Last updated on 22/11/2024

WHAT IS A SOCIAL ENTERPRISE?

A Social Enterprise is an organisation that is a business where profits or surpluses are reinvested or used to benefit the community, rather than to reward private investors. These businesses trade for primarily social or environmental objectives. They trade because they want to benefit the community rather than private individuals, such as shareholders. They do not usually distribute profits in the form of dividends. The purpose of their existence is social rather than financial. None of these ideas is absolute and we can find exceptions to all of them.

The government defines social enterprises as “businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.” [6]

The purpose of running the business is to benefit either the community or the people who work in the company.  Some social enterprise companies do have shareholders and all of them are there “for-profit” rather than “not-for-profit”.

Companies that run as social enterprises are often distinguished by their legal and management structures. The things that people have used to  characterise a social enterprise and  differentiate it from a charity or voluntary organisation include

* Having social goals and objectives that refer to the community
* Their principle activity is trade (either in goods and/or service delivery.)
* Assets are held for the benefit of the community
* They tend to have a more democratic approach to management
* They can be accountable to service users, customers, employees or other stakeholders

There are various legal forms that social enterprises can take, including:

* Co-operatives
* Credit Unions
* Housing Associations
* Industrial and Provident Societies
* Companies Limited by Guarantee
* Limited Partnerships
* Community Interest Companies
* Co-operative Consortium
* An unincorporated association

A Community Interest Company (CIC) is a special legal entity set up by the Government and subject to regulation by The CIC regulator.[1]

Social Enterprise companies can be subject to an asset lock. This means that, should the company be wound up, its assets must be passed to a charity or other suitable organisation, for the benefit of the community. Any assets that are liquidated must be transferred to another organisation whose assets are also locked.

CICs can have limited liability in the same way as private companies. They are subject to an asset lock and to a community interest test, which is applied by the CIC regulator at the time the company is formed. The liability of the directors can be limited in much the same way as a company limited by guarantee. CICs can be limited by guarantee or by shares.

It is not the case that social enterprises are defined by the type of trade they carry on; a social enterprise can do almost anything, provided that it can make a case for saying that its commercial activity benefits the community. “A CIC can pursue a wide variety of social objectives such as environmental improvement, community transport, fair trade etc.” [2]

“A CIC can be established for any lawful purpose, as long as its activities are carried out for the benefit of the community” [2]

A CIC cannot be a charity. A charity may operate a CIC as a trading subsidiary and this would gift its profits back to the parent charity. A CIC can have a single share holder (a parent charity). It can issue a dividend to its share holder but the amount of this dividend is capped by the Companies Act (currently 35%).

CICs can pay the directors of their boards a salary, as would be the case with most private companies. CICs do not attract any tax advantages, as charities do.

The CIC legal form was established in 2005 and it is estimated that there are now around 3000 – 4000 CICs (3,500 being an often quoted figure) [4] but this is a small proportion of all the social enterprises in the UK. [3]. It is estimated that there are around 62,000 social enterprises in the UK [6].

There is a national association of CICs [4] which acts as a representative body for all CICs in the UK and represents their interests to Government and the Regulator.

Social enterprises are sometimes referred to as “not-for-profit” businesses. But then it is possible that an organisation, which sells good or services, portrays itself as being “not-for-profit” and need not call itself a social enterprise.

If an organisation or company that trades makes a surplus (of income over expenditure) then it might either donate that surplus to a charity or other social beneficiary or it might reinvest that surplus back into itself.  Either way, there is no real accountancy difference between a surplus and profit. [8] They are both an excess of income over expenditure.

Community benefit

When we examine businesses that say they are social enterprises, it is clear that the term community benefit can mean a number of different things.

“Community” can be a discrete and definable group of people living together in a geographical area, ranging from a very small village through to a whole city or large urban area. It can also refer to society generally, meaning, the whole of the UK or one of its principalities (England, Wales, Scotland, Northern Ireland).

The Charity Commission refer to “The Public Good” as an alternative to “community benefit” [2].

The terms “public”, “social” or “community” are often used interchangeably without there being any clear technical differentiation between them.

These are general beneficiaries.  Some organisations might have specific beneficiaries, such as the employees of the company (as would be the case with co-operatives.)

Enterprise and trading

Charities can trade. They can sell goods and services in order to raise money.  This is often referred to as fund-raising. Whilst a lot of charitable fund-raising consists of asking for donations of money (tin-rattling and raffles), charities frequently do sell products at a profit or engage in events that are carried on to make a profit (such as a dinner or concert.)

Charity Law lays down restrictions on what trading registered charities can do and what they must do with the profits [2]. They can do this without having to create a separate trading subsidiary, although the Charity Commission issues guidance to regulate the trading activities of charities.

The main difference between a charity and an enterprise is that a charity primarily engages in activities that address its core goals (such as the relief of poverty) whilst an enterprise exists mainly to conduct itself as a business to make money for its beneficiaries.

What is clear from looking at social enterprises is that they confer two main levels of benefit

* What they do benefits the community (e.g. provide a service) – their work is the beneficial outcome.
* They make a profit from sales and this profit is a benefit to the community – their commerce creates a distributable beneficial financial outcome.

