CIO vs CIC: Picking the right fit

If you're running a social enterprise, you may have been recommended to convert to a charity. This would be a fundamental decision, affecting how the organisation is run and the direction in which it develops. To help you consider this, we’ve set out some of the key issues. First, let’s explain some terminology:

• Social enterprises are often set up as Community Interest Companies – CICs.
• The most common form of new charity is a Charitable Incorporated Organisation – CIO.

The decision on whether a CIO or CIC would be the right fit for you is a key strategic choice.

CICs and CIOs are similarly named but are quite distinct models, often reflecting different aims, ambitions, and funding opportunities or constraints. Understanding your goals is the first step.

Grant funding

If your focus is on charitable activities and accessing grants, a CIO might be more suitable. CIOs are registered charities, offering limited liability. Charity registration can be a requirement for some donors, as you may have found if your grant applications have been turned down as a CIC. However, this very much depends on your sector, activities and funding model. CIO status is more likely to be the right choice if the plan is to rely heavily on donations and grants, as it can unlock substantial funding opportunities.

A commercial model, with stakeholder assurances

On the other hand, if you aim to blend social impact with commercial activities, a CIC could be the better fit. CICs provide greater flexibility for trading and generating revenue. An asset lock feature is built in, limiting the amount of profits that can be paid out to owners while trading and at wind-up, ensuring that profits are reinvested for the community purpose. This, and the oversight of the CIC Regulator, exists to create trust and confidence in the enterprise among stakeholders.

The CIC structure is effective for social enterprises that plan to engage in significant trading activities, as it allows for a more entrepreneurial approach while still maintaining a commitment to social objectives.

Rules, rules, rules

You should consider your appetite and capacity to deal with regulation. CIOs are regulated as charities (including annual charity format accounts and annual returns) and, as such, face restrictions on trading activities. This may mean establishing a separate trading subsidiary if there are substantial commercial ventures. This can result in additional administrative costs.

CICs, on the other hand, are regulated by both Companies House and the CIC Regulator. This brings a generally lighter regulatory load than a charity and allows for more entrepreneurial activity. CICs benefit from more straightforward annual financial reporting when compared to charities, which can reduce administrative costs. The main annual requirement, beyond that of an ordinary trading company, is a relatively simple annual return form submitted with the accounts.

Control and earning wages

You should also consider who will control and be employed by the entity. CICs can pay their directors reasonable amounts, which is important if you want to be on the board and earn a living from the enterprise. CIOs usually do not pay their trustees – so if you need to be paid, particularly if you're the CEO, you'll likely need to stand down from the board or committee and be comfortable being answerable to the board of trustees as an employee. In our experience, this is the dealbreaker for some.

Tax

Charities are usually structured to be exempt from corporation tax on their surpluses. A CIC is subject to corporation tax on its profits. There are also charitable tax reliefs (such as Gift Aid) that encourage and augment giving to CIOs, which CICs don’t benefit from. Charities also enjoy business rates relief of at least 80%, which a CIC won’t receive unless it has a supportive local authority.

Setting up

In addition, the process of setting up a CIO with the Charity Commission is challenging, as you need to persuade the Commission that you have constitutional objects consistent with charity law and can deliver them for the public benefit. In contrast, although setting up a CIC requires registration with two regulators – Companies House and the CIC Regulator – registration is a much easier process, being accepted unchallenged in the large majority of cases.

If the CIC is already running, there’s a statutory conversion process consisting of a series of resolutions and form filings that, on the face of it, appears pretty straightforward. In practice, the technicalities of arguing a case with the Charity Commission remain – but you can seek professional support for this.

Need help?

CIOs and CICs offer differing advantages and challenges. Your choice should be guided by all the factors above. If you’d like to discuss this further, don’t hesitate to speak to one of Larking Gowen’s experienced advisers. Get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk

Jordan Stewart