CIC Limited by Shares or Guarantee: Which Gets Grants?

If you are setting up a community interest company, one of the first decisions is whether it will be limited by guarantee or limited by shares. It sounds like a technical company law point, but it has a real effect on which grants you can get. This guide explains the difference in plain English, what the CIC Regulator says about funding, and how real funders treat each type.

For the bigger picture of where CICs find money, read our CIC grants explainer and our explainer on whether a CIC can apply for National Lottery funding.

The two types of CIC

The Office of the Regulator of Community Interest Companies says a CIC must be either a company limited by guarantee or a company limited by shares, and that once incorporated, one type cannot be converted into the other. So it pays to get this right at the start.

CIC limited by guarantee

In a company limited by guarantee, members guarantee to meet the company's debts up to a set limit if it fails, usually a nominal sum such as £1. There are no shares and no shareholders. The Regulator describes this as the traditional form for companies that operate without the aim of making a profit to distribute to members, and suggests it may be the best type if you do not want to pay dividends.

CIC limited by shares

A CIC limited by shares has shareholders, who can in some cases receive dividends. The Regulator suggests choosing this option if you want to pay dividends to investors, if being able to pay dividends would help your funding, and if you understand the limits on dividends.

Why funders care: dividends and the dividend cap

Grant funders want their money to benefit the community, not private owners. A CIC limited by shares can, depending on its articles, pay dividends to private investors, so some funders see a risk that grant-funded surpluses could end up with shareholders.

The CIC rules limit that risk:

• The dividend cap. The Regulator explains that the maximum total dividend is no more than 35% of a CIC's profits, so at least 65% is reinvested or used for the community.
• Two sets of articles. A CIC limited by shares using the Schedule 2 model articles may only pay dividends to specified asset-locked bodies, or others with the Regulator's consent. One using the Schedule 3 model articles can pay dividends to private investors, subject to the cap.
• The asset lock. Every CIC has a compulsory asset lock that cannot be removed. It means the company's assets, including profits, must be used for the benefit of the community, and can only be transferred to another asset-locked body or for community benefit.

Even so, the Regulator's own guidance is blunt: funders tend to look more favourably on applications from CICs limited by guarantee.

The community interest test

Whichever type you choose, every CIC must pass the community interest test. The Regulator explains that a CIC must satisfy it that a reasonable person might consider its activities are, or will be, carried on for the benefit of the community, and that it must keep meeting this test throughout its life. A company will not pass if a reasonable person might think it only benefits the members of a particular body or the employees of a particular employer, and political parties and political campaigning organisations cannot be CICs.

This matters for funding because it is the CIC equivalent of a charity's public benefit requirement. When you describe your community benefit in a grant application, it should match what you told the Regulator and what you report in your annual CIC report.

How real funders treat each type

Funder rules vary a lot, so always read the who can apply and who cannot apply pages. Some examples from funders' own guidance:

Funder	CIC limited by guarantee	CIC limited by shares
National Lottery Awards for All England	Can apply	Can apply if it follows the Regulator's guidance on sharing profits
Garfield Weston Foundation	Cannot apply	Cannot apply
Two Ridings Community Foundation	Can apply if the purpose of the grant is wholly charitable, with extra requirements in its FAQs	Same as for guarantee
Innovate UK	Eligible as a UK registered business with a Companies House number	Same as for guarantee

The National Lottery Community Fund makes a useful distinction. Awards for All England does not accept companies that can pay profits to directors, shareholders or members, including companies limited by shares, but it does accept CICs limited by shares that follow the Regulator's guidance on profits. In other words, it treats a CIC limited by shares differently from an ordinary company limited by shares. See the Awards for All England listing for current terms.

Our Garfield Weston guide and community foundation grants guide give more detail on those funders.

What funders may ask a CIC

Whichever type you are, expect funders to check:

• Your articles of association, especially the asset lock and any dividend provisions.
• Your directors. Many funders need at least two unrelated directors. Awards for All England, for example, needs at least 2 directors who are not related, including through marriage, partnership, living at the same address or blood.
• Your accounts and your annual CIC report. CIC directors must file a CIC report (form CIC34) with the accounts each year, showing how the company benefits the community.
• Whether you pay dividends or directors. Be open about it. Explaining that you pay no dividends, or only small ones to an asset-locked body, can settle a funder's doubts.

If you are already a CIC limited by shares

You cannot convert to a CIC limited by guarantee, but you can still make your bids as strong as possible:

• Check your articles. If you use Schedule 2 articles, which only allow dividends to asset-locked bodies, say so clearly in your application.
• Show your track record of reinvestment. If you have never paid a dividend, tell the funder.
• Target funders that accept you. Use the who can apply page of each fund, and focus on those that name CICs limited by shares.
• Consider a partner. A charity partner can sometimes apply for parts of a project that a CIC cannot. Our guide to using a host organisation explains when that is allowed.

Choosing at set-up: a quick rule of thumb

• Choose guarantee if you expect grants to be a major source of income and you do not plan to take equity investment.
• Choose shares if you plan to raise investment from people who expect a return, and you accept that some grant funders will be harder to reach.
• Consider a charity or CIO if grants from trusts will be your main income and your purposes are charitable. Our CIO grants guide explains why.

GOV.UK notes that you can set up a CIC online with Companies House, and that your application goes automatically to the CIC Regulator for approval. Read the Regulator's guidance before you choose, and take legal advice if you are unsure, because the decision is permanent.

Find grants for your CIC

GrantMatch flags which grants accept CICs, so you do not waste time on funders that exclude you. Browse open grants for CICs, or create a free profile and we will match you with the right ones.