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In this series, we continue looking at some of the key elements and considerations when setting up a Community Interest Company (CIC). 

You may have been doing some research into CIC rules and activities. It all seems pretty straightforward, perhaps. You know what you want to do and how your CIC will benefit the community. Great!

But in setting up your CIC, there is a really important decision that you need to make regarding whether the CIC will be limited by guarantee. This decision is important for three key reasons:

✅ It will affect how you are able to pay yourself through the CIC (if you ever plan to)

✅ In some circumstances, it may affect how your CIC is viewed by others

✅ It’s an irreversible decision! 

Considering these factors, it’s vital that you avoid any unnecessary mistakes and consider the full picture when making this decision. This brief guide is here to help you do just that. Let’s break this into bite-sized chunks and explore.

What are ‘members’ in a CIC that is limited by guarantee?

A CIC that is limited by guarantee will be set up with ‘members’ instead of shareholders. Sometimes, these members are also known as ‘guarantors’. The CIC is a separate legal entity from its members. 

A member of a CIC that is limited by guarantee can be either an individual person or another corporate body (e.g. another company).

Some of the important facts about a CIC that has members are outlined below:

Minimum of one member: Every CIC that is set up must have at least one member, but there is no limit on the number of members that a CIC can have

Membership: Unless the CIC is specifically closed to new members, it must have a process in place for accepting new members

Certificates: As part of the process for admitting new members, those who are accepted as members should be issued with membership certificates from the CIC

Reporting: Companies House should be informed of any initial members that exist when a CIC is being set up. However, any new members after setting up your CIC do not need to be reported thereafter

Records: An up to date register of the CIC members must be maintained and made available upon request by any required authorities

What rights do members have in a CIC that is ‘limited by guarantee’ actually mean?

Members in a CIC that is limited by guarantee will own voting and other rights in the company, but not necessarily rights to its profits and assets (depending on the CIC’s rules that are outlined in its Articles of Association).

What benefits do members have in a CIC that is ‘limited by guarantee’?

Here are a few potential advantages that the members in this type of CIC could benefit from:

✅ Decision-making: CIC members have the right to make key decisions such as voting on director appointments or changes to the CIC’s Articles of Association 

✅ Tax benefits where property and other assets can be held in the CIC’s name instead of by the members personally

✅ The CIC can enter into legal contracts or agreements and the members would not be personally involved for these

✅ The liability of individual members is often strictly limited to the defined guarantee amount (usually £1)

✅ Having limited liability protects members from personal responsibility for future possible debts of the CIC

How can a CIC limited by guarantee make money?

As this type of CIC is still a company that exists to remain profitable, it will generally make its profits through usual business activities such as providing products or services – most likely done to meet the community interest test.

Another way that these CICs can raise money is by imposing a joining fee (separate to the guarantee amount) or annual subscription fees in order to cover costs and make a profit.

How does a CIC limited by guarantee use their money?

As a CIC that is limited by guarantee does not have any shareholders, it cannot pay dividends out. This is usually a common way for all types of companies to distribute surplus profits. 

Therefore, CICs that are limited by guarantee will often retain surplus funds and profits and use them in the following ways:

✅ to reinvest in their future activities (investments)

✅ To promote the CIC’s activities or recruit more members (marketing)

✅ To provide funding and support to other charitable or non-profit organisations (donations)

What types of CIC are more best suited to ‘limited by guarantee’ structure?

The limited by guarantee setup is often used by non-profit organisations. As they have no intention to redistribute profits to the owners, the limited by guarantee setup is a way to evidence this intention. Common users of this structure are:

✅ Associations

✅ Community projects and initiatives

✅ Co-operatives

✅ Membership organisations

✅ Networks

✅ Youth clubs

The above list is by no means exhaustive. It also does not mean that you must set up as limited by guarantee if you intend to run a CIC of this nature.

For more information, why not book a consultation with one of our chartered accountants to explore what options are right for you

What does ‘limited by shares’ actually mean?

Ownership of shares would usually mean that a shareholder also has rights to the CIC’s profits and assets (depending on the CIC’s rules that are outlined in its Articles of Association).

As a CIC that is limited by shares has any shareholders, it can pay dividends out. This is usually a common way for all types of companies to distribute surplus profits.