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| Community Interest Company (CIC)
| Charitable Incorporated Organisation (CIO)
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| Origin | Recommendation of the Strategy Unit review: "Private Action, Public Benefit".
| Recommendation of the Strategy Unit review: "Private Action, Public Benefit"
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| Enacted by | To be enacted by the Companies (Audit, Investigations and Community Enterprise) Bill currently before Parliament. That Bill provides for CICs in England, Wales and Scotland.
| To be enacted by the draft Charities Bill. That Bill provides for CIOs in England and Wales. The draft Charities and Trustee Investments (Scotland) Bill, published on 2 June, provides for Scottish CIOs (SCIOs). The SCIO is modelled on the CIO.
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| Designed for | Social enterprises: that is, organisations wanting to operate flexibly in a business environment but for socially-useful purposes.
| Charities wanting the business benefits of legal personality (including the ability to protect their charity trustees/members from personal liability for the charity's debts) without the disadvantage of dual regulation under both company and charity law.
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| Status | Always non-charitable. No CIC would be treated as a charity even if its purposes were charitable in law.
| Always charitable. No organisation would be eligible to constitute itself as a CIO unless it was a charity.
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| Tax benefits | A CIC would not be entitled to charitable tax benefits.
| A CIO would be entitled to the same tax benefits as any other charity—for example, certain exemptions from income or corporation tax and inheritance tax, and from (at least 80% of) Non-Domestic Rates.
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| Purposes/objects | To become a CIC, a company would have to satisfy a "community interest test" This test would be whether a reasonable person might consider that the CIC's activities were being carried on for the benefit of the community. Certain categories of company ("excluded companies") would not be able to become a CIC even if they satisfied the test. The Companies Bill provides for regulations to specify that certain activities did or did not satisfy the test, and to prescribe certain descriptions of company as excluded companies.
A CIC could have general trading objects in its constitution, and would then have no restrictions on its activities provided that it continued to satisfy the community interest test. Alternatively, a CIC could choose to limit itself to specific "community interest objects", and could do so, for example, in order to demonstrate to stakeholders that it intended to limit itself to specific activities.
| To become a CIO an organisation would have to be established for charitable purposes—that is, for one or more of the charitable purposes set out in the Charities Bill, and for the public benefit.
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| Change of purposes/objects | A CIC could change its objects provided that it still satisfied the community interest test and the Regulator of Community Interest Companies ("the Regulator") had consented.
| A CIO would be able to change its purposes as long as the new purposes remained charitable and the Charity Commission had consented to the change.
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| Governance | A CIC, like any other company, would be governed by a board of directors, who could either exercise day to day management themselves or employ managers.
| A CIO would be governed by a board of trustees, who could either exercise day to day management themselves or employ managers.
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| Liability | Directors would not be liable for the debts of the CIC (unless they had accepted such liability through the giving of guarantees etc). The liability of directors for breach of duty would not be limited.
| The liability of trustees for the debts of the CIO would normally be excluded by their status as agents of the CIO, though their liability for breach of duty to the CIO could be restricted only to the extent allowed by regulations.
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| Payment of directors | CIC directors could, and typically would, be remunerated for their work as directors. CICs would be required to report on the level of directors' remuneration, and the reports would be made public. The CIC Regulator would have powers to intervene where remuneration was paid at a level which amounted to a breach of directors' duties, misconduct or mismanagement of the company, or misuse of the company's property.
| Charity trustees, including CIO trustees, could not be remunerated for their work as trustees unless they had specific legal authority for the remuneration. The Charity Commission would have power to take remedial action in the case of unauthorised remuneration, for example where the remuneration was excessive and it was necessary to act to prevent CIO trustees deriving excessive private benefit from the CIO.
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| Asset distribution | CICs would be prevented from distributing their profits and assets to their members (the "asset lock"), to ensure that the property of CICs was applied for community interest purposes and not for private benefit. CICs with shares could make limited distributions to members.
| CIOs, like other charities, could make a surplus of income over expenditure but would have to apply any surplus, and all of their assets generally, only for charitable purposes. This would rule out any distribution whatsover to members.
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| Winding Up | Some members might be entitled to get back their original investment, but all other surplus assets would have to be transferred to another CIC or to a charity approved by the Regulator.
| On the winding up of a CIO all the net assets would have to be applied for appropriate alternative charitable purposes.
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| Capitalisation and financing | A CIC would be able to raise debt finance, using its assets as collateral if it wished. CICs limited by shares could also issue shares that paid limited dividends to investors.
| CIOs could have loan capital, secured on its assets, but not equity capital. Like other charities their principal sources of finance would be some mixture of voluntary donations, including grants; fees charged for the services they provided; and income from their investments.
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| Registration | An organisation could not be a CIC unless it was registered as a company on the register of companies (at Companies House) and the Regulator had decided that it was eligible to be a CIC.
| An organisation could not be a CIO unless it was registered by the Charity Commission in the register of charities. Registration would have the effect of giving existence and legal personality to a new CIO. The CIO's presence in the register would, as for other charities, be conclusive proof of its charitable status.
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| Regulation | CICs would have to comply with all the general requirements of company law. In addition CICs would be regulated by the CIC Regulator under the Companies Bill. The regulatory regime would be "light touch" compared with the regime applying to charities under the Charities Acts. The CIC Regulator would be required to exercise its supervisory powers only to the extent necessary to maintain confidence in CICs. Most decisions of the CIC Regulator could be appealed, in respect of matters of fact, to a new Appeal Officer to be appointed by the Secretary of State. The Appeal Officer would be independent of the CIC Regulator.
| CIOs would be regulated by the Charity Commission under the Charities Acts. The Commission's powers in relation to CIOs would in essence be the same as its powers in relation to other charities. The regulatory regime for charities is already more extensive than that proposed for CICs under the Companies Bill—in practice the Charity Commission has, in relation to charities, all the powers that the CIC Regulator would have in relation to CICs, and more beyond that. The Charity Commission would share with the CIC regulator the objective of maintaining confidence in their respective sectors, but would have three further objectives which the CIC regulator would not have, to do with promoting legal compliance, increasing social and economic impact, and improving accountability. Appeal against Commission decisions would be to the new Charity Appeal Tribunal created by the Charities Bill.
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| Conversion | The Companies Bill contains provision for an existing non-charitable company to convert to CIC form. Such a company would have to adopt purposes which passed the community interest test. An existing charitable company would, in England or Wales, need the Charity Commission's consent. Under Scottish charity law it is not currently possible for a charity to convert to CIC status, but it is envisaged that following the proposed revision of Scottish law, a Scottish charity would be able to convert with the Scottish Charity Regulator's consent. After conversion, a former charity would still have to use any property it owned before conversion for its original charitable purposes. In effect a CIC newly-converted from a charity would be the trustee for charitable purposes of its pre-conversion property. In reverse, the Companies Bill contains provision for a CIC to convert to the form of a charitable company.
| The Charities Bill contains provision for an existing charitable company to convert easily to CIO form. The converting company would not need to make any change to its purposes. A charitable trust or association would be able effectively to convert to CIO form by creating a new CIO, with the same charitable purposes as the trust or association itself, to which it would then transfer all its assets.
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| Reporting | The Companies Bill would require a CIC to produce an annual community interest report, which would be made public. The report would record what the CIC had done to pursue its community interest purpose during the year and to involve its stakeholders. CICs would also be subject to the reporting requirements applying to companies generally.
| A CIO would be subject to the annual reporting requirements applying to charities generally. This would require it to prepare an annual report complying, as to its content, with regulations made by the Home Secretary.
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| June 2004 | |
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