FID Trust International

Community Interest Companies (‘CICs’ for short) are a new type of company. They are companies established to trade for the community good. The Companies (Audit, Investigations and Community Enterprise) Act 2004 (‘the Act’), and The Community Interest Company Regulations 2005 made under the Act, establish the legislative framework for CICs.

CICs, and the need for them, have been subject to a wide-ranging consultation and discussion with those in the social enterprise sector (a sector which is growing fast in the UK). The overwhelming response to these discussions has been that this flexible form is a welcome addition to the options open to those who wish to pursue trade for social benefit.

The two main features that distinguish CICs from ‘normal’ companies are the asset lock and the Community Interest Statement and Report. Under the asset lock provisions, the assets and profits must be permanently retained within the CIC, and used solely for community benefit, or transferred to another organisation which itself has an asset lock, such as a charity, or to another CIC. For instance, a charity could form a CIC to be its “trading arm” and this CIC could then transfer all its surpluses to the charity. Please note that existing charities can convert to CICs, subject to regulatory permission, but they will lose their charitable status in doing so.

With every application to form a CIC, a Community Interest Statement must be lodged, with the usual documents, seeking company registration. This Community Interest Statement, signed by all the company’s intended or actual directors, must certify that the company is formed to serve the community rather than private profit motives.

It must also describe the activities the CIC intends to engage in to further this community profit motive.

The full range of limited company forms is available to CICs, including that of a company limited by guarantee and also by shares. It is anticipated that some CICs will want to raise equity, hence the provision for the issue of shares. However, the dividends on such shares are to be controlled by a cap on returns. Initially the Secretary of State will set the cap but powers will be given to the Regulator, following consultation on this issue, to set a new cap in the light of experience.

Existing companies will be able to convert themselves into CICs by passing the necessary resolutions and submitting a community interest statement; such conversions will require the approval of the Regulator. Where the company converting to a CIC is a charity, the permission of the Charity Commission is needed for a change of name.

A CIC is a legal form with the capacity to generate surpluses for re-investment in the community. As such it is a valuable additional model for those considering creating a social enterprise. Setting up a CIC is a big step, not least because a CIC is only allowed to cease being a CIC by dissolution / liquidation or by converting to a charity. This means that once a company is a CIC it cannot become an ordinary company. The only “ways out” are:

  1. dissolving the company and ceasing to exist altogether,
  2. or converting the CIC to a charity and subjecting the company to the more onerous regulatory regime of charity law.

But if you are sure that the following key objectives apply to your organisation the CIC may well be the legal model for you. If you are in doubt about any of them think twice before taking steps towards forming, or converting, to a CIC. In any event consider the full list of major considerations below and bear them in mind before going any further and be sure to take professional advice where needed.

In general any organisation, or individual, that has formed or intends to form a company and is prepared to accept the special features and restrictions can form or convert to a CIC, subject to meeting the community interest test. However, there are restrictions:

  1. A charitable company cannot be CIC it would have to give up its charitable status.
  2. Companies that engage in activities which a reasonable person might consider only benefit the members of a particular body or the employees of a particular employer will not satisfy this test.
  3. Political parties and pressure groups (or companies owned or controlled by them) cannot become CICs.
  4. A Charitable company registered in Scotland or Northern Ireland cannot apply for CIC status (giving up its charitable status in the process) until the necessary legislation comes into force.

A CIC must be a limited company. It can either be incorporated as a company or an existing company can be converted to a CIC. However, all CICs share certain special features and are subject to certain restrictions.

If an existing organisation, which is not a limited company, wishes to convert to a CIC it will have to become a company first. In many cases a more practical course may be to form a new CIC to which it can transfer its assets and liabilities. Some organisations may find it impracticable (for example, because of the financial implications of losing charitable status if they are charities), or legally impossible (for example, because of insuperable barriers in their existing constitutional arrangements) to become a CIC. These are important issues and will almost certainly require detailed professional advice.

DEFINING “COMMUNITY” IN COMMUNITY INTEREST COMPANY

The essential feature of a CIC is that its activities are carried on for the benefit of the community and it is therefore important that before creating a CIC you have a clear picture of the community you intend to serve. A community for CIC purposes can embrace either the community or population as a whole or a definable sector or group of people either in the UK or elsewhere. The Act provides that for the purposes of the community interest test, “community” includes a section of the community. The Regulations state that any group of individuals may constitute a community if they share a readily identifiable characteristic which is not shared by other members of the community of which that group forms part.

