Community interest companies: A new type of company ...

As the first community interest companies approach their first anniversaries, charity lawyer Chris Priestley reveals how charities can benefit from this new legal form.

The community interest company has existed for only 11 months, but already 180 have been set up to run activities ranging from cycling to recycling. This new legal form provides the familiarity of a company framework but without either the private profit motive or the constraints of charity law.

In essence, the community interest company (CIC) was created with social enterprises in mind - that is, businesses with primarily social objectives whose surpluses are principally reinvested in the business or distributed for the benefit of the community, rather than being driven by the need to maximise profit for shareholders. This includes bodies involved in childcare, community arts, transport, health, environmental concerns and fair trade. However, charities can also make use of the CIC format.

Although the objectives of a CIC might have charitable elements, a CIC cannot be a registered charity. So, although the payment of charity trustees is restricted, CICs can be run entirely by paid directors. Similarly, whereas a charity must have exclusively charitable objectives, a CIC might be established for any lawful purpose provided that "a reasonable person might consider that the company's activities, or proposed activities, will be carried out for the benefit of the community". This is known as the community interest test.

An existing charity would require the consent of the Charity Commission to convert to CIC status, and the loss of charitable status and associated tax advantages would need to be outweighed by some other significant factor for the trustees to determine that such a course of action was truly in the best interests of the charity.

Few charities would want to make a wholesale switch to CIC status, but some might wish to use one for some activities. For example, a charity can be a guarantor member or shareholder of a CIC and a CIC can pass all or some of its assets and profits to charities. This makes the CIC an alternative to the conventional company structure for charities wishing to establish a trading subsidiary, such as a charity shop.

For a charity wishing to establish a CIC, the choice of company forms is wide. A CIC may be a private company limited by guarantee or by shares, or a public company limited by shares. Whatever form it takes, the regulations require its memoranda and articles to restrict the level of dividends paid to shareholders or members. This ensures that if the CIC is wound up, its assets will be used for the community purposes for which it was established. The organisation must include the words 'CIC' or 'community interest company' in its name.

The process of registering a CIC is in many ways similar to that of registering a conventional company. Suitable memoranda and articles must be adopted and filed, along with a community interest statement that describes the company's activities and confirms that it will serve the community rather than be for private gain.

The directors must also sign and file an exempt company declaration, which confirms that the company will not be a political party, will not be controlled by a political party and will not engage in defined political activities.

Each application for registration as a CIC is assessed by the CIC Regulator, which is based in Companies House in Cardiff and oversees the administration and dissolution of CICs. The CIC Regulator provides guidance on incorporating and operating CICs. It has recently published its first annual report.

See www.cicregulator.gov.uk.

Chris Priestley is a principal in the charities department of Withers LLP. He specialises in company and commercial matters for domestic and international charities. His particular specialities include fundraising law, joint ventures and cross-border issues.

CASE STUDIES

- Happen 4 U in Halton, Cheshire is an example of how charities with different areas of experience can use a community interest company to work together. The Kings Cross Project (a church-based charity), Hope Inclusion Time Success (a youth charity), Age Concern Halton and Halton Voluntary Action established Happen 4 U to meet a range of diverse community needs.

The CIC provides practical help to improve the safety and security of elderly people's homes, a counselling service and an innovative community research function to provide research services for local business and employment skills and qualifications for local people.

- The Thornhill Centre community interest company in Cardiff demonstrates that the benefit of CICs need not be limited to the local community. This CIC has been set up by a church to develop and manage a community centre, church and library.

Some of the profits will be used to support international projects to relieve poverty and suffering, thereby benefiting not only the receiving communities but also increasing the knowledge and world citizenship of the community at Thornhill.

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