Guide: Community Interest Companies
Monday, September 11, 2006
Introduction
A Community Interest Company (CIC) can be summarised as being a limited company, subject to the Companies Act, with special additional features created for the use of people who wish to conduct a business or other activity for community benefit, and not purely for private advantage.
To be classified as a CIC the company must pass a "community interest test", and when so classified, it’s assets are then “locked" which ensures that the CIC is established for community purposes and that the assets and profits are dedicated to these purposes.
A CIC must be registered with the Community Interest Companies Regulator (the “Regulator”), who also determines whether the test has been satisfied.
CICs are companies formed under the Companies Act 1985 (as amended) and are subject to that Act and company Law generally. The directors are also obliged to pursue profits in the normal way as if the company were an ordinary company under the Companies Act – it is the manner in which such profits are used, which differs between ordinary companies and CICs.
A CIC can be limited by shares, or by guarantee, and will have a statutory “asset lock” to prevent the assets and profits being distributed, except as permitted by legislation. This ensures that the assets and profits are retained within the CIC (or transferred to another organisation subject to the asset lock, such as another CIC or a charity) for the benefit of the community.
CICs are intended to be an alternative to charities and have a lighter regulatory regime than charities but will not have the same tax advantages.
Relevant Legislation
The principal legislation relevant to CICs is the Companies Act 1985 (as amended) and the Companies (Audit, Investigation and Community Enterprise) Act 2004, Part 2 and schedules 3-8. The Community Interest Company Regulations 2005 (the “2005 Regulations”) brought the detailed provisions of the two acts into effect.
Benefits
CICs do not have any restrictions on their finances (other than the asset lock) or on their growth, as is the case with charities. They may operate in a quasi-charitable manner, which would not necessarily be the case with ordinary limited companies. CICs have no special tax advantages although governmental/lottery assistance may be available on a case-by-case basis.
Community institutions that have not been incorporated and/or have not applied for charitable status could use CICs as a way of protecting their assets and profits. It would also provide the corporate veil for those individuals that run the institution.
Charities must be established exclusively for charitable purposes, whereas CICs can be established for any lawful purpose, provided their activities are, broadly speaking, for the greater good of the community.
The regulation of charities is more stringent than for CICs, although CICs are subject to Companies House regulation and regulation by the Regulator.
CICs can operate more commercially than charities, but they can provide stakeholders with the assurance that the assets will be used for the benefit of the community.
Elements of a CIC
The “Community Interest Test”
A company will satisfy the “community interest test” if “a reasonable person might consider that its activities are being carried on for the benefit of the community.”
The 2005 Regulations stipulate that the following activities shall not be deemed to be in the public interest: the promotion or opposition to changes in laws or governmental policies, providing or affecting support for political parties, unless they are incidental to an activity which is in the Community Interest.
Consequences of Being Registered
Once deemed a CIC, the company must not distribute assets to its members unless the 2005 Regulations so permit.
The Asset Lock
In order to ensure that the CIC’s assets are retained for the benefit of the community, the CIC’s assets are subject to an “asset lock”. In essence this means that assets cannot be transferred from the company for less than market value, unless they are transferred to another asset locked company or a charity.
The memorandum and articles of association may specify bodies to which the CIC’s assets can be transferred. In the absence of such a specification, the Regulator is required to approve and/or nominate suitable transfers.
The asset lock also has consequences for the payment of salaries and dividends. Salaries must be a reflection of market rates in relation to the role and experience of the individual concerned. This also has consequences for the community interest test, in that if the CIC appears to be being run for the benefit of the employees it may not satisfy the community interest test.
The Memorandum and Articles of Association
Guidance notes provided by the Regulator provide that it may be good practice to state the objects of the CIC as being in the community’s interest. It could also be good practice to state the activity and the community in question.
The memorandum of a CIC must explicitly state that the company is to be a CIC. The CIC’s name must end with “community interest company” or “c.i.c.”, or if a public limited company with, “community interest public limited company” or “community interest p.l.c.".
The articles of association must contain specific information, depending on the capital structure chosen by the members. A company limited by guarantee must contain the information in schedule 1 of the 2005 Regulations; a company limited by shares (including a company limited by guarantee with share capital) must contain the information in schedule 2 or schedule 3 of the 2005 Regulations.
A CIC, which adopts schedule 2, will only be permitted to pay dividends or transfer assets for less than full consideration to other asset-locked bodies, whereas a CIC, which adopts schedule 3, may pay dividends to non asset-locked bodies, subject to the dividend cap.
Charities
A CIC cannot be a registered charity, even though the purposes of the CIC may satisfy the legal test for charitable status. A CIC’s shareholder(s) may, however, be a charity. The rules for converting between a CIC and a charity are highly complex, and they also differ between Scottish and English charities.
The information contained in this article is given for general information only and does not constitute legal advice on any specific matter.