In the UK, the landscape of social entrepreneurship is punctuated by various legal structures designed to facilitate the operation of businesses with a conscience. Among these, the Community Interest Company (CIC) stands out as a relatively new vehicle tailored for social enterprises that aim to benefit the community rather than private shareholders. Since their introduction in 2005 under the Companies (Audit, Investigations and Community Enterprise) Act 2004, CICs have been serving as a bridge between traditional for-profit businesses and charitable organizations.
Definition and Purpose
A Community Interest Company (CIC) is a type of limited liability company created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage. This is achieved by a “community interest test” and “asset lock”, which ensure that the CIC is established for community purposes and the assets and profits are dedicated to these purposes.
Characteristics of a CIC
Community Interest Test
To qualify as a CIC, an enterprise must pass the community interest test. It must demonstrate that its activities are carried out for the benefit of the community. The definition of ‘community’ can be broad and can refer to a specific geographic community or a community of individuals with common interests.
Asset Lock
An integral feature of a CIC is the asset lock. This is a legal promise that the company’s assets will be used for the community purpose it was set up for, and protects the assets from being sold or used for private gain, should the company be wound up or undergo significant changes.
CIC Regulator
CICs are subject to regulation by the CIC Regulator, who has a responsibility to ensure that CICs adhere to their community focus and do not deviate towards serving private interests. The regulator has powers to investigate and take action against CICs that do not comply with the legislation.
Limited Liability
Like any other limited liability company, a CIC protects its members and directors against personal liability for the company’s debts, as long as they operate within the law.
Reporting
CICs must submit an annual report to the CIC Regulator, detailing how they have engaged with the community and how their activities have benefitted the public. This report is in addition to the usual financial reports required of limited companies.
Types of CICs
CICs can be either limited by shares or limited by guarantee:
- CICs limited by shares: These are similar to conventional companies and are owned by shareholders. The difference lies in the dividend cap, which restricts the level of profit distribution to shareholders, ensuring that the primary focus remains on community benefit.
- CICs limited by guarantee: These do not have shareholders but are supported by guarantors who agree to contribute a nominal sum towards the winding up of the company. They are typically chosen when the company does not intend to distribute profits.
The Role of CICs in the UK Economy
CICs are becoming an increasingly important part of the UK economy. They serve a diverse range of sectors, from healthcare and social care to education, community development, and environmental initiatives. Their growth reflects a rising trend in social entrepreneurship, where business is seen as a means to effect social and environmental change.
Conclusion
Community Interest Companies represent an evolution in the world of business, reflecting a broader societal shift towards values-led capitalism. They offer a unique solution for social entrepreneurs to pursue a profit-making business with a heart, ensuring that the fruits of their endeavours are reinvested in the communities they serve. As this business model continues to mature, it promises to play a significant role in fostering a more inclusive and responsible economy in the UK.
FURTHER READING
How to register a community interest company – A Step by step guide.
What are the advantages and disadvantages of a community interest company?
How we registered the first CIC online with Companies House.