Charities versus Community Interest Companies (CICs) – which structure is right for your organisation?
Community Interest Companies (CICs) and charities play vital roles in the UK’s social enterprise sector, each contributing to the public good in distinct ways. Despite their shared goal of serving the community, they are governed by different legal frameworks and have unique governance structures. Recognising the differences between CICs and charities is essential for anyone aiming to create an organisation with social, environmental or community-focused goals.
What is a charity?
A charity is an organisation established exclusively for charitable purposes which are in the public interest. These purposes encompass a wide range of areas including education, poverty alleviation, and the advancement of the arts. There are four main types of charity structure – charitable trusts, charitable incorporated organisations, charitable companies and unincorporated associations.
Charities in England and Wales are regulated by the Charity Commission, and in the case of charitable companies, also by Companies House. The strict reporting and accounting standards they must adhere to foster a high level of transparency and public trust.
What is a CIC?
CICs are a special type of limited company designed to benefit the community rather than private shareholders. Unlike charities, they can be established for any lawful purpose, as long as their activities are carried on for the benefit of the community - “the community interest test”. The CIC will have to continue to meet this test throughout its existence and it cannot be used solely for the financial advantage of a group of people, for political purposes or for the benefit of the employees, directors or member or a single organisation.
CICs are regulated by the Office of the Regulator of Community Interest Companies and Companies House. A CIC needs to file a Community Interest Company Report each year as part of its reporting obligations.
CICs feature an ‘asset lock’ to ensure assets are used for the community’s benefit – this is a legal provision that safeguards a company’s assets from being used for personal profit, instead ensuring they serve their declared objectives. They also have limitations on profit distribution to shareholders, although shareholders can receive dividends, subject to a cap, in CICs limited by shares.
Charities versus CICs – the key considerations
Purpose
The primary distinction between charities and CICs lies in their purpose and public perception. Charities must have exclusively charitable purposes and are often seen as providers of relief or services without a commercial edge. CICs, however, operate more like businesses – albeit businesses with a clear social mission.
Funding
Funding is another area where CICs and charities diverge. Charities are more likely to be dependent on grants, donations and fundraising for the majority of their income. In contrast, CICs typically have a mix of income from contracts and trade, selling products or services for profit, and then reinvesting the money into the social enterprise.
CICs can trade like normal commercial companies, but they cannot issue charitable tax receipts for donations, which may limit certain forms of charitable giving. Despite this, CICs can still access a variety of funding sources, including contracts and trade income.
Governance and remuneration
When it comes to governance, charities are expected to have a volunteer board of trustees, with limitations on paid work for the charity unless the constitution contains such a power and it is considered to be in the charity’s best interests. In charities in general, the founder of a social enterprise who wishes to be paid cannot be on the board and must give up strategic control of the organisation to a volunteer board, which is often unacceptable.
CICs, by comparison, can pay their board members, and founders can maintain control by being on the board and actively working in the CIC. Directors of CICs may be remunerated reasonably and competitively for their services, thereby making a CIC an appealing structure for social entrepreneurs. The remuneration should be proportionate and affordable, considering the company’s sustainability. The regulator expects most profits to benefit the community, not directors or shareholders. Overpaying directors could breach the asset lock, potentially leading to regulatory action.
Taxation
One of the main advantages for charities is the range of tax reliefs they can access. Donations are exempt from income tax and charities can claim back tax on donations through Gift Aid. Charities also benefit from significant reductions in business rates and other taxes. Additionally, charities can access certain types of funding, such as grants and public funding, which may not be available to non-charitable organisations.
The benefits available to charities, such as business rates relief, are not available to CICs. A CIC is liable to corporation tax as a company. It will be chargeable on any trading profits (but it will be a question of fact whether or not a particular CIC is trading) and on its investment income and gains. CICs are eligible for normal corporation tax reliefs, but there are no CIC specific tax exemptions/reliefs available.
This may be a key consideration for organisations as to the best structure to choose and in determining their fiscal viability.
How we can help
While both serve the public good, their operational, regulatory, and financial frameworks differ. The choice between establishing a CIC or a charity should be informed by the specific goals, funding strategies, and governance preferences of the individuals involved.
If you are considering establishing a CIC or charity, and have queries about which structure best suits your vision for social impact, please contact our expert team.
