31 Jul 2024
Someone asked us the other week about when setting up as a social enterprise in the UK whether they should establish it as a Charity or a Community Interest Company (CIC). Each structure has its own benefits and drawbacks, making it essential to understand which aligns best with your mission and social impact goals. But it can be complex. So to make life easy, below is an outline of the pros and cons of both structures.
Charities
Pros
Tax benefits
Charities enjoy significant tax reliefs, including exemptions from corporation tax on most income and gains, VAT reliefs, and business rates relief of up to 80%.
Funding opportunities
Charities can access a wider range of funding options, including grants from charitable foundations, government funding, and donations from individuals and companies. They can also claim Gift Aid on donations from UK taxpayers.
Public trust and recognition
Everyone knows what a charity is, which can enhance credibility and public trust. The Charity Commission’s oversight provides an additional layer of accountability, which can be appealing to donors and supporters.
Regulatory support
The Charity Commission provides guidance and support, helping charities navigate legal requirements and governance issues.
Cons
Regulatory burden
The rules are not to be taken lightly! Charities are subject to strict regulations and oversight by the Charity Commission, which requires detailed reporting and compliance with charity law. This can be time-consuming and demanding.
Restrictions on activities
Charities must operate exclusively for public benefit and cannot distribute profits to members or trustees. There are also restrictions on trading activities and political campaigning.
Governance structure
Charities typically need a board of trustees, which must act in the charity’s best interests. Trustees are often volunteers, which can sometimes lead to challenges in securing and maintaining an effective board. As a CIC we also have trustees, but it’s not essential.
Limited flexibility
The legal and regulatory framework for charities can be rigid, potentially limiting the ability to respond quickly to opportunities and changes in the operating environment.
Community Interest Companies (CICs)
Pros
Flexibility
CICs offer more operational flexibility than charities. They can engage in a wider range of trading activities and can be set up as a company limited by shares or guarantee, providing more options for raising capital.
Profit distribution
CICs can distribute profits to investors, although there are caps on the amount that can be distributed. This can make it easier to attract investment.
Regulatory environment
CICs are regulated by the CIC Regulator, who oversees their community benefit activities but with less stringent requirements compared to the Charity Commission. This can reduce administrative burdens.
Mission-driven
Like charities, CICs must operate for the benefit of the community. The asset lock ensures that the company’s assets are used for the community’s benefit, providing reassurance to stakeholders and communities on the impact you are having.
Cons
Limited funding options
CICs do not have access to the same range of funding opportunities as charities. They are not eligible for charitable grants and cannot claim Gift Aid on donations.
Tax benefits
CICs do not benefit from the same level of tax relief as charities. This means that they are subject to corporation tax and do not receive automatic business rates relief, so is an additional cost to factor in.
Public perception
CICs are less well-known and understood compared to charities which can impact public trust and the ability to attract donations and support.
Profit cap
While CICs can distribute profits, there are limits on the amount that can be paid out as dividends, which can be a drawback for potential investors.
Choosing between a Charity and a CIC depends on your specific goals, operational needs, and funding strategies. Because of the paperwork involved, it’s not a decision to take lightly. But is one that will make a difference for life. Choose wisely.
