How to: Decide between charitable and CIC status

What to bear in mind when choosing between being a social enterprise and a charity.

With their key features of an asset lock and a community-interest test, Community Interest Company can appear to bear more than a passing resemblance to charities. Here are some things to think about for a new socially-minded venture which isn't sure how to choose between the two structures.

1. Think about the money
The obvious advantage of being a charity is the associated tax breaks. Charities can claim relief on most income and gain, and on profits from some activities. They can also claim back tax previously paid on any income they receive – such as the income tax paid on donations.

By contrast, CICs don’t get any tax breaks, even if their objects are entirely charitable. According to the CIC regulator’s website, “It is likely that most organisations operating for the public benefit will choose to be charities, not least for the fiscal advantages.”

Bear in mind, though, that if you are the founder of a charity and want to draw an income from it, rules against trustees being paid would forbid you from sitting on its board. There are no restrictions on payments for CIC directors.

2. Red tape, red mist?
The rules on financial reporting are less burdensome for CICs than for charities. In addition, while CICs are required to submit an annual public interest report, that regulation is supposed to be a “light touch” compared to the public benefit test to which charities will be subject under the new Charities Act.

The test used by the CIC regulator is simply the judgement of a hypothetical “reasonable person”. In practice, according to Phil Horrell, office manager at the CIC regulator, this would be unlikely to rule out many non-political organisations prepared to conform to CIC rules.

“The only application we’ve turned down so far is from a sado-masochistic group. They said they were providing public benefit because they were spreading information,” he says.

Interestingly, though, Horrell said he thought the CIC regulator would “have some difficulty” with allowing private schools to become CICs – even though they look likely to retain charitable status under new Charity Act regime.

3. Is big beautiful?
Before furniture recycling organisation Green-Works, originally formulated as a company limited by guarantee, applied for charitable status, it also considered re-registering as a CIC. It rejected that option because, according to chief executive Colin Crooks, “we're not linked to a particular community and our main objective is the protection of the environment.”

On the other hand, being a CIC theoretically offers greater potential for rapid expansion and diversification, not only because of the looser financial regulation but also because of the greater opportunities for raising capital.

For example, although CICs have asset-locks to prevent asset-stripping by directors, they are permitted to use those assets as collateral for loans. In the event of bankruptcy, the claims of creditors would prevail, with only whatever is left being locked.

CICs are also allowed to issue shares. However, since the dividends they can pay to shareholders are subject to a cap, such shares may not appeal in practice to risk-averse investors.

Horrell himself is sceptical about the real financial advantages of being a CIC, pointing out that although CICs are eligible for grants from the Big Lottery Fund, they need good business plans to win them.

4. Consider how it will affect your image

The main reason to be a CIC, according to Horrell, is be branded as a social business. On the one hand, the public will come to think of CICs as being “like charities”. On the other hand, the dynamism associated with being a business suits the self-image of some founders.

One example is Neil Woodbridge, the driving force behind Thurrock Council’s new user-led CIC delivering disabled services. As a former record company boss, charity worker and self-proclaimed entrepreneur, he is resistant to the whole idea of charity. “I’m for disabled rights, not charity,” he says. “I don’t want people giving money because they feel sorry for disabled people. I want to start calling them our customers.”

5. Think about hedging your bets
Be aware that any decision about structure you take in the early days needn’t be final. A charity can convert into a CIC and vice-versa.

The best solution of all may in fact be to follow the example of the numerous charities which have set up independent trading arms – may of which are now converting into CICs. Such sister CICs are free of the restrictions on charities’ commercial activity but, being wholly owned by charities, are permitted to pass their profits on to them without any capping.

Horrell emphasises that the CIC regulator is not interested in talking up any rivalry with the Charity Commission in attracting new organisations.

“What I say to people is if you can be a charity and want to be a charity then don’t be a CIC,” he says.

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