Legal Structure FAQs
A community interest company (CIC) is a limited liability company incorporated under the Companies Act 2006 by the Registrar of Companies with the specific aim of providing benefit to a community. It must conform to company and insolvency law in the same way as other UK companies. In addition, it is regulated under the Companies (Audit, Investigations and Community Enterprise) Act 2004 (“CAICE Act 2004”) and the CICRegulations 2005 with an asset lock and benefit to an identified community.
The level of governance, the member's rights and duties, and the statutory filing requirements, all adhere to the UK and European company law and guidelines, including rules on insolvency, accountancy, and governance, in the same way as any other UK company.
Listed CICs have to comply with the Combined Code on Corporate Governance, or any other codes (such as those issued by institutional investors).
This legal form can be adopted by a range of social enterprises and ‘not-for-profit’ projects serving communities throughout the UK, which combine the pursuit of a social purpose with commercial activities.
Social enterprises can comprise of partnerships between local authorities, businesses, and other stakeholders working for the community’s benefit – for example, in operating daycare centres, out of hours GP care, waste recycling, local transport or the provision of low-cost work units for start-up businesses.
The “CIC” brand is distinctive in describing a company working for the benefit of the community.
It has the advantage of the “company” legal form, which is familiar and well understood by the business community and is flexible enough to adapt to most organisational structures, membership, or governance from a single-member company to a co-operative.
It is quick, easy, and inexpensive to set up because, unlike a non-charitable company, the CIC has statutory clauses, which include an asset lock. These clauses provide legal protection against demutualisation and ‘windfall profits’ being paid out to its members, (shareholders, if appropriate) and directors, without all the necessary checks and balances of mutuality or charitable status.
There is the transparency of operation as a CIC has to deliver an annual community interest company report about its activities for the public record. This includes details of assets transferred for less than market value; dividends paid; stakeholder involvement; and directors’ remuneration.
Stakeholder involvement is integrated into its governance through its annual community interest report.
It can be a company limited by guarantee or limited by shares.
A CIC limited by guarantee, or limited by shares under schedule 2, is considered to
be a ‘not for profit company.
It can take advantage of the risk-taking features of a company and can access the debt market for loans and bonds.
If limited by shares it may be able to expand through the selling of shares.
There is no limit to the level of profit a CIC is allowed to make as this profit will be used to benefit the community it was set up to serve.
- The CIC has greater flexibility compared to a charity in terms of its activities. It does not have trustees and its directors can receive reasonable remuneration. This enables a tight structure to encourage good business decision-making in the interests of the community.
- There are no tax advantages so regulation is light touch, a balance of minimal regulation whilst maintaining confidence in the "CIC" brand.
- A CIC has continuity of purpose once it is incorporated it will continue in existence until it is either dissolved or converted to a charity. If it is dissolved the residual assets will be preserved for the community rather than distributed to members. So a CIC may find Community Finance Institutions a valuable source of funds.
As with any other company, general company law imposes, on directors, a range of duties and other responsibilities. In addition to these general responsibilities, CIC directors (and, for collective decisions the members) are also responsible for ensuring that the company is run in such a way that it will continue to satisfy the community interest test, which is overseen by regulation. For further information please visit www.companieshouse.gov.uk.
Whatever membership, structure, or governance is adopted, it is up to the directors and members to ensure it is complied with and is in the best interest of the CIC and its community. This is overseen by regulation.
To this end a CIC must deliver to the Registrar of Companies a community interest company report with its accounts, both documents are placed on the public record. The community interest company report provides transparency of operation.
The CIC report describes:
how the company’s activities have benefited the community;
what steps were taken to consult stakeholders and what was the outcome;
what payments were made to directors;
what assets were transferred other than for full consideration;
what dividends were paid; and
what performance-related interest was paid on loans or debentures.
If a funder has concerns about a community interest company (CIC) that it is funding, those concerns should be raised with the Regulator of CIC.
Sections 41 to 51 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 provide supervisory powers for the Regulator to intervene in the affairs of a community interest company (CIC) (for example by appointing or removing directors).
These powers are designed to be used where the Regulator considers that a CIC’s activities are giving serious cause for concern and action will be needed to maintain confidence in CICs generally. The main intervention powers can only be used where the “company default condition” set out in section 41(3) is satisfied
Section 42 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (“the Act”) allows the Regulator to investigate the affairs of any CIC, and Schedule 7 provides the necessary investigation powers. These powers are similar to the powers given to the Secretary of State by section 1038(2) of the Companies Act 2006, which are used by the Companies Investigation Unit (CIU) at the Department for Business, Energy and Industrial Strategy (BEIS).
The power of investigation enables the Regulator to examine the affairs of the CIC in relation to its CIC status; they do not replace the Companies Act 2006 investigation powers. Accordingly, CICs can be investigated in the same way as other companies as well as being investigated by the Regulator.
The Regulator’s powers of investigation are intended to enable her to gather information to establish whether her other supervisory powers should be exercised. The Regulator has the discretion to decide whether to launch a formal investigation in any particular case.
Launching a formal investigation is itself a serious step. Generally, a formal investigation will only be launched where the Regulator considers that there is a genuine and serious concern that circumstances may exist which would justify the use of her other supervisory powers, and considers that it is necessary to investigate in order to maintain confidence in community interest companies. In addition, the Regulator will also only investigate where this is a proportionate response. It is expected, therefore, that the Regulator’s power to investigate will only be used on rare occasions.
As with the exercise of all of the Regulator’s functions, the Regulator follows an approach to investigations which is based on good regulatory practice, having regard to the likely impact on those who may be affected and the desirability of using her resources in the most efficient and economic way.
You will appreciate that for an investigation process to be effective and not to risk unwarranted damage to the reputation of the CIC in question it is essential to maintain confidentiality at all stages. This includes the decision-making process and use of our investigation powers. That said, there may be circumstances when such information could already be in the public domain, for example, where an investigation leads to court proceedings and information is disclosed in open court.
It is not, therefore, the Regulator’s policy to confirm or deny the existence of an investigation to the complainant, or any other third party, or to publish or tell the complainant about the outcome. Nor is it the Regulator’s policy, for the same reasons, to confirm or deny whether she is pursuing a complaint against a CIC.
For more information please visit the CIC Regulators website.
A community interest company (CIC) limited by guarantee is a ‘not for profit’ company, this means that it does not operate for private profit. Any profit generated is used to grow and develop its business which is benefiting an identified community, or goes directly to benefit that community.
An organisation cannot be a CIC and a charity. However, some or all of a CIC’s activities can be charitable in nature.
A parallel may be drawn with state schools that have a noncharitable statutory duty but may have a charitable activity in an after-school activity, community engagement.
A CIC does not have a board of trustees. This is in contrast to a charity that operates as a company limited by guarantee.
However, the CIC is subject to certain checks through regulation. The CIC’s community purpose and the use of its assets are overseen by the Regulator and, stakeholder involvement is integrated into the CIC’s governance through the community interest company report. There is nothing to stop a CIC from establishing a group of stakeholders to scrutinise the work funded and to monitor its progress.