Social Enterprises: What are the differences between CIC and CIO?

Do you know your CICs from your CIOs and which one is right for your social enterprise?

Rebecca Robinson, director in the Company Commercial team at Wake Smith Solicitors, looks at the differences.

This article covers:

• What is a Charitable Incorporated Organisation (CIO)?
• What type of charity would become a CIO?
• Can our charity convert to a CIO?
• What is a Community Interest Company (CIC)?
• Can our charity convert to a CIC?
• What are the advantages of a CIC?
• How does my charity become a CIC?
• Your next move?

What is a CIO?

A Charitable Incorporated Organisation (CIO) is a corporate structure designed specifically and exclusively for charities.

It is an alternative to other common legal structures for charities, such as charitable companies (usually companies limited by guarantee), charitable trusts, and charitable unincorporated associations.

• CIOs only need to register with the Charity Commission. Unlike charitable companies, they do not need to be registered at Companies House;
• All CIOs are registered charities and therefore have charitable status;
• Unlike all other forms of charity, a CIO cannot exist until it is registered by the Commission;
• A CIO's governing document, its constitution, must be in a form specified by the Charity Commission, or as near to that form as the circumstances permit; seeking to register a CIO with a tailor-made constitution is likely to delay registration.

What type of social enterprise would become a CIO?

Generally the CIO structure appeals to medium-sized unincorporated charities that employ staff and/or enter into contracts, although the structure does impose more regulation and registration requirements on them than if the charity remained unincorporated.

There is no web-based searchable register of charges over the property of CIOs. The only public register of charges over CIO property is therefore those charges that would trigger registration with the Land Registry.

In practice, this lack of Companies House style register of charges may mean that a CIO is less attractive for large charities and charities that routinely seek to borrow money against the security of their property.

Can our charity convert to a CIO?

A charitable company can convert into a CIO. Charitable companies may wish to convert to a CIO to benefit from the reduced regulation and administration but retain charitable status.

There is no facility to simply convert an existing unincorporated association into a CIO, the CIO would need to be incorporated and then the assets and liabilities of the unincorporated association would be transferred by way of separate transaction to the CIO.

All income and property of the CIO must:

• be applied solely towards the promotion of its objects; and
• not be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to any of its members (also known as a "non-distribution" clause).

What is a Community Interest Company (CIC)?

A CIC is a limited liability company, designed for social enterprises that want to use their profits and assets for the public good.

• It has the specific aim of providing a benefit to a defined community and must use its income, assets and profits for the community it is formed to serve.
• The primary purpose of a CIC is to benefit the community and not its shareholders, directors or employees.
• CICs can be incorporated as a new company or converted from an existing company and are relatively simple to form as the Regulator of Community Interest Companies provides a model constitution. They can be companies limited by shares or by guarantee however they must satisfy and continue to satisfy a community interest test.

Can our charity convert to a CIC?

A CIC cannot be a charitable company. Charities can convert to CICs with the Charity Commission's consent, but they will lose their charitable status in doing so. Charities benefit from tax advantages (such as business rates relief) but are subject to greater regulation than CICs.

There is no facility to simply convert an existing unincorporated association into a CIC, the CIC would need to be incorporated and then the assets and liabilities of the unincorporated association would be transferred by way of separate transaction to the CIC.

How does my social enterprise become a CIC?

Once the Regulator has decided the social enterprise is eligible, the Registrar will issue a certificate of incorporation which will state that the company is incorporated as a CIC.

Same day incorporation is not available to CICs. This is because the Registrar of Companies cannot incorporate a CIC until the Regulator has considered the CIC's community interest statement and notified the Registrar that the social enterprise is eligible to be a CIC.

The asset lock is a fundamental element of the CIC. It ensures that the CIC's assets are not sold at an undervalue and are used for the benefit of the community it was set up to serve and not to benefit the company's members, directors, employees or service providers. The Regulations provide for a mandatory asset lock in the articles of association of the CIC.

Your next move?

For further information on setting up your charity please contact Rebecca Robinson at Wake Smith Solicitors on 0114 224 2007 or email [email protected]

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Posted 12/12/23