Showing interest

A little known form for social enterprise: Rosie Parr discusses the community interest company (CIC)

The community interest company (CIC) is a new vehicle for a range of social enterprises and/or 'not-for-profit' projects serving communities throughout the UK, which combine the pursuit of a social purpose with commercial activities.

The CIC was introduced in July 2005 as a legal form by the Companies (Audit, Investigations and Community Enterprise) Act 2004, and it is specifically designed for social enterprises which want to use their profits and assets for the public good.

The DTI's Social Enterprise Unit defines social enterprises as 'businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profits for shareholders and owners'. They include community businesses, co-operatives, regeneration trusts, social trade organisations and environmental projects.

Social enterprises can comprise partnerships between local authorities, businesses and other stakeholders working for the community's benefit '“ for example, in operating day care centres, waste recycling, local transport or the provision of low-cost work units for start-up businesses.

There is a wide range of available legal forms for social enterprise, depending on whether the project is to be charitable or non-charitable. If a social enterprise does not pursue exclusively charitable purposes, but wishes to distribute some element of profit to the members, a charity form is not an option.

Until the introduction of the CIC, non-charitable forms for social enterprises included:

• companies limited by shares, or by guarantee without a share capital;
• partnerships, including limited liability partnerships (LLPs); or
• the two forms of industrial and provident society, namely, co-operatives or societies for the benefit of the community.

What distinguishes the CIC from these other non-charitable forms is the statutory 'lock' on its assets, so that neither the CIC nor its assets can be transferred into private ownership following a change in the constitution or a take-over by another organisation. Charities have always been subject to such an 'asset lock', but with the introduction of CICs in 2005, this was a new feature for non-charitable structures. (Since the introduction of the Community Benefit Societies (Restriction on Use of Assets) Regulations 2006, it is also now possible for the members of this type of industrial and provident society to include such an asset lock in its constitution.)

Features of a CIC

• A CIC has the well established form of a normal limited company, either a company limited by shares or a company limited by guarantee without a share capital. It can be a private company or a plc.
• CIC is subject to regulation by the CIC regulator in Cardiff, who has stated that he will operate a 'light-touch regime' in regulating CICs.
• CIC has an effective asset lock. This means its assets must be preserved permanently for the benefit of the community and not passed to private interests, save as permitted by law (eg, by a sale for full market value, so that the sale proceeds are then asset-locked within the CIC). On dissolution, any surplus assets can only be distributed to another CIC or to a charity. The CIC Regulator will ensure the members cannot vote to remove the asset lock provisions from the CIC's Memorandum and Articles of Association. (In an unregulated not-for-profit company, it is possible for members to resolve to remove restrictions on profit distribution.)
• CIC cannot be a charity and so does not have to pursue wholly and exclusively charitable purposes, and is not subject to the extensive regulation of the Charity Commission.
• A CIC can engage in a range of trading activities without the restrictions imposed on charities by the Charity Commission and HMRC.
• The CIC regulation regime will promote trust and confidence in a CIC's community benefit mission, and it will be more likely to attract donations and grants from charities and other grant-making bodies than an unregulated not-for-profit company.
• It can have a mix of community and private stakeholders so that investors can be paid dividends or interest, subject to caps on dividends and on performance-related interest set by the CIC Regulator.
• As a corporate vehicle, the CIC is a legal entity in it own right, with limited liability '“ unlike unincorporated trusts and associations.
• The board directors can be paid '“ unlike trustees of charities '“ although the Regulator can intervene if the pay is excessive.
• If the CIC is the subsidiary of a charity, it can pay surplus profits up to its parent charity via Gift Aid.
• A CIC cannot be set up or sponsored by any political party.

Disadvantages of a CIC?

• CICs do not benefit from tax reliefs, unlike charities '“ and this may be a considerable disadvantage if the organisation is likely to have significant surplus profits. A CIC may, however, be eligible for relief from non-domestic rates if it is a not-for-profit pursuing educational objectives.
• The CIC Regulator's caps on investment return may be a disincentive to private investors (eg, a person or organisation
• buying shares in the CIC).
• Each year, the CIC must file an annual community benefit statement with the CIC Regulator, as well as the usual accounts and returns to Companies House.
• The CIC Regulator does have extensive reserve powers to allow him to supervise a CIC that is in default of the CIC regulations.

Formation of a CIC

The formation and registration process is similar to that of any limited company.

