Community Interest Companies explained

Fri 14th May 2010

If an organisation wishes to establish a business for the benefit of the community, a CIC provides an attractive method to do so. It enjoys the flexibility of selecting one of the company structures: private or public, limited by shares or by guarantee.

As the basic structure of a CIC is a company, it enjoys the characteristics of a limited company. The CIC will therefore be a separate legal entity and those involved will have limited liability. The CIC will also be able to own assets in its own right and can enter contracts in its own name.

A CIC is incorporated in the same manner as a normal company. However there are additional hurdles that also must cleared. One significant hurdle is that in order to be a CIC it must pass the “The Community Interest Test”. This test requires approval from the CIC Regulator that a reasonable person might consider that the CIC’s activities are or will be carried on for the benefit of the community.

Therefore in addition to the normal incorporation documents, every CIC will also be required to produce a Community Interest Statement. It is very important to get this right as it provides the foundation to the CIC’s constitution.

Once incorporated, a CIC is to use its assets, income and profit for the benefit of the community. In order to ensure compliance with this, the CIC is bound by regulations that must be carefully considered. The most significant restrictions for a CIC are as follows:

  • The Asset Lock. This ensures that the assets are retained within the company. Assets, once within the CIC, must be transferred at full market value or instead given to another CIC or charity. Therefore any party dealing with the assets of a CIC, and the CIC itself, must be very careful not to infringe its constitution.
  • This also has consequences in the event that the CIC is wound up. Any assets that are then within the CIC must again be distributed to other CICs or charities.
  • There are also limits on the amount of dividends payable. This limit also applies to interest that a CIC can charge.

Forming a CIC provides a useful and increasingly popular method to support social enterprises. However it has significant and permanent implications. It is advisable therefore to seek legal advice not only in the incorporation of a CIC but also the consequences of incorporation.

Coodes incorporate CICs with costs starting from £350 plus VAT and Companies House charges. For more advice please contact Christian Wilson or Alex Tomlinson in our Corporate Department.

Coodes advise on a wide spread of company and commercial matters. We can help with the formation and governance of companies and other business structures. We also advise on commercial agreements and Intellectual Property matters (Trademark, Copyright and Patents) including licensing and transferring of these rights.

Fri 14th May 2010

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