News & Views

CIC or CIO - Choosing the right community business model

Whether your community business is for the benefit of your local community as a whole or a specific group of people, the interests of others will always be at the heart of your organisation. Ensuring that you have the right corporate vehicle to facilitate that purpose is essential.

We have previously discussed the merits of incorporating an organisation to both create a separate legal entity as well as limit the liability of its members. Understanding the differences between a Community Interest Company (CIC) and a Charitable Incorporated Organisation (CIO) will not only help you in your decision-making process at the offset of your project but can also ensure that, as your venture develops and grows, you are still working from the best option available to serve that primary purpose. 

Community Interest Company (CIC)

A CIC is a special category of limited company which looks to provide a direct benefit to the community that the business looks to serve, whether that be a specific category of people within that community, or the community at large. CICs have their own regulator who must determine that the purpose of your enterprise passes the “community interest test”. i.e. would a reasonable person consider that your activities are/will be carried out for the benefit of the community.

One of the fundamental principles of a CIC is that it must have an “asset lock” in place, whereby the assets (including profits) of the business are used for the benefit of the community.

There are several options for the exact structure of the CIC depending on how its revenues are to be managed, including:

• CIC limited by guarantee without a share capital – i.e. a ‘not for profit company’ without shareholders and therefore does not pay dividends.
• CIC limited by shares adopting Schedule 2 articles of association – an entity which may pay dividends to specified asset-locked bodies or other asset-locked bodies, with consent from the CIC regulator (without a cap).
• CIC limited by shares adopting Schedule 3 articles of association – an entity which may pay dividends to shareholders who are not asset-locked bodies, including private investors (albeit such dividends are subject to a dividend cap).

The benefits of operating as a CIC include:

• A democratic decision-making approach, reserved to those leading the enterprise.
• It can be owned by a charity and operate as a trading arm.
• Security that all assets are for benefit of the community purpose.
• Dividends can be paid to the shareholders provided that it passes the community interest test.
• Their structure means it should be easier and cheaper to administer than a charity, reporting into Companies House and subject to the Regulator of Community Interest Companies.

Crucially, CICs are intended to benefit a community, and therefore do not have a ‘charitable purpose’ within the legal sense, and so they are not able to register with the Charity Commission. This means that CICs cannot achieve a true ‘charitable status’ and receive the benefits associated with such. Instead, CICs report to the CIC Regulator in terms of their operation, and to Companies House as a company entity.

Charitable Incorporated Organisation (CIO)

Rather than being a distinct company entity that is registered with Companies House, a CIO is special category of organisation that is only registered with the Charity Commission. A CIO is still a separate legal entity, therefore allowing its members to limit their liability, and for the entity to enter into contracts, own property etc. 

There are two types of CIO structure that can be adopted: a Foundation CIO or an Association CIO. With a Foundation CIO, the only voting members are the trustees. An Association CIO however has a wider membership, so there are voting members other than the charity’s trustees.

The benefits of operating as a CIO include:

• Receiving charitable status along with the recognition and tax benefits that can offer.
• Reduced administrative and filing requirements as the organisation is not registered on Companies House.
• Protections of charity law.
• All profits go towards the charity purpose.
• Ability to register with the Charity Commission without a financial income threshold.

Whilst traditional charitable companies had to comply with both charity law and company law requirements, CIOs only need to report into the Charity Commission, but as such do need to ensure that they comply with the necessary compliance and reporting requirements.

What action should you be taking?

Given that a CIC cannot be a charity and vice versa, then you need to make sure that you choose the right corporate vehicle that matches your core purpose and offering. If you are already operating under one entity type, then it is possible however to convert from one entity type to another, and there is a set process and series of considerations to enable that to happen.

There are, of course, also other types of corporate vehicle available for charitable entities (such as charitable companies or charitable community benefit societies) in addition to the unincorporated structures, however, due consideration is needed to choose the right one for your business at its inception and beyond. 

For further information, please email Mark Hughes or Philip Bowers or call 0151 906 1000.