While they might sound similar, and both Limited Companies, they serve very different purposes.

So, what is a Commercial Trading Company?

A commercial trading company is what most people think of when they hear the word “business.” It could be a shop, a consultancy or perhaps a tech company. The main goal of a commercial trading company is to generate profit that can be distributed to its owners, who hold shares.

The company’s governing document is its Memorandum and Articles of Association. A shareholders’ agreement is also strongly recommended.

And, what is a Community Interest Company?

A CIC is still a business, but its primary goal is to benefit its community, not just to make a profit. CICs are a also known as social enterprises, which means they work to solve social problems or improve communities, while also trying to be financially sustainable.

They tend to aim for a breakeven position, but if a profit (usually referred to as a surplus) is generated, Corporation Tax is payable under the same rules as a trading company. However, when the directors then spend the surplus to fulfil the objectives, they are likely to make a loss and can obtain a tax rebate.

A CIC must submit Form CIC34 with the annual accounts. Similar to a charity’s annual Trustees’ Report, the CIC34 requires the directors to confirm their purpose and disclose the key activities during the accounting period, that served the community in pursuit of that purpose.

A CIC is also governed by Memorandum and Articles of Association, as it is after all, a UK company. However a constitution is also required.

Consider the legal structure and supplier relationships

Limited companies can be incorporated (formed) with share capital or limited by guarantee. However, for CIC’s this choice is more significant.

For a CIC with shares, the profit distribution is restricted to ensure that most of the profits go back into the community or toward the company’s social mission. Shareholders therefore receive limited dividends and those that manage the company will need to be rewarded via their remuneration package. Also, in some instances grants are not available to companies that have shareholders. With a Limited by Guarantee company, there are not any shareholders. Instead, members agree to contribute a small amount (often a nominal sum like £1) if the company faces financial difficulties. This structure is common for non-profits or organisations that focus entirely on community benefit because it is more transparent and enhances trust. As surpluses cannot be distributed (via dividend to shareholders), they are held until they can be reinvested back into the company or the community.

The key differences are…

Purpose

A commercial trading company aims to make money for its owners, while a CIC focuses on making a positive impact on the community.

Profit Distribution

In a commercial trading company, profits go to the owners or shareholders. In a CIC, profits are reinvested back into the community or the company’s social mission. CICs with share capital can distribute limited dividends, while CICs limited by guarantee do not distribute profits at all.

Legal Structure

CICs have to meet certain legal requirements that ensure they are genuinely benefiting the community, such as having a set of rules that limit how much profit can be distributed to shareholders. They can be structured either with share capital or limited by guarantee, depending on the needs and goals of the business and require a governing document known as a constitution.

Which is right for you?

If your main goal is to make money by selling products or services, or to build value for a future sale of the business, a commercial trading company with share capital might be the way to go. This structure allows you to attract investors and share profits with owners. 

However, if you’re passionate about making a difference in your community and want to run a business that supports that mission, then starting a CIC could be a great option. Depending on your plans, you could set up a CIC with share capital to attract some investment or as limited by guarantee to focus entirely on the social mission without profit distribution.

Whichever you choose, it’s important to understand your business’s goals and the impact you want to have, both on yourself and others.

To find out more about CICs…

The team at Hunter Impact Accounting Services have lots of experience with supporting the financial and governance aspects of managing charities and social enterprises, and would be pleased to discuss your plans, and help your organisation achieve its potential. You will also find lots of great information about setting up and running a CIC at gov.uk