Charity or CIC - which is right for my organisation?
Julian Lomas
Over the last couple of years we’ve worked with lots of start up not-for-profit organisations, many of whom have been struggling to decide if they should be structured as a Charity or a Community Interest Company (CIC).
Of course these are not the only options for the legal structure of a non-profit but in the UK they are the main two. Other options include a simple Company Limited by Guarantee (CLG), a Community Benefit Society or a Cooperative Society.
Only a few years ago our view was that there was little advantage in registering as CIC compared to being a simple CLG. Now CICs are more widely understood, stakeholders (and funders in particular) increasingly have a preference for the option of a CIC limited by guarantee over a simple CLG.
Society structures are less common and tend to be appropriate only in quite specific circumstances (such as community share issues).
Therefore, while a CIC does bring some limited additional regulatory burden and legal constraints (particularly the asset lock) compared to a simple CLG, nowadays it is the primary alternative to being a registered charity for most non-profits in the UK.
What is the difference between a Charity and a CIC?
The key difference between a charity and a CIC is that an organisation can only be a charity (and in most cases must be a registered charity) if it is established for exclusively charitable purposes for public benefit.
Determining whether an organisation is established for exclusively charitable purposes for public benefit can be a complicated matter and the Charity Commission guidance isn’t always easy to interpret. Therefore it is usually worth getting professional advice on this question. Nevertheless, the key factors are:
Is the organisation meeting a charitable need as defined in charity law - it must be to be a charity?
Do the benefits arising from the organisation’s work outweigh any detriment or harm arising from that work - again they must be for the organisation to be a charity?
Is the organisation benefiting a sufficient section of the public - again it must be to be a charity?
Does the organisation’s work give rise to anything more than incidental personal benefits - it must not for it to be a charity?
Is the organisation independent of outside control - again it must be to be a charity?
Further guidance on these and other considerations can be found on the Charity Commission website.
These constraints do not apply to a CIC but a CIC must be established for community benefit and must include an asset lock that ensures the company’s assets can only be used for community benefit (although some CICs limited by shares can distribute some profits to shareholders).
As a result of these differences, the regulatory requirements for charities are also significantly more than they are for CICs. Moreover, charity Trustees carry somewhat more personal responsibility than do the Directors of a CIC.
What are the key factors in choosing between a Charity and a CIC?
Our experience is that there are a limited number of key factors that influence the choice between a CIC and a Charity when choosing a non-profit legal structure. But remember that most organisations established for exclusively charitable purposes and for public benefit must register as a charity. The key factors are:
Is the organisation established for solely charitable purposes? If not then, regardless of any other considerations, the organisation cannot be a Charity. For example, an organisation that is tackling food poverty by making food discarded by supermarkets available free to the public at large is unlikely to be established for exclusively charitable purposes because some of the beneficiaries of the free food may not be in charitable need.
Is the organisation established to benefit a sufficient section of the public? This is tricky one to understand at first but if the answer is no then again, regardless of any other considerations, the organisation cannot be a Charity. For example, an organisation set up to provide educational activities that encourage young people to pursue careers in a particular company or industrial sector is unlikely to pass this test and therefore could not be a Charity.
Do the founders of the organisation need/want to make their living from their involvement? If they do, and the organisation is to be a Charity then they will need to be employed by the Charity and, in most circumstances, it would not be appropriate for them to be on the Board of the Charity. For a CIC, the founders can easily be employed and be Directors of the CIC. For. CIC limited by guarantee they can also be members (but their income would still come solely through employment). For a CIC limited by shares they can be shareholders and therefore derive some income from dividends. This links to the next consideration…
Do the founders want to retain “control” of the organisation’s plans and activities? Put another way, do they want to be the only members of the organisation and/or retain influence or control through being on the Board? If the answer is yes then the organisation may not be able to register as a Charity, particularly if the founders also need/want to make a living from their involvement. A company limited by shares cannot register as a Charity.
How will the organisation generate income? If the organisation is likely to derive most of its income from grants and donations, there are significant advantages from being a Charity - such as ability to claim Gift Aid on donations and the fact that many charitable trusts and foundations will only fund charities. Conversely, if income will be mostly earned - such as local authority contracts or customers paying directly for the services they receive - then those benefits largely disappear and, depending on the level of charges, it may not be possible for the organisation to register as a Charity.
Tax considerations? As well as being able to reclaim Gift Aid on donation, a Charity also enjoys various other tax advantages such as exemption from Corporation Tax (except for non-primary purpose trading) and Business Rate reliefs. CICs generally do not enjoy these advantages.
Can a CIC become a charity or vice versa?
The short answer is yes, a CIC can convert to become an incorporated registered charity and, in some circumstances a charitable company can convert to become a CIC. However an organisation cannot be both a CIC and a Charity at the same time. In both cases, the process can be quite convoluted and therefore costly and time-consuming.
To find out more about the governance support we offer, please contact us at julian@almondtreeconsulting.co.uk to arrange free initial telephone discussion.