Asset lock in community interest companies is one of the most important features of a CIC. It protects the assets of the organisation and helps make sure money, grants, donations, property and other resources are used for community benefit, not private gain. If you are forming a CIC or already running one, understanding the asset lock helps you protect the organisation, reassure funders and plan properly for the future.

About this episode

Asset Lock in Community Interest Companies explains what an asset lock is, why it exists, and how it affects the assets held by a CIC.

We look at the difference between a CIC and a normal commercial company, why CIC profits or surpluses should support the organisation’s community purpose, what an asset-locked body means, and what happens when assets are transferred or a CIC is dissolved.

If you want the broader CIC context first, our episode on Social enterprise and Community Interest Companies is a useful starting point.

Why the CIC asset lock matters

The asset lock matters because a Community Interest Company is set up to serve a defined community purpose.

A CIC can and should aim to make a surplus. However, that surplus is not there simply to enrich founders, directors or shareholders. It should help the organisation sustain itself, build reserves and deliver services to the community it was created to support.

That matters for funders, donors, customers and the wider public. When money or assets go into a CIC, people need confidence that those resources are being used for the CIC’s stated aims.

Key points from this episode

What is an asset lock in community interest companies?

An asset lock is a restriction that helps keep CIC assets within the organisation or within another approved community-focused structure.

Those assets can include cash, grants, donations, land, buildings, equipment, computers, machinery and other resources owned by the CIC.

The core idea is simple. CIC assets should be used for the community purpose of the organisation, not for private gain.

CICs are not the same as ordinary commercial companies

A normal commercial company is usually owned by shareholders. After tax, profits may be available for distribution to those shareholders.

A Community Interest Company works differently. It is commonly used in social enterprise, where the organisation trades, earns income and may generate surpluses, but those surpluses are there to support the community purpose.

That does not mean a CIC should avoid profit. It means profit has a different role. It should help the organisation survive, grow and deliver its mission.

Why funders and donors care about the asset lock

Funders, donors and customers want assurance that money given to a CIC will be used properly.

If a CIC receives grants, donations or income from selling goods and services, the asset lock helps show that those funds are not being used to personally enrich directors or founders.

This is especially important where public money, trust funding or foundation funding is involved. The asset lock supports accountability and confidence.

How CIC assets can be transferred

CIC assets are not frozen forever, but transfers and sales must be handled carefully.

If assets are sold or transferred outside the CIC, the transaction generally needs to protect the value and community purpose of those assets. The episode explains that transfers may need to be at full market value, made for community benefit, or made to another asset-locked body where the rules allow.

That is why CIC directors should understand the restrictions before selling, gifting or transferring assets.

What is an asset-locked body?

An asset-locked body is an organisation that has similar protection around how its assets are used.

Examples include another Community Interest Company, a charity, a Charitable Incorporated Organisation, a permitted registered society, or an equivalent body outside the United Kingdom where the required evidence is available.

Nominating an asset-locked body in the articles of association can help clarify what happens to remaining assets if the CIC is wound up or dissolved.

Why articles of association matter

The articles of association are important because they set out how the CIC is structured and governed.

For asset lock purposes, the articles should normally include clear wording about the nominated asset-locked body and how residual assets should be treated.

If a CIC does not already have the right wording, the articles may need to be reviewed or amended. That is something to handle carefully, especially where regulator consent or professional advice may be needed.

What happens if a CIC is dissolved?

A CIC may stop trading because its purpose has been achieved, the directors choose to close it, or it is no longer needed.

If the CIC has remaining assets after debts are paid, those assets should continue to support community benefit. If a nominated asset-locked body is named in the articles, that body may receive the residual assets.

It is also good practice to tell the nominated body, even where formal notification is not always required. Courtesy and clarity help avoid confusion later.

Avoid self-nomination and conflicts

CIC founders and directors need to be careful when choosing who receives assets.

The episode warns against nominating yourself, a director or an unsuitable recipient. The asset lock is there to protect community benefit, not to move assets into private hands.

If assets are going to a body outside the UK, more information may be needed to show that the organisation is equivalent to an approved asset-locked body.

CICs limited by shares and dividends

Some CICs have a share structure. In those cases, dividends may be possible, but they are subject to CIC rules, the constitution and any applicable caps or restrictions.

This is a specific situation and should not be treated in the same way as an ordinary commercial company.

Before making dividend payments or transferring assets, it is sensible to check the CIC’s articles, regulator guidance and professional advice.