The constitution of the CIC will be a form of Memorandum and Articles of Association, which must be drafted in compliance with the Community Interest Company Regulations 2005. The CIC Regulator's useful website includes some model memoranda and articles (www.cicregulator.gov.uk).

The usual Companies House Form 10 with details of the first directors, secretary and registered office must be completed, plus the statutory declaration Form 12 as to compliance with the formation
requirements.

A Form CIC 36 must also be filed, declaring that the proposed CIC will not be a political party or campaigning organisation. It must also describe the community to benefit from the CIC's activities; state how those activities will achieve that benefit; and how any surpluses will be applied.

These forms, the Memorandum and Articles, and the registration fee of £35 are lodged with Companies House, which will then pass the application to the CIC Regulator's Office, also in Cardiff, to scrutinise. Our experience to date is that this scrutiny is no mere formality '“ the Regulator's Office will ask some searching questions as to the CIC's proposed activities and, for example, any perceived conflicts of interest between the CIC and its directors or sponsors.

Charities, CICs and CIOs

A CIC cannot be a charity, and a charity cannot be a CIC '“ the two are mutually exclusive.

A charity must pursue exclusively charitable purposes for the public benefit, with any private benefit being incidental. At present most charities take the form of either a charitable trust, a company limited guarantee company, or an unincorporated association. Once the relevant provisions of the new Charities Act 2006 are implemented '“ possibly later this year '“ a new legal form, the charitable incorporated organisation (CIO) will be introduced, which will be a corporate form with limited liability specifically for the charity sector. A CIO will be registered only with the Charity Commission (unlike charitable limited companies which must also be registered at Companies House).

Already there has been some understandable confusion between the two new forms '“ but the CIO can only be a charity, while, as stated, the CIC cannot be a charity. However, it is already possible for a CIC to convert to a charity and a charity to convert to a CIC, and the Charity Commission and the CIC Regulator have agreed a Memorandum of Understanding to govern the process for such conversions. So once the CIO is established, we may in due course see some CIO to CIC conversions and vice versa.

Range of projects

To date, nearly 700 CICs have been registered, to operate a hugely diverse range of community projects, such as food co-operatives, training schemes, social housing, village halls and shops, IT services, utilities/renewable energy provision and community transport.

At Burges Salmon, we recently formed a CIC to operate as the residents' management company of an urban village, with responsibility for the 'public realm' amenities. These include the communal open spaces, footpaths and cycle-ways; the community hall and recreational facilities; the residents' intranet; sustainable energy systems and waste recycling facilities, and the community transport scheme.

We have also set up a CIC to be a community fund, receiving payments from a local wind farm development to apply for the benefit of residents in sustainable energy projects; and another CIC to pioneer a new model for secondary education in Bristol.

Regeneration projects

The CIC form might be especially suitable for regeneration projects. Take the example of an important heritage site, which has been operated for many years by an unincorporated charitable trust. Trustee recruitment has been difficult, funding inadequate and the few remaining long-serving trustees are increasingly concerned about their personal exposure and liability in operating the site. A new incorporated vehicle with an enlarged and suitably skilled board with limited liability is required to pursue a mix of community and commercial objectives. The development of new income streams, from catering and retail outlets to functions and events requires a non-charitable vehicle, owing to HMRC/Charity Commission restrictions on charitable trading.

Another important factor is that the project needs to attract the kind of Lottery and grant-aided funding from public sources, charities and philanthropists normally reserved for charitable organisations.

The new CIC combines the appropriate features for just this sort of project. It is free to engage in trading ventures, but has to operate for the benefit of the community, rather than for the private benefit of individuals or groups investing in it. The 'asset lock' means that its assets cannot be 'privatised' and ensures their retention for community purposes.

Unlike the trustees/directors of a charitable company, directors of a CIC can be paid, which allows for the use of professional managers at board level.

The limited liability of the CIC form makes it preferable to the unincorporated trust or association forms that have traditionally been used for community activities '“ forms which leave the trustees or managing committee very exposed in terms of personal liability for contract and negligence claims.

We are now reviewing whether the charitable trust should establish a CIC as a subsidiary to operate the heritage site, or even give up its charitable status to convert itself into a CIC.

The non-charitable social enterprise sector is developing fast, both in size and sophistication, and it is important to ensure that new projects are set up with the correct legal structure to suit their particular objectives and stakeholders.

The CIC is proving to be a very flexible vehicle, and is a useful addition to the range of legal forms available for operating projects in the community.