Community interest companies (CICs) are limited companies with a number of additional features and regulations, created for those who want to conduct a business for the community benefit and not purely for private advantage. This is achieved by a community interest test and asset lock which ensures that the CIC is established for community purposes and the assets and profits are dedicated to those same goals.
The UK Governments stated objectives when drawing up this new legal model were to improve access to finance, create a strong new brand, provide protection from demutualisation (investors changing the aims and nature of the company) and preserve assets and profits for social purposes.
CICs will generally be structured as either a company limited by shares (CLS) or a company limited by Guarantee (CLG) although in practice the majority of CIC's register as the latter.
Setting up a CIC
When registering your company with Companies House, you will need to provide additional documents, including a community interest statement describing your social purpose. The CIC regulator will approve your application if your statement passes the community interest test - ie the business activities you intend to undertake will be carried out for the benefit of the community or a section of it. The test is whether a reasonable person could consider those activities to benefit the community.
Features of a CIC
CICs have to follow specific rules, including the following:
Asset lock
CICs must have an asset lock. This ensures that the company cannot generally transfer its profits or assets for less than their full market share. The exception being a transfer to another asset locked company such a charity or other CIC. It will also protect any remaining assets for the community if you dissolve the CIC. The lock is legally enshrined and cannot be removed under any circumstances.
Dividend Cap
If you set up your CIC as a company limited by shares, you will have the option of issuing shares that pay a capped dividend to investors. The cap is set by the CIC Regulator to protect the asset lock and strike a balance between encouraging people to invest in CIC's and the principle that the assets and the profits of a company should be devoted to the benefit of the community.
There are three elements to the Dividend Cap:
1. maximum dividend per share limits amount of dividend that can be paid on any given share. Currently the limit is a flat rate of 20% of the paid up value of the share.
2. The maximum aggregate dividend limits the total dividend declared in terms of the profits available for distribution. Currently, the limit is 35% of the distributable profits.
3. The ability to carry forward unused dividend capacity from year to year to a limited extent. Currently the limit is 5 years.
It should be noted that these caps set maximums. They should not be taken as in any way suggesting that those who invest in CICs are entitled to a particular rate of return on their investment.
Performance Related Cap
CIC will generally have the same borrowing powers as any other company. On rare occasions the situation will arise were the interest payable on debts or debentures is linked to the performance of the CIC (also known as quasi equity). The ability to pay uncapped interest in this fashion would circumvent the Dividend Cap.
Therefore a cap exists on the maximum interest payable. It has been set as 10& of the average amount of a CICs debt or sum outstanding under a debenture.
Accounting
Together with your annual accounts, you must present an annual community interest company report for public record. The report must show what the CIC has done during the year to pursue its pre-specified community interests.
Whilst take up of the CIC structure has been relatively muted in Northern Ireland the structure does appear to have struck a chord with many social entrepreneurs and is unquestionably a useful addition to the social enterprise sector.
For further information see the CIC Regulator website: http://www.cicregulator.gov.uk/
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