Background to CICs
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.

Who is ‘The Community’?
The Act, taking a sensible and pragmatic approach to this question, says a company satisfies the community interest test if a reasonable person might consider the activities the CIC is undertaking are being carried on for the benefit of the community. The Regulator must decide whether applicants for CIC status satisfy this test. His decisions are subject to review by an Appeals Officer (appointed by the Secretary of State).

‘Community’ for the purposes of a CIC must be wider than the members of the CIC. It must also be wider than the employees who work for the CIC; there has to be a wider community benefit than benefit to members and employees of the company.

The Regulations made under the Act provide 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.

Who might form a CIC?
The CIC 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 distinction the CIC confers, clearly differentiating their philanthropic work from the pursuit of profits for the social good, is valuable to them. Charities barred in general from ‘trading’ have had to go through often difficult and expensive processes to separate these two distinct activities in the past. Even then the mechanisms used have not always been sufficiently watertight to secure profits made for the continuing public good.

CICs, which can be established at modest costs, and which safeguard the assets for community benefit, may be attractive propositions for such charities. The charity sector, as most of us recognise it in daily life, covers many different organisations, some 180,000 of which are registered as registered charities with the Charity Commission; there are many unincorporated bodies running recreational, village and 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 principles of Company Law, protecting those who run them at the same time!

New charities forming each year (currently estimated at some 6,000 a year) may decide to form CICs if they want to pursue trading activities, or if they hold real property. In such 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 to CICs).

The new breed
CICs are not just conceived as an adjunct to charities law. With their simplified regulatory regime, the asset lock to provide donor, investor and public confidence, and the yearly social reporting, CICs could prove attractive to a new breed of social entrepreneurs. Under the CIC model, those with the drive to establish trading concerns of social value can keep operational control of what they create. CICs will also be able to pay directors.

On the payment of CIC 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”.

John Hanlon,
Community Interest Company Regulator
23 May 2005.

Further questions on CICs

1. When can CICs be registered ?
You have been able to register CICs from July 2005.

2. Who will decide whether a company can be a CIC ?
The CIC Regulator will consider whether applications meet the criteria
to become a CIC. If satisfied, the Regulator will inform the Registrar in
Companies House who, providing all the documents are in order, will issue a
certificate of incorporation as a CIC.

3. Are there any definite exceptions to being able to form as a CIC ?
Yes, a CIC cannot be formed by any company that is a political party, controlled
by a political party or engaged in defined political activities.

4. Which company forms can a CIC take ?
A CIC can choose from one of three company forms: a private company limited by shares, a private company limited by guarantee or a public limited company.

5. What about CIC names ?
A CIC must have a name ending in one of the prescribed designations. For public limited companies these are ‘community interest public limited company’ or ‘community interest p.l.c.’ For other companies use ‘community interest company’ or ‘c.i.c.’

Companies with a registered office in Wales may use the prescribed Welsh
alternatives. For public limited companies these are ‘cwmni buddiant cymunedol cyhoeddus cyfyngedig’ or ‘cwmni buddiant cymunedol c.c.c.’ For other companies use ‘cwmni buddiant cymunedol’ or ‘c.b.c’. These designations must not be used by companies which are not CICs.

6. What are the fees for CICs ?
Incorporation £35
Conversion £25
Conversion involving change of status (Re-registration) £35
Change of status £20
Name change £10
Annual Return (Paper) £30
Annual Return (electronically) £15
Annual Accounts (and Community Interest Report) £15
Dissolution (Voluntary) £10

7. How do I incorporate as a CIC ?
A CIC can be registered at Companies House in the same way as a normal
company with the same incorporation documents (link to ‘Incorporating a
Company’). There are however additional incorporation documents for CICs – a
community interest statement and a declaration that the company will not be an
excluded company.

8. What is a Community Interest Statement ?
This is one of the documents that must be filed on formation of or conversion to a
CIC. It must be in the form approved by the CIC Regulator who will publish an
approved format for further guidance.

