What is a community interest company (CIC)?

Are you looking to start a new business where you put communities before profits? If you’re interested in driving social change by tackling environmental issues or helping overcome challenges faced by local communities, you might want to consider setting up a community interest company, also known as a CIC.

But, before jumping right in, let’s understand what a CIC company is and explore some positives and negatives of this trading status.

What is a community interest company?

A community interest company, or CIC, is a specific type of limited trading status designed for community-focused businesses and social enterprises. Basically, companies who choose to use a large proportion of their profits for public good.

These businesses can be set up to sell any product or service, just like any other business. But there’s a caveat — they must provide the CIC regulator with a ‘community interest statement’ outlining their social goals while passing a ‘community interest test’, which is then reviewed annually.

Established as a trading status by Companies House in 2005, a community interest company aims to allow companies to operate with the same flexibility as a traditional limited company while effectively benefiting local communities.

Two examples of a CIC

Sometimes, you just need a real-world example to put things into perspective. From eco-friendly businesses to youth-led projects, there are plenty of CIC business types.

• Bristol Together buys and refurbishes empty properties in the Bristol area, creating job opportunities for ex-offenders and the long-term unemployed, as well as providing on-the-job training and qualifications.
• Little Fish Theatre - London-based theatre company creating productions specifically involving young people to build confidence and provide disadvantaged youth groups with a purpose and direction in the arts.

How is a CIC different from a charity?

While CICs and charities serve the same purpose — i.e. existing to benefit and provide support to those in need, there are fundamental differences, mainly in their funding, governance and reporting requirements.

Purpose and activities: Charities’ activities usually focus on a specific social issue, i.e. poverty relief or education. Whereas a CIC’s focus can include any profitable and lawful activity, with the promise that the profits of the activity will go towards charitable aims.

Funding: While charities primarily gain funding through donations, grants and fundraising, using tax reliefs like Gift Aid, CICs generate their income through regular business methods. This includes selling goods and services, meaning they can be much more self-reliant.

Governance: Charities are governed by an appointed board of voluntary directors, generally more than three. Alternatively, in a CIC, you just need a single director who is paid a salary, just like any business director. It’s usually recommended that CICs have a few directors in place, though, for credibility purposes if you want to apply for funding.

Advantages of trading as a CIC

An outward commitment to social goals

A public stance on social goals can help build trust with prospective customers and investors. Aside from generating profits to help support community projects, a CIC can help create local job opportunities and build the local economy. And by reinvesting their profits back into the community, they can help take the strain off public resources and support the community around them.

Access to specific funding

As a CIC, you might be eligible to apply for specific funding such as The National Lottery Community Fund or Comic Relief. These options might not be available to other businesses but they allow you to make a real difference in your community.

Quicker to set up than a charity

If you’re toying with setting up a charity or a CIC, setting up a CIC is a much more straightforward process. You simply set up the company through a Companies House application like you would when setting up any limited company. Applications are usually processed by HMRC within two working days.

Disadvantages of trading as a CIC

While operating a CIC can have some great advantages, always consider the cons, too:

Lack of tax relief

nlike charitable organisations, CICs don't receive tax breaks when it comes to their income, capital gains, and profits.

Public perception

As a CIC is, in essence, a limited company, the public might perceive your company as just another business with no charitable status. This can hurt funding opportunities and public support.

Compliance admin

As a CIC, you must submit a CIC report (also known as CIC34) alongside your annual accounts. This report proves to the CIC regulator that your business still benefits the community and includes details like dividends, consultations with stakeholders, directors’ remuneration, asset locks and information about how you continue to benefit the community.

Dividends are capped

Community interest companies have to redistribute 65% of their profits back into the business, which means they can only pay shareholders up to 35% of their distributable profits as dividends. This might deter investors from getting involved.

If you’re looking to fund your CIC or limited company, we can help you find and compare business loans to help you grow your business. We work with UK lenders to offer flexible and affordable finance solutions for business owners just like you. Compare business loans here.