Social enterprises have become increasingly popular as part of international development programs. A social enterprise is a business that aims to achieve a particular public or community mission (social, environmental, cultural or economic), and reinvests the majority of its profits into achieving that mission.
Definitions of Social Enterprise
“Social enterprises trade to tackle social problems, improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community. And so when they profit, society profits.”
Social Enterprise UK
“Social enterprises use the power of the market place to solve the most pressing societal problems. They are businesses that exist primarily to benefit the public and the community, rather than their shareholders and owners. Social enterprises are commercially viable businesses with a purpose of generating social impact.”
Features of a social enterprise
To be considered a true social enterprise, an organisation should:
1. Have a clear public or community mission (social, environmental, cultural or economic) that is part of the governing documents
The first objective of a social enterprise is to achieve its mission, rather than generating a profit to be paid to the shareholders or owners of the business. It’s important that this mission is clearly spelled out in the governing documents of the organisation, and that all the activities of the organisation are focused on achieving the mission (rather than creating a profit).
2. Generate the majority of its income through business activities
Social enterprises are self sustaining businesses that generate the majority of their income through selling goods and services, rather than through grants or donations. Some social enterprises start with grants or donations, but the objective is always to cover the running costs using the income generated.
3. Reinvest the majority of its profits into achieving the public / community mission
A true social enterprise puts most of the money it makes back into the organisation so that the public / community mission can be achieved, rather than paying that money to the shareholders or owners of the company.
Some organisations have a few features that are similar to a social enterprise, without necessarily having all of them. The following table gives some examples of this.
|Feature||Social Enterprise||Non-profit charity which raises some funds through selling goods||For-profit business which sells socially responsible goods|
|1. A clear public or community mission that is part of the governing documents||Yes||Yes||Yes|
|2. Generates the majority of its income through business activities||Yes||No||Yes|
|3. Reinvests the majority of profits into achieving the public / community mission||Yes||Yes||No|
|Example||An organisation that sells soap at a profit to generate income, and reinvests all the profits into handwashing promotion activities with a goal to reduce deaths from infectious diseases.||An organisation that receives grants to run handwashing programs and sells subsidised soap to local households as part of the program.||An organisation that sells soap at a profit to generate income, promotes handwashing as part of its marketing activities, and pays all the profits back to the owner of the company.|
For a more details discussion on the features of a social enterprise see this paper from Social Enterprise UK: What makes a social enterprise a social enterprise?
Can an organisation be officially registered as a social enterprise?
Most countries have clear legal structures for setting up a for-profit company, a non-profit charity and an association of members. However, only a few countries have a separate legal structure for social enterprises. Because of this, people looking to setup a social enterprise often have to choose a legal structure that might not be a perfect fit. Some possible options are:
- Registering a for-profit company and writing the governing documents so that the public / community mission of the company cannot be changed (or is difficult to change) and the majority of profits must be reinvested in the company rather than paid out to shareholders or owners.
- Registering a non-profit charity and setting up the governing documents so that the charity is obliged to source the majority of its funds from the sale of goods or services.
- Registering an association or cooperative where the members are the employees or beneficiaries of the organisation, and where the public / community mission is clearly stated in the governing documents.
Thinking of setting up a social enterprise? Check out our Social Enterprise Business Plan Template.
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