Community Interest Companies – benefits and challenges of CICs

For some, starting their own business is an opportunity to help a community and give back, providing valuable solutions while also reaping the benefits of being their own boss.

One way a budding entrepreneur could do this is to start a Community Interest Company, a limited company that exists to benefit a community or social purpose.

A CIC can be incorporated to support any public or community issue, from mental health assistance to housing services for people made homeless.

All CICs are a type of limited company, but you can choose to structure them as either limited by shares or by guarantee.

A CIC might be the right option if you’re on a mission to benefit the local community, deliver solutions to improve quality of life, or tackle environmental issues.

What is a CIC – Community Interest Company?

A Community Interest Company (CIC) operates to benefit the community or environment rather than simply making profits for its owners and shareholders.

Designed specifically for social enterprises, the structure supports activities from small local community projects to large-scale, multi-million-pound services.

2022-2023 saw a 12% increase in the number of CICs in the previous year, with 6,056 new CICs incorporated in the UK.

The Office of the Regulator of Community Interest Companies monitors and regulates CICs to ensure they operate in the community’s interest.

Read more about setting up a social enterprise and a CIC.

What’s the difference between a CIC and a charity?

A Community Interest Company (CIC) and a charity are both organisations aimed at benefitting the community, but they operate differently.

A CIC is a type of limited company created to conduct business for community benefit, not private advantage; while it can generate profits, these must be largely reinvested back into the business to meet its social objectives.

On the other hand, a charity exists primarily for public benefit and is restricted in its ability to conduct trade.

Unlike a CIC, a charity cannot distribute profits; all income must be used to further its charitable purposes, but charities can enjoy certain tax advantages that CICs do not, although they must comply with stricter regulations.

How are CICs regulated?

Community Interest Companies are regulated by the Office of the Regulator of Community Interest Companies, which is a regulatory body specifically designed to meet the needs and requirements of CICs.

The Regulator's role is to decide whether organisations are eligible as CICs, to investigate complaints about CICs and to provide guidance about matters relating to CICs.

It also oversees the application of the asset lock, a legal promise that the company’s assets will only be used for its social objectives and limits the money that can be paid to shareholders.

In addition to this regulation, CICs must also file annual accounts and reports with Companies House, similar to other limited companies.

These accounts should provide a transparent picture of the CIC’s financial position and activities.

The process ensures that CICs maintain their legal obligations and commitment to community benefit, improving their credibility and increasing public trust.

Benefits of starting a CIC

CIC structures can provide several benefits for your social enterprise start-up over other structures.

Commitment to social goals

While any business can claim that they’re using their product or service for the greater good of the community, CICs and charities are required to have and maintain a clear social mission.

Implementing a CIC structure for your start-up could assure the public, consumers, and investors of your social objectives.

Access to finance

Business finance options for CICs differ from that of traditional limited companies, which can affect how it is funded.

More donors and investors may contribute financially to a CIC if they are assured that their donations will support the business’s social purpose rather than pay shareholders.

CICs can obtain funding through grants from social enterprise funds, ethical investors, or specific social finance institutions.

Quick and easy to set up

While generally quicker to set up than a charity, CICs require careful planning and adherence to specific regulatory requirements.

It involves sending an online application form to Companies House with a filing fee – the Government’s CIC page has step-by-step instructions for completing the form.

Limited liability

CICs are limited companies, meaning the business is a separate legal entity, typically protecting directors from personal liability for debts, except in cases of wrongful trading or other breaches of duty.

This protects personal assets, such as the director’s home, savings and other assets against company debts or failure.

Learn more about how to set up a limited company with our guide.

Asset lock

Fundamental to a CIC, the asset lock guarantees that the business assets are used for the community.

The asset lock ensures that the CIC’s assets, including any surplus profits, are either reinvested in the company or transferred to another asset-locked body if the CIC is dissolved.

If the CIC is dissolved, any assets will go to a similar CIC company to continue the mission and will not be shared as profit.

Challenges of starting a CIC

A CIC structure may not be suitable for every business, and it pays to be aware of the potential challenges if going down the CIC route.

Limited public knowledge

Customer awareness can be quite low as CICs are less well-known business structures.

This lack of understanding may impact the number of donors, investors, or volunteers interested in your business.

