue generation through trading and ease of set up as key reasons for favouring the former over the latter. For some, however, the fact that CICs are not eligible for the tax exemptions that apply to charities will continue to present an insurmountable obstacle to its viability as an alternative to charities.

In essence, a CIC might be a more suitable structure for organisations that aim to combine a social purpose with a more business-oriented approach and are comfortable with the regulatory framework of a limited company. If, however, it is intended that an organisation’s primary focus will be on charitable activities and maximising fundraising opportunities, a charity structure might be more appropriate in the circumstances.

For those that wish to explore the conversion of existing entities to CICs or set up charities or CICs our Charity Team would be pleased to assist you. You can contact us by email at info@leathesprior.co.uk or by telephone on 01603 610911.