Asset lock checklist for CIC directors

• Do you understand what the asset lock means for your CIC?
• Are your assets being used for the CIC’s community purpose?
• Do your articles of association name an asset-locked body?
• Have you checked whether asset transfers need regulator consent?
• Are any asset sales being made at full market value where required?
• Have you avoided nominating yourself or a director as asset recipient?
• Do funders and donors understand how the asset lock protects their money?
• Have you planned what happens to residual assets if the CIC closes?
• Are directors clear on the difference between surplus, reserves and private gain?
• Have you taken advice before changing articles or transferring assets?

FAQs about asset lock in community interest companies

What is asset lock in community interest companies?

Asset lock in community interest companies is a legal restriction that helps ensure CIC assets are used for community benefit and not private gain.

Can a CIC make a profit?

Yes. A CIC can make a surplus or profit. The key difference is that those funds should support the CIC’s community purpose, reserves and services, rather than simply enriching founders or directors.

What is an asset-locked body?

An asset-locked body is an organisation with similar restrictions on how assets are used, such as another CIC, a charity, a CIO, a permitted registered society or an approved equivalent body outside the UK.

What happens to CIC assets when it closes?

After debts are paid, remaining assets should continue to support community benefit. Where a nominated asset-locked body is named in the articles, that body may receive the residual assets.

Episode Timecodes

• 00:00 – Why CIC founders need to understand asset lock
• 00:29 – CICs, social enterprise and not-for-profit purpose
• 01:27 – CICs compared with ordinary commercial companies
• 02:13 – What the asset lock is designed to protect
• 03:15 – Long-term consequences of the asset lock
• 03:38 – Rules around transferring or selling CIC assets
• 05:05 – What an asset-locked body means
• 06:05 – Dissolution and residual assets
• 07:06 – Avoiding self-nomination and unsuitable recipients
• 07:40 – Share structures, dividends and final summary

Related episodes

• Social enterprise and Community Interest Companies
• Community Interest Companies and Tax: What CICs Need to Know
• Gift Aid and Charitable Giving: Understanding the Impact

Key takeaway

The asset lock is a core feature of Community Interest Companies. It protects assets, reassures funders and helps keep the organisation focused on community benefit.

If you are forming or running a CIC, make sure you understand how the asset lock works, what your articles of association say, who your nominated asset-locked body is, and what happens if assets are transferred or the CIC closes.

Plan it, Do it, Profit.

“The asset lock protects the community purpose of a CIC and helps make sure assets are not used for private gain.”

Further Support

The I Hate Numbers podcast helps business owners, CIC directors and social enterprise founders understand accounting, tax, finance, profit, cash flow and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

If you want support with your social enterprise, CIC accounts, tax affairs, budgeting or planning, you can contact us for an initial chat.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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If you are considering forming a community interest company or CIC, or you already have a CIC that you're running, then it's important that you understand the idea of an asset lock. In this week's podcast, I'm going to be explaining what an asset lock is, what an asset-locked body is, why we have that in the first place, and the general treatment of assets within a CIC.

Hi, folks. Welcome to another weekly podcast on I Hate Numbers. This is a podcast that has the mission to increase your financial awareness, help you in your business, make more money, save tax and time, plan it, do it, profit. Let's crack on with the podcast. A community interest company, typically is used in the context of social enterprise, is classified by most people as a not-for-profit organisation.

Now, that doesn't mean that it can't aspire to make profits. If anything, it should have as one of its key objectives in making surpluses, in making profits so it can sustain and grow and deliver its why. What we're talking about is those profits aren't necessarily there to benefit the founder, to benefit the directors, they're there to be ploughed back into the organisation to help sustain itself, build up its reserves, and deliver those services to the community that it's defined.

If we contrast that to a normal commercial company, one that's owned by the shareholders, then any profits that are generated after tax are, therefore, available for distribution to the shareholders themselves. So, there is a financial reward in addition to any salaries they're paying themselves. That concept does not exist in a not-for-profit body.

Those profits that are generated are used there to benefit the recipients, the audience, the clients that the CIC seeks to serve. In all other censuses, by the way, folks, community interest companies, and other models that fit within that framework, are businesses, and they have that in common with what I call commercial businesses.

Now, what is this idea about an asset lock? Well, the very idea of this not-for-profit is such that when it receives money through services it provides, grants, donations, funds provided by the selling of goods and services, then it is essential that those customers, those donors, those funders are assured that those funds are being used to meet the CIC’s aims, not to enrich the directors, not to enrich the founders of that organisation.

