When it comes to setting up an organization with a social or charitable purpose in the UK, you may come across a variety of terms: CICs (Community Interest Companies), charities, and not-for-profit organizations. While all these entities are typically focused on benefiting society rather than making profits for individuals or shareholders, there are distinct differences in their structure, purpose, and legal requirements. This blog will break down the key differences between them to help you better understand these legal entities and which might be the best fit for your project or cause.

What is a Community Interest Company (CIC)?

A Community Interest Company (CIC) is a special type of company introduced in the UK to serve the community. It is a relatively flexible structure for organizations that want to deliver social, environmental, or charitable goals without being constrained by the limitations of charity law.

Key Features of a CIC:

1. Purpose: The primary goal of a CIC is to benefit the community. It can engage in a wide range of activities, such as social enterprises, community services, and environmental projects.
2. Regulation: CICs are regulated by the CIC Regulator, an independent body within the UK government. To be approved as a CIC, an organization must submit a community interest statement, which outlines the benefit to the community and how any profits will be reinvested into that community.
3. Ownership and Profit Distribution: While a CIC is not set up to generate profit for owners, it can pay a dividend to investors, though this is capped to ensure that most of the profits are reinvested into the community.
4. Governance: A CIC can be run by directors or members, depending on the type of governance structure. It operates like a limited company, with shareholders and directors, but its focus remains on public benefit rather than private profit.

In summary, a CIC is a hybrid model that combines elements of both for-profit and charitable organizations. It is perfect for businesses that want to make a profit while also delivering social good, but it is more flexible than a charity.

What is a Charity?

A charity, as defined by UK law, is an organization established for charitable purposes, such as alleviating poverty, advancing education, promoting religion, or other activities that benefit the public. Charities must be registered with the Charity Commission (if their annual income exceeds £5,000) and must adhere to strict regulations set out under charity law.

Key Features of a Charity:

1. Purpose: A charity must have a clearly defined charitable purpose that benefits the public, such as advancing health, supporting education, or promoting human rights.
2. Regulation: Charities are regulated by the Charity Commission for England and Wales (or equivalent bodies in Scotland and Northern Ireland). Charities must adhere to strict rules governing how they use funds, including restrictions on profit distribution.
3. Profit Distribution: Charities are not allowed to distribute profits to their members, trustees, or staff. Any surplus income must be reinvested into the charitable cause or used to further the charity’s objectives.
4. Tax Benefits: Charities enjoy a range of tax exemptions, including relief from income tax, corporation tax, VAT, and capital gains tax, as long as they comply with regulations. Donors may also benefit from tax relief for their contributions.
5. Governance: Charities are governed by a board of trustees who must ensure that the charity adheres to its stated objectives and complies with all relevant laws.

In short, charities are more restrictive than CICs in terms of profit distribution and their purpose. They are strictly focused on public benefit and have significant legal protections, including tax exemptions, as long as they adhere to charity law.

What is a Not-for-Profit Organization?

A not-for-profit organization is any organization that does not distribute its surplus income to members, directors, or shareholders. These organizations typically reinvest any surplus into furthering their objectives, which may include community projects, social services, education, or other public benefit activities. Not-for-profits can take various legal forms, including CICs, charities, or social enterprises.

Key Features of Not-for-Profit Organizations:

1. Purpose: Like charities and CICs, the primary aim is to benefit the community or a specific cause rather than to generate profit for individuals.
2. Legal Structure: Not-for-profits may operate as informal groups or as incorporated entities (e.g., CICs, charitable companies, or limited by guarantee companies). The legal form will determine whether they are subject to charity law or business regulations.
3. Profit Distribution: Not-for-profits cannot distribute profits to individuals. Instead, any surplus income is reinvested into achieving the organization’s objectives.
4. Flexibility: The term “not-for-profit” is a broad category that includes many types of organizations, including those that operate in a commercial manner to generate income for their cause (e.g., social enterprises) or even organizations that are designed purely to support an individual or family’s specific needs without charitable status.

Not-for-profit organizations provide the flexibility of operating as a business, but without the incentive to make profit for owners. The term is often used interchangeably with social enterprises, but not all not-for-profits are social enterprises or charities.

Charities vs. Not-for-Profits

While charities and not-for-profits both aim to benefit the community and reinvest any income into their missions, the difference lies mainly in regulation and structure.

1. Tax Relief: Charities enjoy greater tax exemptions compared to not-for-profits. A not-for-profit organization may not necessarily receive the same level of tax relief, particularly if it does not meet the strict criteria for charitable status.
2. Regulation: Charities are subject to more rigorous regulation by the Charity Commission, while not-for-profits, unless they are also registered as charities, may face fewer regulatory requirements.
3. Public Benefit: Charities must prove their public benefit, which is a legal requirement. Not-for-profits, on the other hand, may not need to meet such a standard unless they are registered as a charity.

Key Differences Between CICs, Charities, and Not-for-Profits

Conclusion

Understanding the differences between CICs, charities, and not-for-profit organizations is essential for anyone looking to establish or support a social enterprise or community-focused initiative. Each structure offers unique benefits and limitations based on the specific goals and needs of the organization.

• A CIC offers a flexible option for those who wish to balance profit generation with social good.
• A charity is best for organizations with clear public benefit goals that require tax exemptions and government regulation.
• A not-for-profit organization is a broader category that includes CICs, charities, and social enterprises, offering flexibility in how the entity is structured and managed.

Choosing the right structure depends on your organization’s mission, funding needs, and how you want to operate within the broader legal framework. Would you like help setting up a CIC? Get in touch