COMMUNITY INTEREST COMPANIES Background to CICs Community Interest Companies ( CICs ) are a new type of company 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 provide the legislative framework. CICs, and the need for them, were subject to a wide-ranging consultation and discussion with the fast-growing social enterprise sector. The overwhelming response was that they are a welcome addition to the options for those who wish to trade for social benefit reasons. The two main features that distinguish CICs are the asset lock and the community interest statement and report. Asset lock means that assets and profits must not be transferred for less than full consideration, unless for the benefit of the community. Usually this will be a transfer to another organisation which has an asset lock; for instance, a CIC formed by a charity as its trading arm could transfer all its surpluses to the charity. Becoming a CIC With every application to form a CIC, a community interest statement must be lodged with the usual documents seeking company registration. This statement, signed by all the intended or actual directors, must certify that the company is formed to serve the community rather than private profit motives. It must also describe how the CIC intends to further this purpose. In most respects, CICs will be ordinary companies limited by shares (dividends will be subject to a cap) or by guarantee, regulated by Companies House. However, a separate Regulator of Community Interest Companies will decide whether companies are eligible to become CICs, offer guidance (see www.cicregulator.gov.uk), and take action where appropriate to maintain public confidence in CICs. Existing companies will be able to convert to CICs by passing the necessary resolutions and submitting a community interest statement; such conversions will require the approval of the Regulator. A CIC cannot be a charity, even if established for wholly charitable purposes. However, subject to the consent of the relevant charity regulators, CICs can become charities (thereby losing CIC status), and existing charitable companies can become CICs (Scottish charities will have to wait until the Charities and Trustee Investment (Scotland) Act 2005 comes into force). Who is the community? The Act states that a company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community or a section of the community. The regulator must decide whether applicants satisfy this test. His decisions are subject to review by an Appeals Officer (appointed by the Secretary of State). The legislation provides 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 this community of which this group forms part do not share that characteristic. Community must be wider than the members or employees of the CIC itself.
Who might form a CIC? The CIC, which can be established at modest cost, is flexible. It may prove attractive to many different enterprises, of varying size and activity. Some existing charities that operate a trading arms may decide that the ability it offers to differentiate their philanthropic work from the pursuit of profits for the social good, is valuable. Charities barred in general from trading have had to go through often difficult and expensive processes to separate these activities in the past. There are also many unincorporated bodies running recreational or 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 principle, protecting those who run them at the same time. In some 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 by virtue of their location or the nature of their activities). The new breed The CIC is not just conceived as an adjunct to charities law. It is also intended, with its simplified regulatory regime, the asset lock to provide donor, investor and public confidence, and the social reporting on a yearly basis, to prove attractive to a whole new breed of social entrepreneurs. Under the CIC model, those with the drive to establish social worth trading concerns can keep operational control of what they create. CICs will also be able to pay directors. The Regulator has stated: By being able to pay directors, CICs should be able to attract higher 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. Frequently asked Questions 1. When can CICs be registered? Applications to become a CIC are now being considered by the Regulator. 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 advise 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 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, 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 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. There are however additional incorporation documents for CICs. Either a CIC 36 for the formation of a new CIC, or a CIC 37 for the conversion of an existing company to a CIC. These documents, approved by the Regulator can be found on www.cicregulator.gov.uk. These forms include a community interest statement and a declaration that the company will not be an excluded company. 8. What is a Community Interest Statement? 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? 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 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, including draft examples, 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 consulted persons effected by the company s activities and the outcome of any consultation. 17. Where can I find examples of this annual report? Examples of suitable reports are available on the CICs website at www.cicregulator.gov.uk 18. How can I convert an existing company to a CIC?
You must first pass 3 special resolutions to; i) alter the company Memorandum to state that it is a CIC; ii) and; iii) alter the Memorandum and Articles of Association to conform with the requirements for a CIC; 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 copy of CIC 37, which includes the 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 that ensures that they continue to be retained for community interest or charitable purposes rather than distributed to investors.
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