How To Set Up A CIC With The Right Constitution

Setting up a CIC can be exciting because it lets you build a business around a social purpose, not just profit. But once you get to the constitution, the process can start to feel a bit less friendly.

You might be wondering whether the model articles are enough, what the asset lock actually does, and how much control you should give members or directors from day one.

The good news is that a CIC constitution doesn't need to be complicated. It just needs to match how your social enterprise will run in real life, including how decisions are made, where money can go, and what happens if plans change later.

What Is A CIC Constitution And Why Does It Matter?

A CIC constitution is a type of company constitution, mainly made up of your company's articles of association, and it matters because it sets the legal rules for how your CIC is run.

When people talk about a CIC constitution, they're usually talking about the articles of association registered at Companies House. These sit alongside your Community Interest Statement, also known as form CIC36, which explains your community purpose to the Regulator of Community Interest Companies.

Your articles deal with practical questions like:

• who can become a member
• how directors are appointed and removed
• what powers directors have
• how meetings and votes work
• how profits and assets can be used
• what happens if the CIC is wound up

For a normal private company, articles often focus on shareholder rights and director powers. For a CIC, they also need to work with the special CIC rules, including the asset lock and restrictions on distributions.

This is why your constitution is more than an admin document. If it's too vague, you may struggle to show funders how decisions are controlled. If it's too restrictive, you may make everyday decisions harder than they need to be.

Say you start a CIC to run affordable creative workshops for young people. If your articles don't clearly explain who can vote, whether parents or volunteers can be members, and how income can be reinvested, a simple growth decision could turn into a dispute later.

Should Your CIC Be Limited By Guarantee Or Shares?

It depends on how you want ownership, membership and funding to work, but many community-focused CICs set up as a company limited by guarantee.

A CIC limited by guarantee doesn't have shares. Instead, members agree to contribute a small amount if the company is wound up, often GBP 1 each. This structure is common where the CIC is grant-funded, volunteer-supported or designed to reinvest all surplus into the community.

A CIC limited by shares can issue shares and, in some cases, pay dividends. However, CIC dividends are restricted. The rules are designed to stop too much value leaving the CIC and protect the community purpose. For CICs limited by shares, there's an aggregate dividend cap of 35% of distributable profits.

Here is a practical way to think about it:

• Choose guarantee if your CIC is more like a community organisation, grant-funded programme or social enterprise where members don't expect a financial return.
• Choose shares if you may take on social investors who want equity and a limited return, while still accepting CIC restrictions.
• Get tailored advice if you want both community accountability and investor rights, because the constitution needs to balance both.

For example, Maya wants to set up a CIC offering low-cost coding classes to teenagers. She has three directors and wants 20 local members to have voting rights. Each member's liability is limited to GBP 1. A CIC limited by guarantee fits well because the goal is community delivery, not investor returns.

If Maya later wants investment from local businesses, she'll need to consider whether sponsorship, grants, loans or a share structure works better. That decision is much easier before registration than after.

What Should Your CIC Articles Of Association Include?

Your CIC articles should include the standard company rules plus CIC-specific clauses that protect your community purpose, asset lock and decision-making structure.

The Regulator of Community Interest Companies provides model constitutions, and these can be a helpful starting point. The key is checking whether the model actually fits your organisation. Templates often miss the practical detail that matters when your CIC starts hiring staff, signing contracts, accepting funding or dealing with member disagreements.

A Practical CIC Articles Outline

This outline isn't a finished legal document, but it shows the main clauses to think through. A lawyer should tailor it before you use it.

1. Company Type - state whether the CIC is limited by guarantee or shares.
2. Objects - describe the community purpose clearly, without making it so narrow that ordinary growth becomes difficult.
3. Asset Lock - confirm assets are used for the community purpose and identify what happens on winding up.
4. Members - explain who can become a member, how they join, and when membership ends.
5. Member Voting Rights - set out voting rights, meeting rules, quorum and written resolutions.
6. Directors - cover appointment, removal, duties, conflicts of interest and decision-making powers.
7. Payments And Benefits - explain when directors, members or connected people can be paid or receive benefits.
8. Profits And Surplus - state how surplus income can be reinvested and, if relevant, how dividends are controlled.
9. Transfers Of Shares Or Membership - include rules to stop control moving to the wrong people.
10. Winding Up - name an asset-locked body or set a process for transferring remaining assets.

The objects clause deserves special care. If it's too broad, the CIC Regulator may question whether your community purpose is clear enough. If it's too narrow, you may need to amend your articles later when your activities expand.

A good social enterprise constitution gives you enough flexibility to grow while still proving that the CIC exists for community benefit.

How Does The Asset Lock Work In A CIC?

The asset lock stops CIC assets being used mainly for private gain, so your constitution needs to say where assets can go and who can benefit.

This is one of the main legal features that makes a CIC different from an ordinary company under the Companies Act 2006. The asset lock is overseen by the CIC Regulator and is built into the CIC framework under the Companies (Audit, Investigations and Community Enterprise) Act 2004 and related CIC regulations.

