Do you have any confusion about whether a CIC is a charity or a regular limited company? If your answer is yes, this guide is for you. A Community Interest Company (CIC) is one of the fastest-growing legal structures in the UK. However, many people, like you, aren’t sure how it differs from a charity or a regular limited company.
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CICs are a special type of limited company built to operate businesses and provide benefits to the community. It is more flexible than a charity and has legal safeguards compared to a standard limited company.
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TAJ Accountants work with your in-house team and provide comprehensive accounting training to meet your unique business CIC needs.
What is a CIC Company?
A Community Interest Company (CIC) is a type of UK limited company designed to gain profits for welfare services to vulnerable people. It aims to provide community benefits directly rather than private profits.
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A CIC operates in the same way as any other limited company. It has a separate legal identity. This means a CIC will continue to exist despite changes in ownership or management. Also, it can own assets in its own name. It has flexibility in contracting, borrowing, and fundraising.
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Directors can be paid or unpaid and have the same rights and duties as other directors. CICs will become established as a company brand and recognised by the public.
How is a CIC Different From a Normal Limited Company?
In the UK, a CIC company is registered at Companies House. It has directors, files annual accounts, and can trade like any other business. The key differences are in two features. These are –
1. The Community Interest Test
To qualify for registration, a CIC must pass a community interest test. The directors have to ensure that the company’s activities benefit the community. Not for the financial advantage of its employees, members, or a political interest.
2. The Asset Lock
Asset lock is the legal feature of a CIC. This compulsory system restricts what can be done with the company’s assets and profits. It means:
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- Assets can not be sold or transferred for less than their actual market value, except to another asset-locked body or directly for community benefit.
- Any remaining assets must be transferred to another asset-locked organisation if the CIC is wound up.
Can a CIC Pay Dividends and Make a Profit?
Yes, a CIC can pay dividends and make profits, depending on its structure. Whereas a CIC is not a charity, it can trade and make profits. But these profits must be used for a social purpose or kept by the company.
To provide dividends, a CIC must check how it’s structured:
- Limited by guarantee: In the UK, most CICs are built for small communities by guarantee. This structure has no shareholders. So they can not pay dividends. Revenue will stay within the company or be spent for communities.
- Limited by shares: This structured CIC Â can pay dividends to shareholders within strict limits. But the regulatory body sets a cap with two elements. A CIC can pay Aggregate dividends up to 35% of the company’s distributable profits in any given year. It ensures that the remaining 65% of profits stay in the company or can be spent on community services. However, dividends paid to another CIC or a charity don’t count in this cap.
Apart from these, here’s also a cap on performance-related interest payments on loans. Currently, the limit is 20% of the average amount outstanding.
Who Regulates CICs?
CICs are regulated by the Office of the Regulator of Community Interest Companies, which sits within Companies House. Its role is to maintain public confidence in CICs. It also ensures companies genuinely operate for community benefit.
The Regulator can investigate complaints, appoint or remove directors, and wind up CICs operating outside their community purpose. Companies House handles day-to-day compliance, including filing accounts and submitting confirmation statements.
Every year, CICs must submit a Community Interest Report alongside their accounts. This explains how the company has benefited its community during the year. The report is publicly available to stakeholders, funders, and the wider public.
CIC vs Charity vs Standard Limited Company
Each structure has a different purpose, tax position, and level of flexibility. The right choice depends on how you plan to operate and fund your organisation.
Factor | CIC | Charity | Limited Company |
Primary purpose | Community benefit | Charitable purpose | Profit for shareholders |
Regulator | CIC Regulator | Charity Commission | Companies House |
Tax relief | Limited, with no automatic relief | Significant, including Gift Aid and some rates relief | Standard Corporation Tax applies |
Asset lock | Yes, assets are protected for community benefit | Yes | No |
Profit distribution | Restricted, with capped dividends | Not permitted | Generally unrestricted |
Public reporting | Annual CIC Report and accounts | Annual accounts and trustees’ report | Annual accounts |
Funding access | Grants, social investment, and trading | Grants, donations, and Gift Aid | Commercial finance and investment |
Setup complexity | Moderate | High | Lower |
A CIC sits between a charity and a standard limited company. It offers more commercial flexibility than a charity, including the ability to trade and employ staff. However, it must follow an asset lock and operate for community benefit. A standard limited company does not have these restrictions.
