CIC or charity? How to choose the right structure for a social enterprise

2 days ago

4 min read

Social enterprise team discussing whether to register as a Community Interest Company or a charity.

CIC vs charity: how do they compare?

	Charity	CIC
Regulator	Charity Commission (England and Wales); charitable companies also report to Companies House	CIC Regulator and Companies House
Purpose test	Exclusively charitable purposes for public benefit	Community interest test: a reasonable person would consider it benefits the community
Registration	Required at £5,000+ income, or if a CIO	Incorporated as a company and approved by the CIC Regulator
Tax and giving	Charity tax reliefs; can claim Gift Aid	Pays corporation tax; no charity reliefs; cannot issue charitable tax receipts
Paying people	Trustees generally unpaid unless authorised	Directors may be paid a reasonable amount
Profits to owners	Cannot be distributed to private owners	Dividends only if limited by shares, capped at 35% of profits
Assets	Applied to charitable purposes	Permanent asset lock: assets must stay for community benefit
Typical income	Grants, donations, trading to support purposes	Contracts and trading, reinvested in the mission

Sources: GOV.UK CIC guidance, GOV.UK charity registration, Irwin Mitchell. This table simplifies; check the detail for your own case.

What is a charity?

A charity must have only charitable purposes that benefit the public, and it can be set up in several legal forms, including a trust, a company, an unincorporated association or a charitable incorporated organisation (CIO). In England and Wales it must register with the Charity Commission if its income is at least £5,000 a year, or if it is a CIO (GOV.UK). The government explains the process in its guide to setting up a charity.

Registered charities can claim Gift Aid and receive significant tax and rates reliefs, and some grant-makers only fund charities. The trade-off is control: trustees are generally unpaid, and founders cannot take profit from the organisation.

What is a community interest company?

A CIC is a special type of limited company for businesses that use their profits and assets for community benefit. It must satisfy the CIC Regulator that "a reasonable person might consider" its activities benefit the community, and it can be limited by guarantee or by shares (GOV.UK CIC guidance).

Asset lock: assets, including profits, must be used for community benefit, and this protection is permanent.
Dividend cap: a CIC limited by shares can pay private investors no more than 35% of profits, so at least 65% is reinvested.
Pay: directors may be paid, as long as it is reasonable and disclosed.
Reporting: directors file an annual CIC34 report showing how the community benefited, who was consulted, and director pay.
Tax: a CIC pays corporation tax with no charity reliefs, and it cannot issue charitable tax receipts (Irwin Mitchell).

How do you choose between a CIC and a charity?

Ask these questions in order:

Are all your purposes exclusively charitable? If not, a charity is not available.
Is your income mainly grants and donations, and do donors need Gift Aid? That points to a charity.
Is your income mainly trading or contracts? That often points to a CIC.
Do you or your team need to be paid for running it, or do you want to bring in investors? A CIC is more flexible.
Do you want to keep strategic control as a founder? A CIC usually allows this more easily than a charity.

Some organisations also run a charity and a trading CIC side by side. That adds complexity, so take advice first. Our charity law and social enterprise team can help you compare options, and our commercial law services cover contracts, governance and funding agreements.

What does it involve to set up each one?

A CIC is formed by incorporating a company at Companies House with a community interest statement, then approval by the CIC Regulator. A charity needs a governing document with charitable purposes, trustees, and, once it passes the income threshold or is a CIO, registration with the Charity Commission. Timelines and costs vary, and the wrong constitution can be costly to fix later. See our fees and pricing page.

Frequently asked questions

What is the main difference between a CIC and a charity?

A charity must have exclusively charitable purposes for public benefit and is regulated by the Charity Commission. A CIC is a limited company that must pass a community interest test and is regulated by the CIC Regulator. Charities get charity tax reliefs; CICs do not, but can pay directors and, if limited by shares, pay capped dividends.

Can a CIC pay its directors?

Yes. Directors may be paid for their services, but the pay must be reasonable and is reported in the annual CIC34 report.

Can a CIC pay dividends?

Only if it is limited by shares. The dividend cap is 35% of profits, so at least 65% is reinvested for community benefit. A CIC limited by guarantee has no shareholders to pay.

Does a charity have to register?

In England and Wales, a charity must register if its income is at least £5,000 a year, or if it is a charitable incorporated organisation (CIO), whatever its income.