CHARITIES (ENGLAND AND WALES) CONVERTING TO COMMUNITY INTEREST COMPANY STATUS OR VICE VERSA

The Companies (Audit, Investigations and Community Enterprise) Act 2004 specifically excludes the same body from being both a CIC and a Charity. It is possible for a CIC to have wholly charitable purposes, but such a CIC will not be entitled to charitable status. A charitable company registered in England or Wales may convert to a CIC with the consent of the Charity Commissioners. In so doing it will lose its charitable status, including tax advantages [See Chapter 4 and CAICE Act 2004 s.39]. A CIC may convert to a charity in which case it would cease to be a CIC. It would then be fully subject to the charity regulatory regime. On the other hand a CIC may have wholly charitable purposes and be entitled to charitable status, but may not want to be subject to the regulatory requirements associated with being a charity regulated by the Charity Commission, or to be subject to the charity jurisdiction of the High Court. A CIC may pass its assets and profits to a charity as they are both asset-locked bodies and may nominate a charity to receive its surplus assets if the CIC is liquidated or dissolved.

CHARITIES CONSIDERING SETTING UP A CIC SUBSIDIARY COMPANY

If you are a charity and considering setting up a CIC subsidiary company you should consider the following advice from the Charity Commission:

  1. The financial structures of the charity and the subsidiary trading company ought to be kept separate.
  2. The separate identities of the charity and the subsidiary trading company should be made clear in all publicity material and, in dealings with suppliers.
  3. The names of the charity and the subsidiary trading company should be distinguished from each other to prevent confusion between the activities of the two organisations.
  4. The charity must not settle the debts of the subsidiary trading company.
  5. The charity should not feel any moral obligation to fund the subsidiary trading company.
  6. Any financial support the charity can give to the subsidiary trading company including non-cash commitments (eg staff, office space and equipment) should be carefully assessed.
  7. The charity buying stock and donating it to the subsidiary trading company should be avoided.
  8. Plan for the subsidiary trading company to be financially viable as soon as possible. Normally, this will be within its first 5 years of operation. The need to obtain the Commission’s authority to any proposal for a lease of property by a charity to a subsidiary trading company.
  9. To ensure that investment in a subsidiary trading company is a qualifying investment for tax purposes. To ensure that at least one person who is a trustee of the charity is not a director of the trading company, and at least one person who is a director of the trading company is not a trustee of the charity. Those without dual interests can be expected to give suitable advice in a conflict of interest situation. This should reduce the risk of transactions between the charity and the company being challenged, or questioned.
  10. A charity trustee cannot be paid for his services as a director, or employee, of the subsidiary trading company (or, of course, as an employee or trustee of the charity) unless the governing document of the charity specifically provides for this. In addition to the above, the trustees must be aware of what rights ownership of shares in the subsidiary trading company will give to the charity (or themselves).

COMMUNITY INTEREST COMPANY NAMES

Before choosing the name of your proposed CIC you should consult the Companies. Companies (Audit, Investigation and Community Enterprise) Act 2004 requires that a CIC must have a name ending with one of the prescribed designations.

Companies that are not CICs must not use these designations and there are criminal penalties for misuse of these designations.

The designations are: Public Companies community interest public limited company or community interest p.l.c. Other companies community interest company or c.i.c. Incorporating a new Community Interest Company Setting up a company brings many obligations.

Before proceeding you are recommended to take professional legal, or accountancy, advice on whether a limited company, in the form of a CIC, is the best way to run your enterprise.

THE DOCUMENTS YOU NEED TO DELIVER TO FORM A NEW CIC

To form a new CIC you need to deliver the following documents to the Registrar of Companies for England and Wales, in Companies House, Cardiff or the Registrar of Companies for Scotland in Edinburgh, or to Registrar of Companies for Northern Ireland:

  1. MEMORANDUM AND ARTICLES OF ASSOCIATION that comply with the Regulations A FORM CIC36. This contains the community interest statement. The purpose of the community interest statement is to confirm that the company will provide benefit to the community. It does this by describing its intended activities who they will help and how. The community interest statement is an important element in the Regulator’s consideration of the company’s eligibility for CIC status. The form CIC36 contains explanatory notes, which you should read carefully before completing the form. Each person who will be a first director of the company must sign this form. The form contains the following: - A declaration that the company will not be: A political party; a political campaigning organisation; or a subsidiary of a political party or political campaigning organisation. - A declaration that the company will pursue activities for the benefit of the community, or section of the community. - A description of the community or section of the community that the company’s activities will benefit. - A description of the companies activities. - A description of how the activities benefit or will benefit the community. - A description of how any surpluses will be used.
  2. A FORM 10 (or FORM 21 in Northern Ireland), which requires details of the first directors, company secretary and address of the Registered Office.
  3. A FORM 12 ( or Form 23 in Northern Ireland), which is a statutory declaration of compliance with the legal requirements for formation of a company.

THE EFFECT OF INCORPORATION

Changes take effect on the date that the Registrar records the resolutions. The Registrar will also issue a new certificate of incorporation stating that the company is a CIC. All copies of the memorandum and articles of association issued by the company after the resolutions take effect must be in the revised form submitted to the Registrar on conversion.

FID Trust Information is a registered agent for Company formation in the United Kingdom and not only guides you through the entire process, it also checks all the entered data.

Please contact us by telephone 0207 439 3400 (0044 207 439 3400 – International) or E-mail if you wish to incorporate Community Interest Company.