https://communityinterestcompanies.blog.gov.uk/2018/02/22/thinking-of-funding-a-cic-make-an-informed-decision/

Thinking of funding a CIC? - make an informed decision!

If you are thinking of funding a CIC, then read on!  CICs are the untold success story of company regulation and social enterprise over the past 12 years!

What is a CIC?

The CIC model allows companies to compete in the commercial world while demonstrating that they have a commitment to social change.

So, what makes a CIC different to an ordinary company? Well, although it is incorporated under the Companies Acts, it must also adhere to CIC Regulations.

They also have extra reporting requirements to ensure that they fulfil their community purposes. Directors’ pay must be transparent and an annual community interest company report (form CIC34)  must be placed on public record.

A CICs additional obligations are:

  • to continue to meet the community interest test – by demonstrating that the company’s activities are being carried on for the benefit of the community it was set up to serve
  • to adopt certain statutory clauses in its constitution (this includes a clause to lock in the assets to providing benefit to the community)
  • to deliver an annual community interest company report about the CICS activities throughout the financial year and particularly the benefit provided to the community

These features make the model particularly attractive to funders interested in organisations working and providing benefit to the community.

The community interest test

All CIC applications must pass the community interest test. The Case Manager will look at the motivation of the company and its underlying purpose:

  • what it is going to do?
  • what will it do with any surplus it makes?
  • who it is going to help and how?

It is only when the Regulator is satisfied that the company’s main purpose is to benefit the community it will be set up to serve that she will approve the application and ask the Registrar of Companies to incorporate the company as a CIC.

The CIC must continue its community purpose from incorporation to dissolution, or if it converts to a charity. If a CIC were to dissolve, any surplus assets will be preserved for the community rather than distributed to members.

Statutory clauses and the asset lock

A CIC has statutory clauses that are enshrined in a CICs Articles of Association. These ensure that there is legal protection to prevent the company owned by its members converting into a company owned by shareholders. It also stops “windfall profits” being paid out to members and directors.

The “asset lock” clause ensures that assets are used only for the benefit of the community. Other companies can set up asset locks, but there is always a possibility that the asset lock could be removed by its members. Not so with a CIC, this is one of the mandatory clauses and can never be removed!

Transparency and the CIC report

The annual CIC report, which is filed on the form CIC 34, provides transparency of operation as anyone can access it from Companies House. The report provides information about:

  • any assets transferred for less than market value
  • any directors’ payments
  • how stakeholders were involved and outcome
  • the benefit provided to a community

The purpose of the report is to show that the CIC is still satisfying the community interest test, and that it is engaging appropriately with its stakeholders in carrying out activities that benefit the community.

The Regulator encourages CICs to give as much detail as possible in the reports, for example, they should outline how the they have ensured that the assets have been solely used for the benefit of the community the CIC serves.

CICs limited by shares

This can be a sticking point for funders. You may feel that your organisation could never approve funding for a company limited by shares but CICs that choose this model are a very different beast compared to the ordinary limited company!

CICs limited by shares are subject to a dividend cap. This means that 65% of all a CICs surplus profits must be used for community purpose and just 35% can be used to pay dividends to their shareholders.

A CIC can also ring fence any funding that it has been awarded to give assurances that it will be used for the purpose in which it was intended rather than being used for the benefit of its shareholders.

The importance of funding CICs 

Funding opportunities are important for CICs and are enabling them to grow and compete successfully against private limited companies, while demonstrating their full commitment to providing community benefit.  The amount of CIC growth and business success has surpassed all  expectations and has continued steadily for the last 12 years. We are confident that CICs will continue to be the social enterprise of choice for businesses who want to succeed and be profitable.

 

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