What Is The Dividend Cap In A Community Interest Company (CIC)?

If you’re thinking about setting up a Community Interest Company or already running one, you might have heard about something called the dividend cap. You need to understand what the dividend cap is if your CIC has shareholders. Put simply, the dividend cap exists to make sure the bulk of your company’s profits are used to support your mission rather than being taken out as private gain. 

What Does the Dividend Cap Mean?

Solvent companies with model articles can pay dividends to shareholders largely unrestricted if there are sufficient distributable profits. A CIC, on the other hand, is a company that is to serve the community, not the CIC’s shareholders or members. 

The dividend cap has a single element called the maximum aggregate dividend cap, which is no more than 35% of CIC’s profits. This ensures that the remaining 65% of profits are reinvested back into the company or used for the community it was set up to serve.

Why Is This Dividend Cap Rule In Place?

The simple answer is to protect a company’s community interest position. It is another feature of a CIC, which, rather like an asset-lock body, is designed to protect the community’s interest in the company.

Community Interest Companies are not traditional businesses. They sit somewhere between charities and limited companies. While they can trade and earn a profit, that profit is expected to support a wider cause. Whether you are helping local families, providing education, or running a mental health service, the dividend cap ensures the money stays focused on that goal.

It also prevents people from using the CIC model as a way to earn unlimited personal profit while still appearing to run a socially responsible business.

What Does The Dividend Cap Mean For A Director?

If your CIC has shareholders, you will need to keep accurate records of how profits are used, and if you are paying dividends, you must make sure they fall within the legal limits. Failure to do so could see members having to repay dividends to a liquidator if there is a wind up of a community interest company (cic) and this is discovered.

You should also explain the rules clearly to any investor or stakeholder. Many directors find it simpler to set up their CIC as a company limited by guarantee. This means the business has members rather than shareholders, and dividends are not a factor at all.

The dividend cap is a key part of what makes a CIC different. It is there to keep your company’s profits working for the community or the cause you are passionate about. Rather than being a restriction, it can help you attract the right kind of support from funders, social investors, and the people you aim to serve.