Community Interest Companies: Advantages and Disadvantages
15 April 2021
A community interest company (CIC) is like a cross between a business and a charity.
Like a business, a community interest company offers a product or service, which it sells for profit. But somewhat like a charity, a community interest company channels its profits into changing the world for the better.
Think of it like this: A standard business exists to enrich its shareholders. But a community interest company exists to enrich the world.
For a more detailed explanation of what a community interest company is and how it works, read our step-by-step guide to setting up a social enterprise.
Advantages and Disadvantages to Setting up a Community Interest Company
Community interest companies don’t quite work like standard businesses. Nor do they quite work like standard not-for-profit enterprises. To fulfil its unique mission, a community interest company must commit to certain obligations when it comes to tax, accounting, and other financial arrangements.
So to help you decide whether running a social enterprise is right for you, let’s explore some of the advantages and disadvantages of community interest companies.
Alternatives to a Community Interest Company
If you want to change the world, a community interest company isn’t your only option. You could also set up a trust, a charity, or a charitable incorporated organisation. You could even set up a standard limited company, one with strong social aims and a vision for change.
Advantages of Community Interest Companies
So why would you choose to set up a community interest company? Because this sort of social enterprise offers a range of unique benefits, such as:
- Inspiring confidence and transparency
- Being registered as a limited company
- Financial benefits when it comes to profits
Community Interest Companies Inspire Confidence
Community interest companies channel their profits into social change. When you register as a community interest company, you commit to a statutory asset lock. So by law, you must use your funds to achieve your social objectives. This can inspire confidence and trust in both the public and in potential investors.
It goes further than this. As a community interest company, you must submit an annual report which becomes public record: Anyone can view it, so your operations are totally transparent. Meanwhile, the government’s CIC Regulator guarantees that everything remains above board at all times.
If you want to change the world, you’ll need a lot of people on your side. The tight regulation, the total transparency and the statutory nature of a community interest company’s financial arrangements guarantees integrity. This could win you a lot of support, which in course could lead to lasting change where you want to see it.
The Benefits of Being a Limited Company
Community interest companies are still limited companies. Limited liability offers a great deal of financial security. It means that, should anything happen to your operations, the company’s owners and managers will not be liable for the loss. Your own finances will be treated as separate from your company’s finances.
This arrangement is also good for your social enterprise mission. Any assets you’ve set aside for your social project will also be protected should you run into financial hardships.
Ultimately, a community interest company is a business, and the world of business is inherently risky. But limited liability means that, no matter what happens, you won’t take a personal financial hit, and you could still be able to help those you want to help.
Community interest companies can pay a proportion of their profits to owners and shareholders. Charities simply cannot do this. So if you want to make a personal profit while effecting real social change, a community interest company is the way forward.
You’ll have to commit to dividend and performance interest caps as part of your statutory requirements. And as we mentioned above, you’ll have to disclose all of your finances in your annual statement.
Yet compare this to the financial arrangement you’ll find in a charity. Charity directors and board members can often only take a salary when they can justify it financially. Sometimes, charity founders give up control of the charity’s operations to a board of volunteers in exchange for personal financial security.
But with a community interest company, you can get paid for your work while still driving the change you want to see. You can retain full control of your mission without taking a personal financial hit.
Community Interest Companies are Quick, Cheap and Easy to Set Up
It can take months to set up a charity. You essentially have to make two complicated applications at the same time: One for Companies House, and another for the Charity Commission.
But to set up a community interest company, you just have to complete one single application, which Companies House and the CIC Regulator will review in turn.
Beyond the application process, running a charity in the long-term can also be much harder than running a community interest company. Yes, you have to complete your annual statements, and yes, you need to think about the CIC Regulator on an ongoing basis. But compared to charities, who must think about the Charity Commission’s ultra-strict regulation, the CIC Regulator can be a breeze.
Charity CEOs no doubt resent the endless red-tape of regulation. They probably feel that all the ongoing governance requirements stand in the way of their charitable goals. But CIC owners, on the other hand, are free to commit to their social mission without having to worry too much about stringent regulations.
Disadvantages of Community Interest Companies
The truth is that running a community interest company requires a lot of compromise. So before you decide whether this is the path for you, let’s explore some of the disadvantages of community interest companies, such as:
- Paperwork, compliance and commitments of a limited company
- Fewer tax breaks than charities
- Unable to access funding ringfenced for charities
Paperwork, Compliance, Commitments
We mentioned above how it’s easier to set up a community interest company than it is to set up a charity. We also mentioned that it can be easier for community interest companies to stay compliant in the long-term.
But there are still a lot of ongoing things you’ll have to commit to:
- Annual accounts – You’ll have to be totally transparent about your asset locks, your dividend caps and your performance interest caps. And you’ll have to file your accounts once a year, and these accounts will be a matter of public record. You’ll also have to submit an annual report to the CIC Regulator. Can you commit to such detailed bookkeeping and financial transparency?
- Confirmation statements – Because community interest companies are limited companies, you’ll also have to maintain ongoing company registers, and periodically file annual confirmation statements with Company House.
- Business operations – Stock. Supply chains. Payroll. Taxes. These are all the trimmings that come with managing a standard company, of course. But they all add up.
Tax and Funding Issues
One undeniable benefit that charities have over community interest companies is greater access to tax breaks. Charities can claim tax relief on many things, and they can also claim gift aid on donations. All of this can maximise the amount they can ultimately donate to their cause.
As a community interest company, you won’t be able to access these same tax breaks. And from business rates on your property to tax on your capital gains, you’ll lose huge chunks of both your personal income and your social change income to the taxman.
You may also struggle to access certain funding opportunities. There are many grants available to charities and social enterprises. But many might be unfamiliar with how community interest companies operate, or they may see them as less trustworthy or prestigious than charities. As such, many companies might choose to prioritise charities when allocating funds.
Is a Community Interest Company Right for You?
When you’re new to the world of business and social enterprise, the compliance issues might seem profoundly complicated. But they don’t need to be. And if you really struggle with forms and figures, you can hire help to ensure you meet all of your obligations.
But the question is, is all of this paperwork worth it?
Think about your social enterprise. If you’ll only be working towards your social goal occasionally, then maybe all of these formal regulations will be more trouble than its worth. There might be better ways to pursue your cause.
For more information about community interest companies, read our step-by-step guide to setting up a social enterprise. It contains more information about how CICs operate, and about your ongoing tax and financial commitments. Head here to get started.
Finally, like with any business, running a community interest company could be risky. So whatever course you decide to take, you’ll need to ensure that you have the appropriate insurance cover in place.
At Hazelton Mountford, we offer specialist social enterprise insurance to cover your unique requirements as a community interest company. Head here to learn more.