In good company

Introduction to community interest companies as a new type of company established to trade for the community good

The Journal, September 2005, page 41

Community interest companies (“CICs”) are a new type of company 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 provide the legislative framework.

CICs, and the need for them, were subject to a wide-ranging consultation and discussion with the fast-growing social enterprise sector. The overwhelming response was that they are a welcome addition to the options for those who wish to trade for social benefit reasons.

The two main features that distinguish CICs are the asset lock and the community interest statement and report. Asset lock means that assets and profits must not be transferred for less than full consideration, unless for the benefit of the community. Usually this will be a transfer to another organisation which has an asset lock: for instance, a CIC formed by a charity as its trading arm could transfer all its surpluses to the charity.

Becoming a CIC

With every application to form a CIC, a community interest statement must be lodged with the usual documents seeking company registration. This statement, signed by all the intended or actual directors, must certify that the company is formed to serve the community rather than private profit motives. It must also describe how the CIC intends to further this purpose.

In most respects, CICs will be ordinary companies limited by shares (dividends will be subject to a cap) or by guarantee, regulated by Companies House. However, a separate Regulator of Community Interest Companies will decide whether companies are eligible to become CICs, offer guidance (see www.cicregulator.gov.uk), and take action where appropriate to maintain public confidence in CICs.

Existing companies will be able to convert to CICs by passing the necessary resolutions and submitting a community interest statement; such conversions will require the approval of the Regulator.

A CIC cannot be a charity, even if established for wholly charitable purposes. However, subject to the consent of the relevant charity regulators, CICs can become charities (thereby losing CIC status), and existing charitable companies can become CICs (Scottish charities will have to wait until the Charities and Trustee Investment (Scotland) Act 2005 comes into force).

Who is “the community”?

The Act states that a company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community or a section of the community. The Regulator must decide whether applicants satisfy this test. His decisions are subject to review by an Appeals Officer (appointed by the Secretary of State).

The legislation provides that any group of individuals may constitute a section of the community if (a) they share a readily identifiable characteristic; and (b) other members of the community of which this group forms part do not share that characteristic. “Community” must be wider than the members or employees of the CIC itself.

Who might form a CIC?

The CIC, which can be established at modest cost, is flexible. It may prove attractive to many different enterprises, of varying size and activity. Some existing charities that operate a trading arm may decide that the ability it offers to differentiate their philanthropic work from the pursuit of profits for the social good, is valuable. Charities barred in general from trading have had to go through often difficult and expensive processes to separate these activities in the past.

There are also many unincorporated bodies running recreational or community facilities (many with valuable heritable assets) which may see incorporation as a CIC as helping to protect these assets, and through the limited liability principle, protecting those who run them at the same time.

In some cases, there may be a delicate balancing act to perform, weighing up the possible advantages of forming a CIC against the disadvantage of failing to attract the tax concessions open to registered charities. There are no special tax advantages in being a CIC (though specific regional relief and access to Lottery and other funding may be open by virtue of their location or the nature of their activities).

The new breed

The CIC is not just conceived as an adjunct to charities law. It is also intended, with its simplified regulatory regime, the asset lock to provide donor, investor and public confidence, and the social reporting on a yearly basis, to prove attractive to a whole new breed of social entrepreneurs. Under the CIC model, those with the drive to establish “social worth” trading concerns can keep operational control of what they create.

CICs will also be able to pay directors. The Regulator has stated: “By being able to pay directors, CICs should be able to attract high quality wealth creators, paying them reasonable salaries, giving them immense job satisfaction, and the opportunity to put their talents to making profits for the public good”.