Companies House introduces new procedures for incorporating community interest companies:
Companies House has launched an online formation process for Community Interest Companies (CICs). However, this process is nowhere near as quick as the fully online formation of ordinary companies limited by guarantees, shares or limited liability partnerships. The process still requires an extra couple of days to allow the regulator to review all submitted documents to ensure that the company can be registered as a CIC. The new process in only quicker as supporting documentation can be uploaded online rather than being submitted by post. Anyone who regularly deals with Companies House will be aware that there is usually a 2 week backlog of post, due to the huge volumes they have to deal with.
The following points are worth noting regarding the new process for setting up a CIC:
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No same day service:
It is not possible to utilise the same day service for a CIC registration. This is because the Registrar of Companies has to wait for the CIC regulator to confirm the application meets the registration criteria of a CIC before the company can be registered. If you need a company registered on the same day, it is best to form a company limited by shares (LTD) or a company limited by guarantee (LBG) and then apply to change the newly-registered company to a CIC. The process costs slightly more and takes 3 to 5 weeks.
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Five participator limit:
The online registration process is limited to CICs that only have 5 officers or members. If you wish to have more than 5 officers or members, the postal process has to be used. However, it is possible to first register with only 5 officers or members and add more later.
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Participants cannot be corporate bodies:
If a shareholder, guarantor or director is a limited company or another corporate body, the new process cannot be used. Then, the old system will have to be used. This takes a few extra weeks. However, it is possible to simply make representatives of the corporate bodies, guarantors or shareholders and add corporate members or shareholders later i.e once the CIC has been set up.
CICs limited by guarantee (LBG) or limited by shares (LTD)
A CIC cannot be unincorporated. It cannot be a charity or Industrial and Provident Society (IPS). A CIC can either be a company limited by shares or a company limited by guarantee. We offer both options on our website and – our charges for either option are the same. Both company types offer shareholders or members limited liability, so that their personal assets are not at risk if their company fails and cannot meet its debts. The key differences are explained below:
CICs limited by shares (LTD):
- Voting rights accrue to shareholders in proportion to their shareholdings. Accordingly, someone who owns 75% of the company’s issued shares, will have virtual control of the company.
- A share capital structure enables dividends to be paid to the shareholders. However, it should be noted that there is a cap on the profits a CIC can distribute.
- At some point, the shareholders will have to pay the company the nominal value of shares to which they have subscribed.
- Shares are easily transferable, bought or sold. Share capital can easily be increased to bring in more capital.
CICs limited by guarantee (LBG):
- Companies limited by guarantee have members and not shareholders. Each member has one vote. For example, if there are 5 members, 3 would need to vote for a resolution for there to be a majority. One member cannot control 75% of the votes.
- No contribution is made to the company. Each guarantor agrees to pay a fixed sum (typically, £1) if the company runs into financial troubles.
- The membership of an LBG does not facilitate the payment of dividends as a distribution of profits.
- The perception is that a social enterprise is usually a company limited by guarantee. Thus, LBG-CICs tend to find it easier to raise finances and get other types of support as compared to LTD-CICs.
Making an application to Companies House
The Regulator requires a form CIC36 (or a CIC37 if you are converting an existing company) and a tailored Articles of Association.
The CIC36 contains the following:
- A statement identifying the community the CIC will benefit. A community for CIC purposes can be the community or population as a whole or a definable sector or group of people either in the UK or elsewhere. Any group of individuals may constitute a community if they share a common characteristic, distinguishing them from other community members and that they constitute a section of the community.
- A description of the activities of the CIC. The Regulator assesses whether the provided description of proposed activities can benefit the community identified. The Regulator thus will look at the following:
- the purposes for which the CIC is set up;
- the range of activities in which it will engage; and
- who will be seen as benefiting from its activities
It is not necessary that each activity directly benefits the community. However, it is important that everything that a CIC does, in some sense, contribute towards achieving a purpose beneficial to the community.
- An explanation of the way those activities will benefit the community.
- A statement of how any profit or surplus will be used to benefit the community.
- A declaration that the CIC will not be:
- A political party;
- A political campaigning organisation; or
- A subsidiary of a political party or political campaigning organisation.
The Memorandum and Articles of Association: These two documents form the constitution of the company being incorporated. The Articles state the responsibilities of the directors, the objects of the CIC, and the way in which the members or shareholders exert control over the directors.
Asset Lock:The community interest company regulator will only approve an application if the Articles of Association contain a provision specifying that any surplus generated by the company or its assets will be used for the benefit of the community for which the CIC has been established. Additionally. the Articles should specify that in the event of a dissolution of the company, any surplus will be used for the community or transferred to another asset locked body. The purpose of the asset lock is to ensure surpluses or assets generated by the CIC will be used for the benefit of the community for which the CIC was established.
Selecting and drafting the CIC Articles of Association
Companies House has created a number of model Articles of Association, which are designed to accommodate a variety of CIC structures as set out below:
Model 1 is for use when:
- A company is limited by guarantee, and
- All the directors are also members of the CIC, and
- All the members are directors of the CIC.
Model 2 is for use when:
- A company is limited by guarantee, and
- The number of members exceeds the number of directors.
Model 3 is for use when:
- The company is limited by shares, and
- Each director is a shareholder in the company, and
- Each shareholder is a director, and
- Dividends will only be paid to an asset locked body.
Model 4 is for use when:
- The company is limited by shares, and
- The company has more shareholders than directors, and
- Dividends will only be paid to an asset locked body.
Model 5 is for use when:
- The company is limited by shares, and
- The company has more shareholders than directors, and
- Dividends will be paid to an asset locked body and the shareholders.
The Regulator’s role in the formation process:
When a CIC is requested, the CIC regulator considers whether applications pass the ‘community interest test’ and meet the criteria of becoming a CIC. If satisfied, the regulator advises the registrar in Companies House, who, provided all other documents are in order, will issue a certificate of incorporation as a CIC.
The ‘community interest test’ is an assessment of whether a reasonable person would consider that the proposed activities of the CIC are or will be carried out for the benefit of the community identified in the application.
A company will not satisfy the test if it carries on certain political activities, or if a reasonable person might consider that its activities are carried on only for the benefit of the members of a particular body or the employees of a particular employer.
Related FAQs
What is a community interest company?
Community Interest Companies or CICs are usually described as business enterprises with social objectives. A CIC’s profits and assets are used for the public good. CICs differ from charities in many ways. In particular, CIC legislation allows social entrepreneurs to both control the company and to receive a salary.
Can a Community Interest Company be a charity?
A CIC cannot be a charity. The CIC regulations expressly prohibit that option. However, a CIC can be owned by a charity, and this usually happens when a charity wants to benefit from trading activity. A CIC can also be a member of a charity.
Does a CIC pay corporation tax?
A CIC is subject to Corporation tax, just as any other company is. There are no tax concessions available to CICs.
Are there any special tax treatments for investors in CICs?
SITR (Social Investment Tax Relief) is a special tax relief that is available to donor’s who provide debt and equity funding to CICs. This tax relief has been available since 2014/2015.
How many directors and shareholders can a CIC have?
CICs are companies registered at Companies House and either limited by shares or by guarantee. The 2006 Companies Acts applies to CICs as it does to any other company registered at Companies House. There are no limits to the number of directors and shareholders they can have.