Should A CIC Be Limited By Shares Or Guarantee?

For most grant-funded or volunteer-led social enterprises, a CIC limited by guarantee is usually the cleaner choice. If you want to bring in investors and pay limited dividends from future profits, a CIC limited by shares may fit better.

That answer is simple on the surface, but the practical consequences are bigger than many founders expect. Your choice affects who controls your CIC, whether anyone can receive dividends, how funders view you, and how easy it's to raise money later.

The good news is that you can make a confident decision before incorporation if you look at the right questions early.

What Is The Difference Between A CIC Limited By Shares And Guarantee?

The difference is that a CIC limited by shares has shareholders, while a CIC limited by guarantee has members who promise to contribute a small amount if the company is wound up.

Both are Community Interest Companies. Both are registered at Companies House and regulated by the Regulator of Community Interest Companies. Both must pass the community interest test and have an asset lock, which means the CIC's assets and profits must mainly be used for its community purpose.

The legal wrapper changes how ownership and profit work:

• CIC limited by shares: the company has shares. Shareholders can vote, receive dividends if the CIC has distributable profits, and sell or transfer shares if the articles allow it.
• CIC limited by guarantee: the company has no share capital. Members usually vote on a one member, one vote basis and don't receive dividends.

Both structures sit within UK company law, including the Companies Act 2006, with extra CIC rules under the community interest company regime. When you incorporate, you also submit a community interest statement, usually on form CIC36, explaining who your CIC helps and how.

A helpful way to think about it's this: shares are better suited to an ownership and investment model, while guarantee is better suited to a membership, grant and reinvestment model.

Which Structure Is Better If You Want Investment?

A CIC limited by shares is usually better if you want equity-style investment, because it gives investors something to own.

If someone puts money into a company limited by shares, they can receive shares in return, usually documented through share issue or share purchase terms. Those shares can carry voting rights, dividend rights and transfer rights, depending on what your articles and any shareholders agreement say.

That can suit a social enterprise that wants patient capital from supporters who believe in the mission but also want a limited financial return. For example, you might issue shares to a small group of local supporters who invest start-up funds for your community cafe, repair workshop or renewable energy project.

There are limits, though. CICs aren't ordinary profit-maximising companies. The asset lock and dividend cap restrict how much value can leave the CIC for private benefit. In broad terms, dividends to shareholders must come from distributable profits and the total dividends paid are capped, commonly at 35% of distributable profits. You should check the current CIC rules before issuing shares, because your articles and the Regulator's guidance matter here.

A CIC limited by guarantee can still raise money, but not by selling shares. Your options are more likely to be:

• grants
• donations
• trading income
• loans
• social investment that's structured as debt
• service contracts with councils, schools, charities or businesses

If you need equity investment, shares may help. If your funding plan is grants, contracts and reinvested income, guarantee may keep things simpler.

Which Structure Gives You Better Control?

It depends on whether you want control to follow capital, membership, or a carefully designed mix of both.

In a CIC limited by shares, control often follows share ownership. If you own 70% of the voting shares, you normally control ordinary shareholder decisions. This can be useful if you need founder control while you build the CIC. You can also create different share classes, such as founder shares and investor shares, and include share vesting rules, although this needs careful drafting.

In a CIC limited by guarantee, control usually follows membership. Each member commonly has one vote, regardless of how much time or money they contribute. This can feel more democratic and community-led, which funders often like.

Control isn't only about votes. You should also think about:

• who appoints and removes directors
• which decisions need member approval
• whether funders or community representatives get any reserved rights
• what happens if a founder leaves
• whether members can be removed for conflicts, misconduct or inactivity

Say Amina sets up a CIC to run after-school coding clubs in Manchester. She wants to keep strategic control for the first three years while she builds partnerships with schools. A shares structure could let Amina hold founder voting shares and bring in two small investors through a non-controlling share buy in. If Amina wants parents, teachers and volunteers to vote equally on the CIC's direction, a guarantee structure would probably match that culture better.

Whichever route you choose, don't rely on default articles without checking them. Your constitution should reflect how your CIC will actually make decisions.

How Does The Choice Affect Profit Distribution?

A CIC limited by shares can pay capped dividends, while a CIC limited by guarantee generally can't distribute profits to members.

This is one of the biggest practical differences.

If you choose a CIC limited by shares, shareholders may receive dividends if the CIC has enough distributable profits, the directors decide to declare a dividend, and the CIC rules allow it. The asset lock still applies. Your CIC must use most of its profits for its community purpose, not private gain.

Here is a simple example. Green Wheels CIC limited by shares makes 40,000 pounds of distributable profit after its first profitable year. If the current aggregate dividend cap is 35%, the maximum total dividend pool would be 14,000 pounds. The directors may still decide to pay less, or no dividend at all, if the CIC needs the money for bikes, staff, rent or community programmes.

If Green Wheels were limited by guarantee, there would be no shareholders to pay dividends to. The profit would usually be reinvested into the CIC's activities, kept as reserves, or used for another purpose that supports the community object.

Directors can be paid reasonable remuneration for real work in either structure, provided conflicts are managed properly and the payments are in the CIC's interests. That's different from taking profits as an owner.

