At a time when more of us are thinking about our part in local communities and our impact on the world, businesses that give back are more in demand than ever.
Starting a community interest company (CIC) is one way to do this. It means you can use your entrepreneurial talents for a good cause, running a business that’s focused more on social good than on profit.
Sceptics might assume this is a nice idea with limited real-world impact, but evidence shows that socially-focused businesses are not only popular among consumers, but can make a real difference too.
A recent report by the World Economic Forum found social enterprises have the potential to change entire industries, by shifting public expectations and raising the bar for other organisations to act responsibly.
Other research shows social enterprises around the world were particularly agile and innovative last year in the face of the challenges presented by COVID-19, with 38% developing new products or services and 55% moving their products online.
A CIC isn’t the only vehicle for businesses driven by social goals, but it does have various advantages.
What is a CIC?
A CIC is a type of limited company that’s used by businesses with a social purpose.
This structure comes with the flexibility and limited liability of a company, making it relatively easy to set up and operate compared to other social enterprise or charity structures.
But unlike a normal limited company, its primary purpose is to benefit the community, rather than creating profit for private shareholders.
CIC vs charity structure
There are several differences between charities and CICs, but we’ve covered some of the main factors to consider when you’re deciding between the two.
One of the biggest differences in practice between CIC and charity structures is that while a charity relies mainly on donations and grants, a CIC will get most of its income by trading.
That doesn’t mean a CIC can’t accept grants or donations. In fact, there are some situations where raising funds this way might be a sensible option. For example, you might apply for a grant when you’re just starting up or if you’re testing a new service. But for the most part, your main source of income will be the sale of products or services.
In some ways, the choice between the two can come down to personal preference. Are you willing to go out and ask for money every year, or are you more comfortable making money through your trading activities?
In summary: Charities source most of their money from grants and donations, while CICs get theirs from trading.
Tax and audit requirements
The other big difference is tax relief. Charities are exempt from tax on most types of income and gains, including donations, trading profits, rental or investment income, as well as tax when they buy property.
CICs, meanwhile, are liable to corporation tax. They can claim normal corporation tax reliefs, but there are no specific exemptions or reliefs available for them.
This comes with the trade-off, however, that charity accounts tend to be placed under more intense scrutiny than CIC accounts.
Charities are required to have an audit if their gross income exceeds £1 million, or if it exceeds £250,000 and their gross assets are more than £3.26m.
Charities below these thresholds can opt out of a full audit, but those with a gross income of more than £25,000 are still required to undergo an independent examination. In some instances, funders will also require charities to be audited, or it might be a requirement of the charity’s governing document.
CICs are subject to the same regulatory requirements as companies, so they are exempt from an audit as long as they meet at least two of the following criteria:
- Their turnover is less than £10.2m
- Their total assets are less than £5.1m
- They have less than 50 employees.
In summary: Charities benefit from more tax exemptions and relief than CICs, but they are more likely to require an audit or independent examination.
Paying directors and trustees
While most of a CIC’s profits will usually go back into running the business, directors can still be paid for their services as long as their remuneration is “reasonable” and “transparent”.
The idea is that CICs are run as a business, so they’ll want to attract talented directors to achieve their full potential.
In contrast, it’s generally not possible to sit on the board of a charity while being paid by it, so trustee boards are generally made up of volunteers.
This means charity founders often have to choose between retaining strategic control of their organisation and receiving remuneration for their work.
In summary: You can pay yourself while retaining control as the director of a CIC, but you usually can’t get paid to be on a charity board.
To set up a CIC, you’ll have to explain how the company will provide a benefit to the community, what your activities will be, and why they will help.
Most organisations with a social purpose are likely to pass the CIC Regulator’s test for this, which is based on whether a “reasonable person” might think the company’s activities are for the benefit of a community.
The term ‘community’ can also be fairly broad – you might be working for the benefit of a particular town or region, or for a group of people such as those within a particular age bracket or people with disabilities.
The only limitations are that the CIC’s activities can’t be about political campaigning, and they can’t exist only for the benefit of members of a particular body, or the employees of a particular employer.
For instance, a sports club set up for company employees won’t be considered a CIC, unless it provides some other benefit to the community at large.
Meanwhile, a charity has to meet a much more specific list of requirements when setting out its purposes.
These must pass the ‘public benefit test’, which is narrower than the community interest test.
Each one must also fall within one or more of the 13 descriptions of purposes set out by the Charities Act.
In summary: Charity purposes must adhere to a strict set of criteria; CIC purposes can be relatively wide-ranging.
How to set up a CIC
To form a CIC, you’ll need to apply and be approved by the CIC regulator. You can register online with Companies House or apply by post.
To apply, you’ll need a ‘community interest statement’, which explains what your business plans to do for the benefit of the community.
You’ll also need an ‘asset lock’, which is a legal promise stating that the company’s assets will only be used for a community benefit. This also sets limits on the money your company can pay to shareholders.
And you’ll need a constitution, which you can base on one of the CIC regulator’s model constitutions.
What are your other options?
If you’re not sure whether a CIC structure is right for you, it’s worth considering some of the other ways you can structure an organisation with a social purpose.
- limited company
- sole trader or business partnership
- unincorporated association (for small organisations that don’t intend to make a profit).
As specialist accountants for charities, non-profits and social enterprises, we can provide expert advice on structuring your organisation.