Registered Charities, CIOs and CICs
In recent years new types of legal entities have been introduced for non-profit organisations, social enterprises and charities. This includes the formation of the CIC (Community Interest Company) in 2005 and the CIO (Charitable Incorporated Organisation) in 2013. Charities have of course been in existence for hundreds of years, but here we have a look at the main differences between these main three social enterprises.
1. Registered Charities
Registsred Charities may be formed under a trust deed or by incorporation with memorandum and articles. Charitable trusts will be registered with the Charity Commission and charitable companies will be registered with both the Charity Commission and Companies House, meaning they have a dual registration. Charitable companies cannot have share capital so would need to be limited by guarantee.
Charities cannot make a distribution and generally cannot remunerate trustees for being trustees. They have to re-invest any surplus generated into their charitable activities. Their charitable status generally makes them exempt from tax on any surplus.
2. Community Interest Company (CIC)
A CIC is designed for social enterprises that want to use their profits to help a community. According to GOV.UK, “A CIC is a special type of limited company which exists to benefit the community rather than private shareholders.”
Can a CIC have charitable status?
Although a CIC exists to help the public, they do not have “charitable purposes” per se. What’s important to note with a CIC is that although it looks like a charity, it is actually a company. This type of company was first introduced in 2005 as an easy way for social enterprises to have the foundations of a company, but with additional features that allow it to be used for the benefit of the community. CICs can often benefit from easier access to grant funding that a traditional limited company, which is one of their main appeals.
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. It is eligible for normal corporation tax reliefs but there are no CIC specific tax exemptions/reliefs available.
Can a CIC convert to a charity?
While it’s not an easy task, it is possible to convert a CIC to a charity. This process requires the setup of a new charity, into which the CIC’s remaining assets are transferred, before closing the CIC altogether. More recently, The Charity Commission announced that CICs can change their structure to a CIO under the Charitable Incorporated Organisations (Conversion) Regulations.
CIC asset lock
The asset lock means that a CIC can only transfer assets for less than their market value, to another CIC or asset-locked body (such as a charity or a similarly asset-locked community benefit society) or to a third party (not falling into the description above) for market value. Any surplus assets arising on the dissolution of a CIC (after satisfaction of its creditors) must go to another asset-locked body. This is designed to protect assets that are being utilised for the benefit of the community.
Dividends are capped at 35 per cent of distributable profits (the ‘Maximum Dividend Cap’) and other forms of remuneration to director’s, such as salaries, are permitted.
3. Charitable Incorporated Organisation (CIO)
Unlike a CIC, a CIO (or Charitable Incorporated Organisation) is a relatively new legal structure introduced for non-profit organisations and charities. With a CIC, you need to apply to Companies House when registering. However, with a CIO, you only need to register with the Charity Commission.
Is a CIO a limited company?
One of the benefits of choosing this structure is that a CIO creates a separate legal entity, and business is conducted in the company’s name, along with limited liability – meaning that the company’s members and trustees cannot be held personally responsible for its financial losses or debts.
What are the other benefits of a CIO?
Alongside the benefits listed above, regarding limited liability and a separate legal status, a CIO is generally considered a more cost-effective and simpler structure than a company limited by guarantee. A CIO is particularly beneficial for smaller charities, or larger charities that want to establish a smaller wing, as they provide a registered number with the Charity Commission even if they have less than the £5,000 income needed to become a registered charity.
CIOs pay no tax provided that their income is generated from their charitable activities. They therefore enjoy similar privileges to charities.
If you have recently set up a charity, or manage an established charitable organisation or CIC and need assistance with charity accounting, then please get in touch.