The statement, which must be signed by all of the directors (or intended directors)
is required to confirm that the company will serve the community rather than
operate for private profit motives. It must also describe the intended activities of
the company.

9. What is an Excluded Company Declaration ?
This is one of the documents which must be filed on formation of (or conversion
to) a CIC. It must be in the form approved by the Regulator who will publish an
approved format for further guidance.

The declaration, which must be signed by all the directors (or intended directors) is
required to confirm that the company will not be an excluded company i.e. will not
be a political party or pressure group or controlled by a political party or pressure
group.

10. Can I register a CIC electronically ?
Initially it will not be possible to register a CIC electronically although some CIC documents can be filed by these means. We will be aiming to make electronic registration of CICs available in the future.

11. Can I incorporate a CIC in Welsh ?
Yes, a CIC can be incorporated in Welsh. Welsh versions of Forms 10 and 12 are available on the Companies House website as for all companies. Welsh versions of the Community Interest Statement and Excluded Company Declaration can be found on the CIC website at www.cicregulator.gov.uk (this website is currently under construction and should be more fully developed by late June).

12. Will there be any differences to CICs Memorandum & Articles of Association ?
Yes, the Memorandum must contain a statement that the company is a
Community Interest Company. For a company to be eligible to be a CIC, the
Memorandum & Articles of Association must comply with the detailed
requirements of the CICs Regulations. These are concerned with the preservation
of the asset lock and other essential CICs features.

13. Where can I find example Memorandum & Articles of Association for CICs ?
There is detailed guidance on Memorandum and Articles of Association on the CIC website on www.cicregulator.gov.uk

14. What if a CIC wishes to change its objects ?
If a CIC wishes to amend its objects, it may pass a special resolution to change its
Memorandum and send a copy of it together with a community interest statement,
a statement of the steps taken to bring the proposed alteration to the notice of
persons affected by the company’s activities and a copy of the memorandum as
altered to the Registrar for registration.

The Registrar will refer the documents to the CIC Regulator for approval of the
alteration. If approved, the Registrar will record and register the documents.
The Regulator will only approve a change if it meets the community interest test.

15. Does a CIC need to file any additional documents once it’s been incorporated ?
Yes, a CIC will be required to file with its accounts an annual community interest
report which will be placed on the public record at Companies House and will be
copied to the CIC Regulator.

16. What will need to be included in the annual community interest report ?
The report will need to include details of the remuneration of the directors, the
dividends paid on shares and the interest paid on capped loans. It will also need to
explain what the CIC has done to benefit the community and how it has involved
its shareholders in its activities.

17. Where can I find examples of this annual report ?
Examples of suitable reports will be made available on the CICs website at
www.cicregulator.gov.uk (this website is currently under construction and should
be more fully developed by late June).

18. How can I convert an existing company to a CIC<br> ?
You must first pass 3 special resolutions to:
i) alter the company Memorandum to state that it is a CIC;
ii) alter the Memorandum and Articles of Association to conform with the requirements for a CIC; and
iii) to change the name of the company to one of the CIC designations.

The company must deliver these resolutions to the Registrar having allowed a prescribed period for members to raise objections.

You will also have to send the Registrar: a community interest statement, a
declaration that the company will not be an excluded company and either a
declaration that the company is not a charity or, if it is a charity, a statement that
the Charity Commission has consented to the company changing its name.

19. How can a company cease to be a CIC ?
A company can cease to be a CIC only by dissolution (which may follow
liquidation) or by conversion to a charity. In both cases the CIC Regulator will
need to be satisfied that the proper procedures have been followed and that the necessary resolutions have been passed by the CIC.

20. What happens to the assets if a company ceases to be a CIC ?
To protect the asset lock, the Regulator must be satisfied that any surplus assets
(subject to any allowable return to investors) are transferred in a way which
ensures that they continue to be retained for community interest or charitable
purposes rather than distributed to investors.

For any further queries in respect Community Interest Companies please
telephone 02920 346 228 or refer to the Community Interest Company website
at www.cicregulator.gov.uk