Like Homer Simpson discovering a meal between breakfast and brunch, the British government has recently “discovered” an organizational form between charity and public company. It’s called a Community Interest Company or CIC.
If Henry Hansmann is right that the nondistribution constraint is the defining feature of nonprofit organizations, the CIC is essentially a nonprofit. (“A nonprofit organization is, in essence, an organization that is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees.” 89 Yale L. J. 835, 835 (1980)). As the British government Fact Sheet on CICs notes, CICs are “restricted from distributing profits and assets to their members. This is known as an ‘asset lock’ – a transparent and entrenched way of ensuring that assets are used to benefit the community.”
What’s unique about the CIC is that it is nevertheless permitted to pay some dividends to investors. Quoth the British government Fact Sheet again, “In order to raise investment, CICs limited by shares will have the option of issuing shares that pay a dividend to investors. The dividend payable on these shares will be subject to a cap, set by the Regulator (after consultation), in order to protect the asset lock.”
There’s more, to be sure. See, e.g., in addition to the links above, here and here.
While there might be some benefit here in providing an off-the-rack form that could have been difficult to contract into otherwise (or not -- more on this in a later post), the form surely seems tailor made to deal with the CSR problem. (On which see here, here, here and here). If corporate directors want to maximize something other than shareholder interests, let them. But why not also make them (permit them to?) identify their organizations accordingly -- call it Whole Foods, CIC –- and subject them to dividend monitoring by regulators (and see how well that goes over).
Part of the stated purpose with the CIC is, in fact, branding, and this might be its real appeal: “The CIC legal form was specifically designed to provide a purpose-built legal framework and a ‘brand’ identity for social enterprises that want to adopt the limited company form.” It’s a way for “socially-conscious” corporations cheaply to identify their consciousness (and a way for the rest of us cheaply to avoid investing in them). (But I will note that some fascinating recent research by Anup Malani and Guy David has suggested that there may be less value in nonprofit branding than we might have thought, and the benefits of a CIC designation may be accordingly limited).
As I said, more on this topic in later posts . . . .
And before I go -- many thanks to Christine, Gordon and Vic for having me here.
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1. Posted by Robert Schwartz on October 31, 2005 @ 12:58 | Permalink
I remember a conversation in a tax department meeting.
Bob said to Harry:
Look Harry, either it [the proposed activity] is going to make money in which case it is not a non-profit, or it isn't and it won't have to pay income taxes.
2. Posted by Vic Fleischer on October 31, 2005 @ 16:42 | Permalink
You forgot (or perhaps intentionally avoided) the kicker: they are taxable. This may be less important in the UK than in the US, but still ... I like branding as much as (and usually more than!) the next guy, but that seems like a pretty steep price.
A capped dividend sounds an awful lot like a perpetual bond. If the entity is taxable, issuing bonds at the entity level would seem to be the better way to go. I'm not exactly sure what happens on the shareholder side, as I think they get a partial but not full imputation credit for taxes paid at the entity level.
My UK tax is too rusty to think this through .. Steve Bank -- if you are reading -- am I missing something here?
3. Posted by Geoffrey Manne on October 31, 2005 @ 17:25 | Permalink
Isn't that price only relevant to the choice between CIC and tax-exempt charity/nonprofit? Not every company can be a CIC, but it looks to me like it would be easier to be a CIC than a 501(c)(3) (or the UK equivalent). So for some companies the choice is between CIC and, say, public company, not between CIC and charity.
But you did anticipate where I was going with my cryptic, "more later" comments. Here we have a new class of organization, with a new regulatory agency, set up to do either what could have been done anyway by contract (limited company with a "social conscience") or else something worse (charity without the tax benefits). I suppose there's some class of entities that might be squeezed from both ends -- those entities with a social purpose but which prefer an investment or governance structure which violates the requirements for tax exemption -- but, as you note, for how many of these will the organizational benefit exceed the tax cost?
4. Posted by Christine Hurt on October 31, 2005 @ 20:30 | Permalink
Interesting. One difference between profits and non is that nonprofits get donations. I suppose some people do donate to for-profit hospitals, but I haven't thought about it. In the U.S., a donation to a for-profit would not be tax deductible. So, can these CICs fundraise like nonprofits?
As an aside, I saw Anup Malani present his paper at MLEA, and it was interesting. As a consumer of childcare services for the past six years or so, I will say that nonprofit childcare centers/preschools have been exceedingly better in our experience of two nonprofit and two for-profits. In their study, they looked at yellow pages ads for childcare centers, and I'm not sure that's where most people get their information on child care facilities.
5. Posted by Steve Bank on October 31, 2005 @ 21:58 | Permalink
At first glance, it seems like the UK version of a community foundation, except for the limited dividend rights and the taxation. I think Vic is generally right that the tax costs will outweigh the benefits for a genuine charity, but as Geoffrey says that might not be the relevant comparison. The UK has a 10% shareholder credit (it's barely a partial imputation system now), but 50% of public investors in the UK are pension funds that are tax-exempt, so perhaps the shareholder consequences are irrelevant. It may be that pensions need to or feel the need to invest in community-minded enterprises (I'm not sure if there is any official or unofficial push for this), but want to make sure they get a return as well. The CIC "brand" would help attract this type of investment. Another possibility is that this operates like the UBIT (unrelated business income tax) for charities in the US. The CIC fact sheet mentions the possibility of charities setting up CICs for activities that are not wholly charitable. They would have less regulation and could raise funds from investors. The money would still go toward the designated public purpose, but it would be taxed.
An interesting concept. I'll have to think more about it.
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