In the UK, both charities and Community Interest Companies (CICs) are recognized as vehicles for social good, but they operate under different legal frameworks and governance structures. Understanding the distinctions between these two forms of organisations is crucial for anyone looking to establish an entity with a primary focus on social, environmental, or community objectives. This article aims to provide an authoritative comparison to help social entrepreneurs and philanthropists make an informed decision.
Charities: Definition and Key Characteristics
Definition
A charity is an organization with exclusively charitable purposes for the public benefit. These purposes include areas such as education, poverty relief, religious or racial harmony, the advancement of the arts, and more.
Regulation
Charities in the UK are regulated by the Charity Commission for England and Wales, the Office of the Scottish Charity Regulator in Scotland, or the Charity Commission for Northern Ireland, depending on where they are based.
Tax Relief
Charities benefit from a range of tax reliefs. They can claim back tax on donations through Gift Aid, are exempt from income tax on donations, and receive significant reductions in business rates and other taxes.
Funding
Charities can access certain types of funding that may not be available to non-charitable organizations, such as grants and public funding earmarked specifically for charities.
Transparency and Trust
Charities are required to adhere to strict reporting and accounting standards, fostering a high level of transparency and public trust.
Community Interest Companies: Definition and Key Characteristics
Definition
A Community Interest Company (CIC) is a special type of limited company which exists to benefit the community rather than private shareholders.
Regulation
CICs are regulated by the CIC Regulator, in addition to the standard corporate regulation by Companies House.
Asset Lock
CICs have an asset lock, which ensures that assets are used for the community’s benefit. They also have limitations on the amount of profit that can be distributed to shareholders, if any.
Funding
While CICs can still access a variety of funding sources, they cannot issue charitable tax receipts for donations, which may limit certain forms of charitable giving.
Flexibility
CICs can trade like normal commercial companies and can pay their directors competitive salaries, which can make them attractive to social entrepreneurs.
The Differences
Purpose and Perception
Charities must have exclusively charitable purposes and are often seen as providers of relief or services without a commercial edge. CICs, on the other hand, operate more like businesses with a clear social mission. This distinction can influence public perception, funding opportunities, and the organization’s approach to revenue generation.
Tax Treatment
The tax benefits available to charities are not available to CICs. This can significantly affect the organization’s finances and should be a critical consideration during the decision-making process.
Dividend and Profit Distribution
CICs are allowed to distribute some profit in the form of dividends, subject to a cap, whereas charities cannot distribute profits and must reinvest all income in the pursuit of their charitable objectives.
Governance
Charities are often subject to more stringent governance requirements and reporting standards, which can be both a mark of credibility and a burden.
Conclusion
When deciding between setting up a charity or a CIC, consider the long-term mission and objectives of your organization. If the primary goal is to carry out activities with a charitable purpose and the ability to access the widest range of funding and tax relief is important, then a charity might be the most suitable option. However, if there is a need for greater commercial freedom, the ability to pay directors without the constraints of charity law, and a desire to explicitly protect the social mission while operating like a business, a CIC could be the preferable choice.
The decision is complex and should not be made lightly. It is often advisable to seek professional guidance to navigate the nuances of each structure and to align the choice with the specific goals and strategies of the social enterprise or philanthropic endeavor.
FURTHER READING
How to Register a CIC.
CIC Articles of Association.