Two common entities used for not-for-profit or community orientated organisations are the company limited by guarantee and the community interest company (“CIC”). As the names suggest both types of entity are limited companies (a CIC is a special type of company and may be either a company limited by guarantee or a company limited by shares). 

The two main advantages of limited companies over unincorporated entities are that (1) they have their own separate legal personality (enabling them, for example, to hold property) and (2) they have the benefit of limited liability for their members. Set out below are some of the key characteristics of the company limited by guarantee and the CIC.

Companies Limited by Guarantee

Suitable uses for companies limited by guarantee are not-for-profit activities where no sharing of profit is contemplated. The key characteristics of a company limited by guarantee, and the main ways in which they differ from a company limited by shares, are:

  1. No share capital – a company limited by guarantee may only be formed without a share capital.
  2. Capital – there is no liability on members to contribute to company's capital while the company is a going concern but instead there is a liability on winding up. Members are liable, to the extent of their guarantees (usually a nominal sum), only if the company is wound up and a contribution is needed to enable its debts to be paid.
  3. Constitution – it is normal for a company limited by guarantee to have provisions in its articles of association stating that its income is to be applied in promoting its objects and prohibiting the payment of dividends to its members. Any provision in the articles of a company limited by guarantee which purports to give any person the right to participate in the divisible profits of the company otherwise than as a member is automatically void.
  4. Company name – the Registrar of Companies may agree to dispense with the word "limited" from the name of a company limited by guarantee if certain requirements are met. In particular, a company limited by guarantee will qualify for this exemption if its objects are the promotion of commerce, art, science, education, religion, charity or any profession and anything incidental or conducive to those objects and its articles of association require:
  • its profits or other income to be applied in promoting its objects;
  • that dividends (or returns of capital) are prohibited; and
  • if the company is wound up, all the assets are to be transferred to another body which has similar objects or which promotes a charity.

Community Interest Companies

Community Interest Companies can be either a company limited by guarantee or a company limited by shares. Whichever option is chosen it will be subject to further regulation in accordance with the CIC Regulations. The key characteristics of a Community Interest Company are:

  1. Community interest test – CICs must satisfy the community interest test at formation and continue to do so for as long as they remain a CIC. A CIC will satisfy the community interest test if it can show that a reasonable person might consider that its activities are being carried on for the benefit of the community. A company will not satisfy the test if its activities only benefit members of a particular body or its activities are political. Not all of the activities carried on by a CIC need to have a direct benefit to the community to which it serves but everything a CIC does should somehow contribute to benefiting the community it is set up to serve.
  2. Transparency – CICs have to deliver to the Registrar of Companies an annual community interest company report with its annual accounts. This report records the CIC's activities for that year including any details on assets transferred for less than market value, dividends paid and the remuneration of directors.
  3. Charitable status - a charitable company can convert to a CIC but on conversion it will lose its charitable status. A CIC cannot be a registered charity and a CIC simultaneously. A charity may, however, own a CIC.
  4. Asset lock - a CIC cannot transfer its assets (including any profits or other surpluses generated by its activities) for less than market value unless transferring them to another CIC or charity (that is either specified in its or articles or consented to by the CIC Regulator) or if the transfer is for the benefit of the community it was set up to serve (known as the asset lock). This asset lock is set out in the articles of association of the CIC. CICs must consider the asset-lock when entering into commercial relationships and when deciding remuneration for its employees and directors. The asset lock protects the assets of the CIC and ensures that the assets and profits of the CIC will be devoted to the benefit of the community and not for rewarding shareholders and directors.
  5. Flexibility - a CIC can take the form of a number of different corporate structures so long as all its activities contribute to providing benefit to the community. If the CIC is a not for profit organisation, it can be formed using a company limited by guarantee (see the characteristics referred to above). If however, it wishes to make profits and distribute the profits to its members, it may be formed using a company limited by shares. As CICs cannot be charities, their objects do not have to be exclusively charitable and it is not subject to regulation by the Charity Commission. A CIC may also declare dividends on its shares to investors who are not asset-locked bodies (subject to its constitution) but such dividends will be subject to capping rules set out in the CIC Regulations. Directors may also receive reasonable remuneration.
  6. Supervision and regulation - CICs are regulated by the CIC Regulator who ensures that the CIC satisfies the community interest test and pursues its community interest objects. The CIC Regulator has powers of intervention which include removing or appointing directors, transferring the CIC's property or shares and taking action in the name of the CIC.
  7. Compliance with company law - CICs are limited companies. In addition to complying with the CIC Regulations, they must adhere to the principles of company law and will be subject to the Companies Act 2006 and any other applicable legislation.

About the author

Keith Ainsworth Partner

Keith specialises in corporate finance and finance law including bank and asset finance, venture/investment capital, flotations, mergers and acquisitions.