Setting up a Community Interest Company

If you want to develop to develop a business while putting something back into your community, you can set up a Community Interest Company - a firm that enables you to make profits while giving others a helping hand

An increasing number of entrepreneurs are choosing to use their talents for the general good and form social enterprises. Such businesses operate for wider community purposes than simply profit-generation and their range of activities is huge - from fair-trade food production to employing people with special needs.

Social enterprises like these are likely to be Community Interest Companies (CICs), which were established by the Government in 2005. A form of limited liability company, they enjoy the flexibility of the company form but with some features to ensure their assets are used for the benefit of the community, not just the owners and employees.

Benefits of being a CIC

A CIC sits somewhere between a charity and a conventional limited company: like a charity, you will be able to dedicate yourself to socially beneficial work; unlike a charity, you will be able to make profits, but you will also have to pay full business rates. Like a limited company, you will be able to pay dividends to shareholders; unlike a limited company, you will be able to apply for funding and grants aimed at social enterprises.

The investment advantages don't end there. The Government is providing CICs with preferential access to equity finance through its Enterprise Capital Funds, and leading financial institutions, backed by the Bank of England, are likely to be more willing to provide finance than they are to small limited companies. You will also be a more attractive investment package to investors generally, as CIC directors receive community investment relief of five per cent per annum on their assets.

The asset lock

CICs are obliged to comply with company law, including rules on insolvency, accountancy and governance. They also have directors and members like any other company and are obliged to file annual accounts and reports at Companies House.

But CIC directors cannot siphon off profits for other purposes, such as investing in other businesses. Instead, the mechanism that underpins CICs is a legal 'lock' that ensures assets and profits will be used for the community interest and not private gain. Although this asset lock allows for 'reasonable' payments to directors and shareholders, it ensures that upon winding up assets will only be used to benefit the community.

Setting up a CIC

It is possible to either set up as a CIC from the outset or to convert an existing limited company to a CIC. In order to do so, you will have to register with the CIC Regulator at Companies House. You will also need to:

• pass a community interest test showing that your business is socially motivated.
• ensure your company memorandum and articles show that you intend to benefit the community
• prove that your stakeholders agree to the change if you are already in business.

You must also provide an annual community interest report to the regulator, outlining what you have done to provide public benefit and involve your stakeholders in your work.

Although any business is free to give some of its assets to good causes, a CIC provides a regulated model for doing so, as well as powerful incentives such as buy-in from stakeholders. If you are inclined to work for the public good, but don't want to give up your entrepreneurial ambitions, it could be the perfect way forward.