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Community interest companies (CICs) are an ideal vehicle for many UK social enterprises. But recent experience suggests that the allure of the CIC brand means some social entrepreneurs take the wrong path and restrict their potential to scale up in future.
As the purpose of business is increasingly acknowledged as a crucial issue for a sustainable society, the CIC form might seem a neat solution. The clue is in the name – “community” (not shareholder) interest. CICs were created in 2005 as a bespoke vehicle for social enterprise, to fill the “gap” between traditional companies – whose purpose is to benefit their shareholders – and charities, which exist for defined charitable purposes.
That gap needed to be filled partly because of the range of activities spinning out of UK public sector organisations in the 2000s and early 2010s. CICs are a great option for protecting the public benefit of those activities, because of the protections built into the legal form and the presence of the CIC Regulator, but also because their regulation is lighter touch compared to charities. CICs must use their assets for community benefit; dividends and executive pay are limited; and accumulated value in the business belongs to the community, rather than individual shareholders.
Perfect home
CICs continue to facilitate great success in a variety of sectors, from healthcare, to transport and community energy. They have provided the perfect home for trading businesses which do not see themselves as “charities” but want to publicly and irreversibly commit to embedding social purpose into their organisations, and can be the right vehicle for non-trading social organisations concerned about charity regulation.
Restructuring is possible but involves a fairly complicated, potentially expensive and time-consuming transaction
But the CIC structure does not easily support founders of new social businesses who also need to scale through equity investment. The need and opportunity to attract that investment is not always obvious when a founder begins their journey, and simply the name “community interest company” can be powerfully convincing that the CIC is the right legal form for them. We have seen a number of cases where founders have been held back in scaling up their business, and their social impact, because of the CIC’s asset lock. The pool of potential equity investors in a CIC is small, because shares in a CIC do not accumulate capital value – on winding up, shareholders receive back only the nominal value of their shares, plus any premium they have contributed. That means founders need to restructure away from a CIC into a “normal” company limited by shares in order to secure investment. Restructuring is possible but involves a fairly complicated, potentially expensive and time-consuming transaction where the CIC’s assets are (independently) valued, then sold to a new company limited by shares which continues to run the business. The CIC receives market value for its assets, but is no longer the right vehicle for the business. For smaller CICs, the process can feel disproportionate to their assets, and some elements of the business, like intellectual property, are difficult in practice to value.
As the need for more sustainable business grows, these particular founders need a solution which embeds purpose into company structure, but doesn’t inhibit external investment.
Other solutions
The answer may be another approach which fills a “gap” in the spectrum of legal solutions – a company limited by shares which embeds purpose into its constitution, but which does not limit returns for investors to the same extent as CICs. Many will be aware of B Corps, which require companies to change their legal purposes to benefit both their shareholders and create a material positive impact on society and the environment.
B Corps are not required to be asset locked, and so in theory those commitments can be changed in future. But founders can choose to adopt a “B Corp Plus” model, which builds in further protections for the mission, like higher voting thresholds for certain key decisions, or issuing “golden shares” to specific shareholders. There is a lot of flexibility in how these structures can be designed, as can be seen from recent examples like Tony’s Chocolonely and Library of Things (pictured above).
There is a lot of flexibility in how these structures can be designed
Going further than the B Corp model requires careful thought and most likely seeking external advice, but for those in the UK who would prefer to take it as far as they can themselves, the free tool Purposely offers options, explanations and template legal documents to embed mission in a variety of ways. The Purpose Foundation has also created templates and models for steward ownership structures in multiple jurisdictions.
There is a large number of organisations for whom the CIC structure offers a neat combination of asset-locked purpose with the freedom to trade as a commercial business – as well as the guarantee of regulatory oversight and long-term commitment to community interest. But for those entrepreneurs starting their journey, who feel that external investment will be in their future, thinking more broadly than the CIC model is crucial.
- Oliver Hunt is a partner at Bates Wells.
Top photo: Library of Things, pictured at a launch in Hammersmith, London, in 2022. The social enterprise is structured as a private company limited by shares.
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