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Why Do People Choose the CIC Structure?
A Community Interest Company (CIC) can offer a practical balance between commercial activity and social purpose. Key reasons people choose this structure include:
- Social purpose:Â A CIC lets you run a sustainable business while creating measurable community or social impact.
- Commercial flexibility:Â CICs can trade, employ staff, and pay market-rate salaries.
- Limited profit distribution:Â CICs can distribute limited dividends while remaining committed to their community purpose.
- Less restrictive than a charity:Â CICs have fewer restrictions on trading and operations than charities.
- Clear community commitment:Â CICs must operate for the benefit of the community, unlike standard limited companies.
- Funding opportunities:Â CICs can access grants, social investment, and trading income.
- Suitable for social entrepreneurs:Â They can suit social enterprises, community organisations, and professionals seeking measurable social impact.
Overall, a CIC can be a strong option for organisations that want to combine commercial sustainability with a clear social mission.
How Do You Set Up a CIC?
Setting up a Community Interest Company (CIC) is similar to forming a standard limited company. The main difference is that your community interest statement must also be approved by the CIC Regulator.
Step 1: Choose your structure
Choose between limited by shares or limited by guarantee, depending on whether you plan to attract investment or distribute dividends.
Step 2: Prepare your community interest statement
Explain what your CIC will do, who it will benefit, and how its activities serve the community.
Step 3: Incorporate through Companies House
Submit the required CIC36 or CIC37 form, along with your community interest statement, memorandum, and articles of association.
Step 4: CIC Regulator review
The Regulator reviews your application and approves it if your organisation meets the community interest test.
Step 5: Start operating
Once approved, you can open a business bank account, seek funding, and begin trading
Once your CIC is registered, you can begin trading and delivering your community purpose. Getting the structure and documents right from the start can help avoid delays and compliance issues later.
Is a CIC Right for Your Business?
A CIC can be a good choice if your main goal is community benefit. It also gives you the flexibility to trade and generate income without the restrictions of charitable status.
However, it may not suit businesses where shareholder profits or Gift Aid and donation income are central. In those cases, a standard limited company or charity may be more appropriate.
Before deciding, ask yourself three questions: Is your main purpose genuinely to benefit the community? Are you comfortable with the asset lock? Would CIC status help you access funding or contracts?
If the answer is yes to all three, a CIC could be the right structure for your organisation.
Conclusion
A CIC offers a practical middle ground for organisations that want to run a sustainable business with a genuine community purpose. It provides more commercial flexibility than a charity while offering greater credibility with funders and commissioners than a standard limited company. However, the asset lock, restricted profit distribution, and annual reporting requirements are important commitments.
Getting the structure right from the beginning can help you avoid problems later. TAJ Accountants is a small business accountants firm helping social entrepreneurs and community organisations across London set up, manage, and grow their CICs compliantly. Book a free consultation to find out whether a CIC is the right structure for your organisation.
Frequently Asked Questions
CIC stands for Community Interest Company. It is a type of limited company designed for businesses that use their profits and assets for community benefit rather than private shareholders.
Yes. A CIC can trade and generate profits, but those profits cannot be freely distributed to shareholders. Dividends are permitted within limits, while most surplus is retained for community purposes or reinvested into the business.
Yes. CIC directors and employees can receive market-rate salaries. There is no general restriction on staff pay, provided remuneration is reasonable and consistent with the organisation’s purpose.
The asset lock requires a CIC’s assets to be used for community benefit. They cannot normally be transferred to private individuals below market value. If the CIC closes, remaining assets must generally pass to another asset-locked organisation.
Yes. A CIC may be able to convert to a charitable company if it meets the Charity Commission’s requirements. The process requires approval from the relevant regulators and changes to the company’s governing documents.
A CIC is generally taxed in the same way as a standard limited company. It pays Corporation Tax on its profits and may also have VAT, PAYE, and other tax obligations. CIC status does not provide automatic tax relief like registered charitable status.