If your business model needs to reward investors financially, shares are worth considering. If your message to funders is that all surplus goes back into the mission, guarantee is often clearer.

Will A Shares Or Guarantee CIC Help With Grants And Future Funding?

A guarantee CIC is often more comfortable for grant funders, but it depends on the funder's criteria and your income model.

Many grant makers prefer structures where profits can't be distributed to private shareholders. A CIC limited by guarantee sends that message neatly because there are no dividends. It can also look more familiar to funders used to working with charities, charitable companies and membership organisations.

That doesn't mean a CIC limited by shares can't win grants. Some funders support CICs limited by shares, especially where the community benefit is strong and the dividend policy is restrained. Others may exclude companies with share capital or ask extra questions about private benefit.

Before you set up your CIC, check the funding sources you care about most. Look at:

• whether the funder accepts CICs at all
• whether it accepts CICs limited by shares
• whether it requires an asset lock, which all CICs have
• whether it expects unpaid directors or community control
• whether it excludes organisations that can distribute profits
• whether it requires charity status, which a CIC doesn't have

A CIC isn't a charity. In England and Wales, if you need charitable status for tax reliefs or specific grants, a charitable company limited by guarantee or another charity structure may be more suitable. That's a different pathway and brings Charity Commission regulation.

Also think ahead. Switching structure later can be awkward. You may need a reorganisation, fresh documents, funder consent, contract updates and tax input. It's much easier to choose the right social enterprise company structure before incorporation than to unwind it later.

How Do You Set Up A CIC With The Right Structure?

You set up a CIC by choosing the structure first, preparing CIC articles and a community interest statement, then filing the incorporation documents with Companies House.

The process is similar for both structures, but the details change depending on whether you choose shares or guarantee.

Step 1: Decide Your Funding And Control Model

Start with your next two to three years, not just launch day. Ask yourself whether you expect equity-style investors, grant funding, community members, trading income, or a mix.

Step 2: Choose CIC Limited By Shares Or Guarantee

If dividends and investor ownership are part of the plan, consider shares. If community membership, grants and reinvestment are the plan, guarantee is often simpler.

Step 3: Prepare Your CIC Articles

Your articles set out the rules of the CIC. They deal with directors, members or shareholders, voting, share transfers, conflicts and the asset lock. Templates can be a starting point, but CIC documents work best when tailored before you use them.

Step 4: Complete The Community Interest Statement

Your CIC36 statement explains the community you serve, the activities you'll carry out, and how any surplus will be used. The Regulator of Community Interest Companies reviews this as part of the incorporation process.

Step 5: File At Companies House

You'll file the incorporation application, articles and CIC36. For a shares CIC, you also need share capital details. You should check the current Companies House CIC filing fee when you apply, as fees can change.

Step 6: Plan Your First-Year Compliance

After incorporation, you'll need to keep company registers, file accounts, submit your annual CIC report, file a confirmation statement at least every 12 months, and keep Companies House information up to date. Identity verification requirements under the Economic Crime and Corporate Transparency Act 2023 are also being phased in, so directors and persons with significant control should be ready for that process.

What Documents Should You Prepare Before Incorporation?

You should prepare your articles, community interest statement and a short founders or members agreement before you incorporate.

The articles and CIC36 are part of the official setup. A founders agreement or members agreement isn't always filed publicly, but it can save a lot of confusion later.

Here is a practical outline you can use as a starting point. A lawyer should tailor it before you rely on it:

1. Purpose And Community: describe the community you serve and the practical benefit your CIC will deliver.
2. Structure Choice: record why you chose shares or guarantee and how that matches your funding plan.
3. Founders' Roles: set out who is doing what, including paid and unpaid roles.
4. Decision-Making: list which decisions directors can make and which need member or shareholder approval.
5. Investment Or Funding: explain expected grants, loans, share issues or service contracts.
6. Profit And Surplus Policy: state whether surplus will be reinvested, reserved or, for shares CICs only, considered for capped dividends.
7. Conflicts Of Interest: set rules for director payments, related-party contracts and declaring conflicts.
8. Leaving Or Removing Members: explain what happens if a founder resigns, stops contributing or acts against the CIC's interests.
9. Intellectual Property: confirm who owns the brand, website, course materials, software or programme content.
10. Disputes: include a practical process for resolving disagreements before they damage the organisation.

You may also need commercial contracts quite early, such as venue hire terms, service agreements with councils or schools, employment contracts, contractor agreements, privacy notices and trade mark protection for your brand.

Getting these foundations sorted from day one helps your CIC look credible to funders and partners.

Key Takeaways

• A CIC limited by guarantee is often best for grant-funded, member-led or reinvestment-focused social enterprises.
• A CIC limited by shares may suit you if you want equity-style investors and are comfortable with capped dividends.
• The asset lock applies to both structures, so your CIC's assets and profits must mainly support the community purpose.
• Control works differently: shares often follow ownership, while guarantee commonly gives members equal voting rights.
• Funders may treat the two structures differently, so check grant criteria before you incorporate.
• Changing structure later can be difficult, so it's worth getting tailored advice on your articles, funding plan and governance early.

If you'd like help with choosing the right CIC structure, preparing your CIC articles and community interest statement, or setting up your founder and funding documents, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.