Individuals may feel more comfortable donating to a charity because they are more familiar with charity funding.

Taking a transparent approach to your business may increase public awareness and help them learn about how your business funds the community.

Limited access to some funding

Different structures are eligible for different types of funding, schemes, and finance options, so having a CIC may limit your funding and support options.

Governance requirements

A CIC must report annually to the Companies House, HMRC, and the CIC regulator, who has the authority to investigate your CIC and take action if they have any concerns.

Concerns may include breaching regulations, such as not supporting the cause it set out to help.

Cannot be converted

A CIC cannot be directly converted into another business structure.

If a change is needed, the CIC must be dissolved, with assets transferred according to the asset lock, before establishing a new structure.

Fewer tax breaks

CICs have fewer opportunities for tax relief than charities that can claim tax relief in different areas, regardless of whether all of their profits go towards social purposes.

Business rates and taxes may also take a large chunk of money from the company income.

Promoting your CIC may be a good way to get funding to help combat some of the disadvantages.

The more the public is aware of your cause as a CIC, the more they may understand and be willing to donate.

How to set up a CIC

Setting up a Community Interest Company involves certain key steps and requirements:

1. choose a name and address – your CIC will need a unique name which is not similar to that of any existing company; it must also have a registered office address in the UK.
2. define the company structure – decide whether your CIC will be limited by shares or by guarantee; this will determine how the company can raise money and how it is run.
3. prepare ‘Articles of Association’ – this is a document that sets out the rules for running the company, agreed by the shareholders or guarantors, directors, and the company secretary.
4. draft a ‘Community Interest Statement’ – you will need to prepare this statement to explain what your CIC plans to do and how these activities will benefit the community.
5. decide on directors and a company secretary – your CIC will need at least one director, who is responsible for managing the company; having a company secretary is optional, but they could assist with administrative duties.
6. keep necessary records – this includes details about the company, its directors, and company secretary, and the minutes of meetings; you will also need to maintain a register of ‘People with Significant Control’ (PSC).
7. register your CIC – after preparing all necessary documents, you can register your CIC with Companies House; this involves completing the IN01 form and the CIC36 form detailing your community interest statement.

Remember that the CIC Regulator must approve your application and that CICs have annual reporting obligations to both the CIC Regulator and Companies House.

Funding a CIC

Several options are available to entrepreneurs who want to start a Community Interest Company.

Typical options might include loans, such as bank loans or friends and family loans – potentially good options for those who need a lump sum quickly and may be able to repay over time in accordance with a clear business plan.

You could also consider a government loan, like those offered by Start Up Loans.

Start-Up Loans is a government-backed loan scheme in which budding entrepreneurs can receive a personal loan of up to £25,000 with a fixed interest rate and a free year of business mentoring and supports CIC funding.

You may also be able to secure grants for trusts or foundations created specifically for social enterprises, which do not need to be repaid.

Crowdfunding is another popular method, using the CIC’s community focus to appeal for public support.

This not only raises funds but also builds engagement and awareness of your cause and organisation.

Each option is very different, and not every option may be suitable for your CIC, so it is a good idea to conduct some thorough research before committing to a funding option.

Alternatives to CICs

If you want to establish a social enterprise, there are several alternatives to Community Interest Companies (CICs), each with its own benefits and drawbacks:

• sole trader – this is a simple, straightforward business structure where the individual and the business are considered one entity; the setup is easy and requires less paperwork, but a potential downside is that you may have unlimited personal liability for any business debts.
• limited company – a limited company is a separate legal entity from its owners and offers limited liability protection; it requires more administration and stringent financial reporting but could project a more professional image and could be tax-efficient.
• partnership – partnerships are formed when two or more people share the ownership of a business; although it allows for shared control and decision-making, each partner is equally liable for business debts.
• charity – a non-profit entity with the purpose of benefitting the public; it can offer significant tax advantages, but it can face strict regulation and cannot distribute profits to its founders or trustees.
• cooperative – owned and run by its members, it promotes democratic decision-making, and profits are shared amongst members; however, decision-making and growth could be slower because of its democratic nature.

Not all structures may suit all community business ideas, so you might want to carefully consider your objectives and funding sources before making a decision.

Learn more in this detailed guide to business structures.