So, therefore, that assurances get provided by the idea of the asset lock. Those assets could represent machinery, plant, land, buildings, computer equipment, whatever it may be, those are locked within this corporate veil, and they're not there for the benefit of the individuals. Now, that's the idea of an asset lock. And again, it's there as much to provide assurance, but also money that's donated via trusts and foundations, through grants is effectively public money.

And therefore, to give that extra level of satisfaction, that extra level of assurance those public funds are being used correctly, the asset lock reinforces that. An asset lock has permanent long-term consequences. So, it's really vital that those who run CICs, those who are looking to form CICs, are fully aware of its implications.

Now, having looked at the idea of an asset lock, let's summarise the key features. Now, a CIC, for example, must use its assets, must keep those assets, and it has to be used for community purposes for which it was formed. Now, if for any reason, those assets are transferred out, outside of the CIC where they're sold on,

or given to other organisations, then it must satisfy any of these following requirements. Those transfers or sales must be at the full market value, and that's the market value at a hands off transaction. Now, selling something at the full market value means that ultimately the CIC still retains the value of those assets that have been transferred. If those assets are transferred to another asset-locked body,

more of that in a few moments, then it has to be to one that's been specified in the articles of association of the CIC. It's got to be made for the benefit of the community. It's not there to enrich the founders, and it's got to be made to another asset-locked body with the consent of the regulator.

Within this restriction, that's essentially the asset lock. Now, I mentioned earlier that the askers of association should ideally include a condition about the asset lock, who the beneficiary is, normally seek their permission. If for any reason you haven't got that in the articles, more of that later, then you can have them amended.

So, what is an asset-locked body itself? Now, a CIC, as I mentioned earlier, is classified as an asset-locked body, but there are other organisational structures that can also be classed as asset-locked. These are typically a charity, a charitable-incorporated organisation. That is a charity nonetheless, by the way,

but it means that it only has to submit its documents to one regulator, that’s the Charity Commission. It cannot either be a permitted register to society or if for any reason it's a body outside of the United Kingdom, then it can be so. Now, it's quite possible, by the way, to nominate more than one asset-locked body,

and that nomination by good practice is normally reflected in the articles of association of the CIC. Though I mentioned earlier about the inclusion within the articles of association of your designated organisation, your designated asset-locked body that you will donate or transfer those assets to,

again, it's normal good practice to seek permission or to certainly clarify with that entity that they're being so known. No, it may be a situation that the CIC decides to cease activity. It could be a voluntary dissolution, it could wind up. It may be that you found that you've actually achieved your objectives,

your purposes and the CIC no longer is needed, and therefore it's going to be dissolved. Now, if you have nominated an asset-locked body within your articles of association, then there's no major issue, and they will be the recipient of any residual assets that you have after you've paid off any debts outstanding.

These assets can still then be retained to benefit the wider community. And again, you don't have to notify the nominated asset-locked body, but it's good practice to notify them as common courtesy. Be careful, folks. When you do nominate an organisation or an individual to be the recipient of your assets and your articles, you must be careful not to nominate a director.

You cannot nominate yourself. And if you wish to nominate a body that's outside of the United Kingdom, then you need to provide more information and proof to the regulator that the body is an equivalent body to that of a charity, CIC, or Permitted Registered Society. Now, as a side note, or a footnote, if you want to call it that. If for any reason you are transferring or selling any assets below the market value to those bodies, to any asset-locked body, which isn't in itself nominated in your articles, then you need to have that approved by the regulator.

There is a slight variation in this theme. You could be a CIC that has a share structure and, therefore, you will be paying dividends subject to the cap to those recipients. And therefore, that is a particular situation whereby you can have assets transferred where those dividends are actually paid out.

Folks, let's summarise where we are. We have the idea of an asset lock. Again, it's a feature of CICs, but it's also a feature of charities, CIOs, register societies, and those equivalent bodies outside of the United Kingdom. The asset lock is there to protect the community that you are looking to serve.

It’s looking to preserve and give accountability to public funds that are made, and it's there as an assurance to those funders that any funds provided ought to be used for the benefit of the audience that you’re looking to serve, the client base that you have, those people in need that you've been set up to serve in the first place.

If you don't actually have a nominated body within your articles, you can by all means, amend your articles. Folks, I hope you found this podcast useful. I hope you got some value from that. If you did, I'd love it if you could share it. Let me know what your thoughts are. If for any reason you need support on your own CIC, if you need any assistance in terms of modifying those articles or in any sort of planning matters as such, then let me know.

There's contact details in the show notes and in the meantime, plan it, do it, profit.