In practice, the asset lock affects:

• Profits - surplus should usually be reinvested into the community purpose, subject to any permitted dividends for CICs limited by shares.
• Asset Transfers - assets can generally be transferred for full market value, to an asset-locked body named in the CIC's articles, to another asset-locked body with the CIC Regulator's consent, or otherwise in line with the CIC asset-lock rules for community benefit.
• Winding Up - remaining assets can't simply be distributed to members like a normal private company.
• Director And Member Benefits - payments need to be properly authorised and consistent with the CIC's purpose.

You can usually name a specific asset-locked body in your articles, or set a process for choosing one later. Naming a recipient can reassure funders, but it can also create a problem if that organisation closes or changes direction. If no asset-locked body is nominated in the articles, CIC Regulator consent may be needed before residual assets can be transferred on closure.

For example, if your CIC supports disabled adults through community gardening, your articles might say that leftover assets go to a named disability charity or another asset-locked body with similar objects. That gives a clear path if the CIC winds up.

The main risk is accidentally drafting the asset lock too loosely. If the articles allow assets to move to private individuals or an ordinary company without proper value, you may run into registration issues or governance problems later.

How Do You Register A CIC With Companies House?

To register a CIC, you need to file or prepare the company application, CIC articles and a Community Interest Statement with Companies House for review by the CIC Regulator.

The process is similar to registering a company, but with extra CIC-specific checks. What you provide depends on whether you register online or by post.

If you register online, the Companies House service creates the IN01 application and memorandum as part of the process. You'll need to upload:

• Articles of association - either model CIC articles or bespoke CIC articles.
• Form CIC36 - the Community Interest Statement explaining your activities and community benefit.

If you register by post, you'll need to send:

• Form IN01 - the Companies House application to register the company.
• Memorandum of association - signed or authenticated by the subscribers.
• Articles of association - either model CIC articles or bespoke CIC articles.
• Form CIC36 - the Community Interest Statement explaining your activities and community benefit.
• Current filing fee - check the latest Companies House fee before you lodge, as fees can change.

You'll also need director and member details, the registered office and people with significant control information where relevant. Your CIC36 should line up with your articles. If your articles say your object is youth employment but your CIC36 talks mostly about environmental projects, the application may raise questions.

Companies House checks the company formation details, while the CIC Regulator considers whether the organisation satisfies the community interest test. That test looks at whether a reasonable person might consider your activities are carried on for the benefit of the community or a section of the community.

A simple step-by-step plan looks like this:

1. Choose whether the CIC will be limited by guarantee or shares.
2. Write clear objects that match your planned activities.
3. Decide who the members and directors will be.
4. Choose your asset lock wording and winding-up destination.
5. Prepare the CIC articles and CIC36 so they tell the same story.
6. File the application with Companies House, online or by post.
7. Set up your first board records, registers and banking documents after incorporation.

The filing step is only one part of community interest company setup. The real value is making sure the constitution supports the way you'll operate after registration.

When Are Bespoke CIC Articles Worth It?

Bespoke CIC articles are worth it when the model constitution doesn't match your governance, funding plans or community accountability model.

Model CIC articles can work well for a simple structure with a small group of directors, straightforward membership and no unusual funding arrangements. But your articles should do more than get you through registration. They should help you manage control, risk and growth.

You should consider bespoke articles if:

• you'll have different member groups, such as founders, community members and partner organisations
• you want certain decisions to need member approval
• you need safeguards around a founder leaving or being removed
• you want investors, lenders or grant funders to have specific protections
• you plan to run trading activities alongside grant-funded programmes
• directors may be paid for services and you need clear conflict rules
• you want tighter rules around share transfers or voting control

Director powers also need careful thought. Directors usually manage the day-to-day business, but members can have reserved powers for major decisions. For example, your articles might let directors approve ordinary supplier contracts, but require member approval before changing the objects, borrowing above a set internal limit or transferring key assets.

Be careful with overly democratic structures. Giving a large group of members a vote on every operational issue can slow your CIC down and make funding or contract decisions difficult. A better approach is often to give members control over major constitutional decisions, while directors handle normal management.

A well-drafted constitution should also deal with deadlocks. If two founding directors disagree and there's no process for breaking a tie, your CIC may stall at the exact moment it needs clear leadership.

Key Takeaways

• A CIC constitution is mainly your articles of association, and it controls how your CIC makes decisions, uses assets and protects its community purpose.
• You need to choose between a CIC limited by guarantee and a CIC limited by shares before you register, because that choice affects membership, funding and profit distribution.
• The asset lock is central to a CIC, so your articles should clearly explain how assets, surplus and winding-up funds can be used.
• Online and postal CIC registrations have different filing steps, so make sure you prepare the right documents for the route you're using.
• Model CIC articles can be useful, but bespoke articles are often worth it if you have investors, different member groups, paid directors or special governance rules.
• Your CIC articles and Community Interest Statement should match, otherwise your registration may be delayed or your governance may become unclear later.

If you'd like help with your CIC constitution, community interest statement, asset lock wording or member and director rules, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.