Social enterprise: community interest company vs charity

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Social enterprise: community interest company vs charity

Social enterprise is more and more popular as a form of entrepreneurship in the UK particularly in an era beset by scandal and where there is perception of erosion of social values. We discuss both Community Interest Companies & Charities.

Community Interest Company or charity – the pros and cons

Whilst a Community Interest company (CIC) is a not for profit organisation, it is not a charity. It is entirely legitimate for those managing or working in the business to be paid a good salary and/or incentives commensurate with an entrepreneurial spirit. Consequently, such organisations are a hybrid between a for profit business and a charity.

Social enterprise is a more rewarding way of doing business for twenty-first century entrepreneurs with a conscience who want to make the world a better place – and who understand that today’s media-aware consumers want to use businesses which operate in an ethical, sustainable and community-minded way. Thus far, over 6,000 CIC’s have been set up with numbers rapidly increasing in the last 2 years.

Whilst Community Interest Companies have been around since 2005 the concept is still not well known. It is likely to be easier to raise money via fundraising (especially given that donor businesses obtain tax breaks for helping charities which are not available for donations to CIC’s) or grants with a traditional charity status.

Charities are subject to a more favourable tax treatment. CIC’s are liable to pay corporation tax just like other limited companies. CIC’s may also be liable to pay Capital Gains Tax, Stamp Duty Land Tax and VAT. Businesses get tax benefits from charitable donations.

Charities are generally more restricted in the sorts of activities they can undertake and need to be more risk averse. Such restrictions do not apply to CIC’s.

Whilst both CIC’s and charities are regulated, charity regulation can be extremely onerous and time consuming. The level of regulation is higher for charities than for CIC’s.

Charity trustees may face a bigger risk of personal liability than directors of CIC’s. In essence, a CIC is like a limited company in this respect.

It is generally easier to convert from a CIC to a charity than from a charity to a CIC. Closing down a charity is an onerous task.

CICs can be financed by loans or bonds, although the amount of interest paid is limited. Some Community Interest Companies are limited by shares, and others by guarantee. If the company is limited by shares, the shareholders cannot benefit from any uplift in the shares when they are bought back (this profit must be for the company). However, there is no restriction on the price at which the shares can be sold on to a third party.

35% of a CIC’s profit can be divided up in the form of dividends to shareholders, ensuring some limited return on investment which may encourage investment or provide incentivisation to start up shareholders who have bought shares at nominal value without injecting significant cash.

CIC’s are generally quicker to set up and cheaper in terms of administration and fees.

Legal aspects

In addition to standard limited company formalities on set up, the CIC regulator must approve each application to create a Community Interest Company. Technically, CICs are created by the Companies Act 2006 and subject to that Act and company law generally.

The Regulator applies a 2 stage test which comprises :-

  • a ‘community interest test’ – encompasses an extremely wide range of activities from environmental interests, to promoting healthcare, to education, or any other non-profit or community-based venture. CICs are often set up in traditional third sector areas such as these, but are increasingly run in areas such as property, finance and professional services. Companies must declare a statement of community interest on an annual basis, using form CIC34.
  • ‘asset lock’ – compliance in order to ensure that the company really does operate for the benefit of the community and in a non-profit spirit.
    The CIC regulator assesses the company on its launch, and continues to monitor its activities on an ongoing basis.

The directors of the CIC benefit from limited liability, in that the actions of directors do not incur personal liability except in cases of gross negligence or fraud. Where the CIC is limited by guarantee, members are held liable up to a nominal amount, which is usually £1, in the event that the company ends or fails.

To start a Community Interest Company, the directors need to make an application to Companies House, which costs about £35. In addition to the normal formalities involved in setting up a limited company, you will need to fill in form CIC36 where you will make a statement about the community purposes of the company, the proposed articles of association and some administrative information.

We can advise and assist in the following ways :-

  • Advice and assistance with applying to become a CIC including the requisite documents and forms
  • Articles Of Association and an appropriate shareholder agreement and other documents such as employment contracts, terms and conditions of trading.
  • Converting an existing limited company into a CIC or a CIC to a charity or a charity to CIC.
  • Advice on regulatory issues including dealing with compliance and any complaints made to the Regulator

Legal Advice for Charities

Many charities operate as businesses these days and need to be effective to serve the purposes of the charity. Recent developments in charity law reflect the changing scope of charities and offer some significant improvements in the way charities can operate especially those charities with trading arms.

However, in order to maximise the benefits that can be achieved for a charity specialist advice is required as the path is now complex with a number of options and alternatives for the trustees of charities to consider.

At Gannons we have specialist solicitors who can assist you with all aspects of charity law. For those charities with trading operations we are able to offer you all the skill and commercial expertise we offer to businesses generally. We can help you decide on the structure for the charity and how best to operate the charity and appropriate internal governance measures. We assist trustees wishing to set up a new charity and those wanting to convert an existing charity into a more suitable structure.

Charities can set up in many different ways and often need advice as to which structure is best for them. Most charities wish to set up using an incorporated structure which gives the benefit of limited liability to their trustees and members. With the introduction of Charitable Incorporated Organisations (CIOs) there are more new charities wishing to set up using this new structure and there are unincorporated charities as well as charitable companies seeking to convert to this new structure.

There are a variety of charitable structures to choose from:

  • Trusts
  • Unincorporated associations
  • Companies
  • Charitable Incorporated Organisation (CIO)

Gannons can discuss the advantages and disadvantages of each structure with you to ensure that the most suitable one is chosen for your charitable objectives. There are tax considerations and structures available which minimise the tax burden for the charity on any profits it makes whilst at the same time preserving tax relief available for donors which we will deal with or work with your accountants. In addition, we offer a variety of other services to charities including:

  • Setting up and registering new charities
  • Restructuring or reorganising charities
  • Advising on governance and compliance
  • Dealing with the Charity Commission
  • Advising trustees and members on their duties and responsibilities and payments made to them
  • Resolving disputes both within the charity and externally
  • Property matters
  • Ways of funding trading operations and loan agreements

Charity legal advice often involves other areas of expertise including employment law, dispute resolution, property law, tax law, and intellectual property, all of which are our specialist sectors.