Nearly all social enterprises need to make a profit; they might be able to survive on a break even basis, but, like most businesses, need to make a profit in order to build up their reserves or to justify their existence if they are subsidiary of a charity. Profits can be reinvested into operational costs or into reserves that ensure the company’s financial future.

Many social enterprises have been created for the benefit of people who are in some way disadvantaged, such as, people who have been unemployed for a long time, people who are disabled, or people who live in areas of high deprivation.

One objective of such enterprises is to create employment and income for their client group, through commercial activity.

Social Enterprises by type of activity

As already observed, these bodies can engage in almost any kind of activity.  We can see that there are certain types of activity

* Very specific activities such as undertaking one particular function or providing a specific kind of service (for example, selling cheap wheelchairs to disabled people or teaching children from a particular ethnic background.)
* A range of activities within a defined field, for example, social care, health, education, environment, sport, etc. All kinds of things might be sold, a variety of services might be provided but there is a focus on a field of interest or group of service users.
* Geographically limited activities, where, for example, the social enterprise is a shop or centre in a village, town or city. Its customers will tend to be people living in that defined locality.

Discussion

What is clear from examining the evidence, about  organisations that are calling themselves “social enterprises”, is that it is a broad church in which there is a wide range of activities being engaged in by an equally broad range of legal entities (legal types of organisations.)

A recent debate about what is and is not a social enterprise calls into focus the issue of definition. A company called Call Britannia set itself up to employ people from a deprived area of Birmingham. Some bloggers commented that they thought that this was not a social enterprise. It was claimed that this was a private limited company. It was argued that this company could not be a social enterprise if it distributed a dividend to its private investors. The blogger argued that social enterprise is “a way of doing business rather than a specific, single ‘model’. [5] He went on to argue that some companies could be more commercial than others and some more social than others. Some private sector limited companies see themselves as having a social mission and that what they do has a socially beneficial impact. Private companies often donate from their profits to charities and enter into sponsorship deals with community bodies. Some very large public companies are known to be philanthropic. It is common now for companies to donate a fixed amount or percentage of a fee or charge to charity. Some companies get involved in fundraising for specific charities that they wish to support. [7]

Some have argued that “social enterprise” is a brand rather than a model. An organisation can self-identify as a social enterprise, when it thinks it has a social mission and wishes to benefit a community or cause. Commentators have argued that many voluntary organisations have dubbed themselves in this way but whilst they are very social, they are not very enterprising.

Another point of view is that “social enterprise” is an activity rather than a particular structure or legal form”. [9] Geof Cox argues that “social enterprise is a verb not a noun – its something you do, not something you are”. The debate doesn’t end at this point, because other commentators have emphasised that structure can be as important as function. It all depends on what the definition is for.

Any kind of legal structure can be used to engage in “social enterprise” but it is the nature of the commercial activity that primarily defines this as being socially entrepreneurial with a possible added property of what can and can’t happen to the profits and assets. Layered on top of this is the view that truly social enterprises will have a set of values and ethics that differentiate them from mainstream business entities. [9]

This presupposes that there are clear activities, procedures or models that must be present for an organisation to justify calling itself an enterprise. Simply selling goods is not in itself enterprising – many charities do that all the time as part of their fund-raising departments.

Given the general level of technical looseness in this subject, the word “enterprise” is frequently used as a synonym for business; an “enterprise” is a commercial project or a business. When an organisation is “enterprising” it is being run as or engaging in a business. So if an organisation is a “social enterprise”, that means it is being run as a business that has social benefits.

In the wider world, the term “enterprise” often means something that is associated with risk taking, as when an investor puts money into a company or project in the hope that there will be a return on investment or pay back.  Buying shares in a company is a risk-taking enterprise. In the social world, entrepreneurs want to reduce risk as much as possible.

They don’t often want to engage in something that is risky. Commercial investors risk their capital in an enterprise in order to hopefully win a return. Social capital investors are not so keen on risk.

“Enterprise” in this sense can just mean “trading”.

Conclusions

It would be easy to get into hang-ups about the word “enterprise”.  In the writings about social enterprise, there is a severe lack of accuracy; words are used in a  facile way that lacks technical specificity. A social enterprise is just an organisation (some form of company) that has been created to trade for social benefits.

There is a very broad range of organisation types, activities and methods that can be found out there. This makes accurate counting and classification difficult if not impossible.

Charities and other types of voluntary organisations undertake trade but they are not social enterprises because this is not their primary purpose – they engage in trade as a feature of a broader fund-raising function.

What characterises a “social enterprise”  is that it has trading as its primary activity.

Notes

1 The Companies House Web site.

2 The Charity Commission web site.

3  The Guardian.

4 http://www.cicassociation.org.uk/

1. http://www.bssec.org.uk/blog/?p=384 A posting to the Birmingham and Solihull Social Consortium about a company called Call Britannia.

6 The Social Enterprise Coalition.

http://www.socialenterprise.org.uk/pages/about-social-enterprise.html

1. Evidence from the Charities Aid Foundation www.cafonline.org

2. Actually there is a difference between a profit and a surplus in strict accountancy terminology. See http://www.ventureline.com/Glossary_S.asp

3. Highly useful discussion by Geof Cox http://www.geofcox.info/index.php?q=node/55

4. http://www.geofcox.info/index.php?q=node/100