Are CICs 'not-for-profit'?

[Geof Cox]

I've been invited onto the expert panel for The Guardian's Live Q&A Session on employee-owned social enterprise at 1pm this Thursday.
One of the advance questions - actually posed by a member of the CIC Association - raises in passing a point of wider interest to CICs: can they be categorised as 'not-for-profit'?
'Not-for-profit' is a notoriously vague and misleading term in the UK. It probably originated in American English - and indeed it does have a specific meaning in US tax law. Many alternatives have been suggested for social enterprise, of which perhaps Declan Jones' 'More-than-Profit' is the best. However, 'not-for-profit' is still firmly entrenched in funders' language, and for most people this is reason enough to want to continue using the term to describe social enterprise.

You would certainly not choose to use a CIC structure if your main aim was to make money, so we can honestly say that CICs are not primarily for profit. However, can they really be said to be 'not-for-profit' when some of the profit - in a Share CICat least - can in fact be shared out?   Also, there is no specific limit on what directors or anybody else can be paid – as long as the CIC is still judged to be operating in the community interest.

On the other hand, the Charity Commission no less views CIC dividends, because of the statutory cap, as similar to the legitimate interest that might be charged on a loan (they therefore allow a charity trustee to invest in and receive dividends from a CIC that is a subsidiary of their charity).  Also, in countries where 'not-for-profit' is clearly defined in law it does differ from our 'charitable status', and it is quite normal to allow paid directors; it is not unusual even in Scotland – where the Charity Commission does not have jurisdiction - for at least a minority of charity trustees to be paid.

While it would obviously be quite wrong to describe a CIC as 'charitable', therefore, CICs are in fact similar to many 'not-for-profit' structures in other countries; they are primarily for social purposes rather than for profit, the dividends they pay can be seen simply as proper interest payments, and in this light I think they might legitimately be described as 'not-for-profit' in the UK context.

But this is admittedly a fine judgement, and I'd welcome other views.

[John Mulkerrin]

agh! definitions!!!!! this one doesnt really make sense to use anywhere other than casual conversation or over your conference coffee, its an unfortunate, inadvertent oxymoron!

not for profit? everyone's for profit, Collins dictionary, verb.... ' If you profit from something you gain or benefit from it eg. I profited from his advice. The Third Sector is all about profit, eg a school, which is a trust, does the child profit from learning to read? A hospital, doesnt the patient profit from treatment, and then society from their return to helping us pay off the debt mountain? I know its pedantic but hopefully makes my point,can I ask for it to be dumped????

I subscribe to Declan Jones 'More than Profit' personally for CICs, but to answer the particular question, Yes- 70% of CICs are CLG (company limited by guarantee), same as Charity. In any practical sense we fit comfortably into the general public expectation of 'not for profit'. If your CLG you're 'not for profit' , although you'll see from earlier I dont agree with the term.

Moreover, the current CIC Share structure separates the entrepreneur's sweat equity investment from any monetary investment, so its pretty hard for the entrepreneur who leads an activity (too hard in my opinion) to share in any monetary reward other than to receive a reasonable market salary,again satisfying 'not for profit'.

Your comments on the Charity Comission view provide a reasonable position for monetary investment to be achieved while satisfying the 'not for profit' ideaology. I think the controls of monetary investment are well balanced, but perhaps slightly unfair on the individual entrepreneur.

Directors of CICs will have to work hard to find balance between community primacy and sustainable growth strategies, we need to ensure a reward system matches the risk involved, potentially moving some CICs slightly outside what 'not for profit' means to joe public. Id happily endorse a barometer that matched a total allowable individual reward to that of allowable charity director pay :-)

Im starting to go off at a tangent, its subjective......as the young lady off Little Britain so adequately put it...............yeah but,..no....but yeah.

[Alastair Irvine]

Every organisation in the world should be aiming to make a surplus, to enable future investment if nothing else.

CICs are not for my profit, they are for our profit.

[Adrian Jevans]

Not for profit is a term that we do not particularly like. Our aim is to make a profit out of contracts and commissioned work- this allows us to either match fund or fund community projects that would not get any mainstream funding. We see ourselves as a social entersprise, but as we trade, we must do with a business brain - and that means profitably - and if we make a profit, so does our community

[Jeff Mowatt]

I missed this earlier.  For some time we've used 'profit for poverty' and more recently 'profit for purpose' to describe the business model investing in a social outcome.  A guarantee xompany based CIC would be 100% congruent with this description while a share based CIC which determined to distribute part of profit in dividend would be a partial interpretation of this principle.

[Jeff Mowatt]

Geof, They are 'profit for purpose' in our perception and the case for using this approach is made at some length in our founding white paper which pitched the concept at President Clinton. We'd probably have become one ourselves had it been available in 2004 but with the founder unable to visit the UK, we now have just one director.   

The role of an investment trust mechanism and CDFIs has been an ongoing theme of advocacy. 

CLG format painted us into a corner for attracting investment and since, here and in Ukraine we took the conventional share company format with a non dividend distributing philosophy.

 A key point about CDFIs is that they attract tax relief for the investor, and hence suggesting this as a mechanism for SE propagation in 2004.

 

In other countries, other terms such as 'more than profit', benefit corporation' and 'low profit limited liability company' have been used to describe a business with at least part of its profit invested in a social purpose. Muhammad Yunus is best know with simply 'social business'.     

[Jill Poet]

I'm going to add to the confusion now because another thing to bear in mind is whether or not the CIC is Limited by Shares or Limited by Guarantee.

I have a CIC which is the former, which is probably the rarer of the two (I think). Because that means the company is essentially under the control of the two share holding directors it is treated quite differently from a CIC which is limited by guarantee.

[Geof Cox]

Yes - I think about three quarters of CICs are Guarantee flavour - surprising because it is the Share CIC that is the true innovation.

The Guarantee CIC is more grant-friendly, partly because the Guarantee company form has always been used for philanthropic purposes while the Share company has been more commercial (a division which goes back to the basic nature of the limited liability - shares are negotiable instruments, which can be bought and sold, wheras guarantees are more like personal promises, which you can't trade).  But I don't think this has much impact on the question of whether either Share or Guarantee CICs can be legitimately presented as 'not-for-profit'.

There is though a presentational, and grant-fundability issue around any CICs that have only one or two members who are also directors, especially if they are also employees.  I don't think these issues would be much different if you were a Guarantee CIC.  I know of Share CICs that have been good at raising grants, and obtained discretionary rate relief - but they have some not-for-profit articles in addition to the usual Regulator's models and more importantly broader governance arrangements - stakeholder involvement, non-executive directors, etc.

[Terri Hills]

This all sounds very impressive!

Quite daunting also as it's a live discussion, so good luck with that.

One thought: I wouldn't get too tied-up with semantics of the various structures; this could go on forever and is subjective at best. Perhaps it might be more helpful and illuminating to highlight the variety of practical ways of operating - as you are clearly more than capable of doing!

Kind regards.

 

[michelle jones]

WOW!