Social enterprise – What is a social enterprise?
A social enterprise is an organisation that trades for social purposes.
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Whereas most businesses strive to make a profit for their shareholders, social enterprises invest any money they make into tackling social problems, supporting communities, or helping the environment.
Main features of a social enterprise
The term ‘social enterprise’ was first widely used in the 1990s to refer to the growing number of organisations that used business strategies to drive social change. Although there still isn’t an official legal definition of a social enterprise, according to Social Enterprise UK, the main features of a social enterprise include:
- Having a clear social or environmental mission outlined in their governing documents (such as their articles of association)
- Generating the majority of income through sales and trade rather than donations or fundraising
- Reinvesting profits into projects that support their social or environmental mission
- Running independently from the state
- Being accountable and transparent.
Legal structure of a social enterprise
The most common legal structures of social enterprises include:
- Limited companies: although the limited company structure is one of the most common legal structures for traditional businesses, it is also widely used by social enterprises.
- Community Interest Companies: CIC is a relatively new business structure that was introduced in 2005 in order to meet the growing interest in social entrepreneurship.
- B Corporations: although still technically considered to be traditional limited companies, B Corp status is given to companies that have demonstrated that they benefit all of their stakeholders, not just their shareholders.
However, whether an organisation is considered to be a social enterprise depends on its goals and source of income rather than its legal structure. As such, the term ‘social enterprise’ can be used to describe organisations that follow a number of other business structures – including sole traders, partnerships, and charities.
Differences between a charity and a social enterprise
As they’re both incentivised by social, community, or environmental goals, charities and social enterprises might seem like similar organisations. However, there are a few differences between a charity and a social enterprise:
- Source of income: while charities rely on donations and fundraising, social enterprises employ commercial strategies to generate profit that can be invested in projects that support their social missions.
- Regulatory bodies: in the UK, charities are registered and regulated by the Charity Commission. On the other hand, there is not a single, centralised body for regulating social enterprises, and social enterprises register with different governing bodies, depending on which business structure they follow.
- Organisational structure: whereas social enterprises are relatively free to choose their legal organisational structure, charities have fewer options for which structure they follow.
Setting up a social enterprise
When you set up any new business, it’s important that you register with the correct authorities. When setting up a social enterprise, the process and organisation you have to register with depends on the legal structure of your social enterprise.
For example, if you want to become a Community Interest Company, you will need to register your social enterprise with Companies House and the community interest company regulator. On the other hand, if you want to register as a partnership, you should register with HMRC.
Getting funding for a social enterprise
The majority of a social enterprise’s income in generated through trade, but, like other businesses, social enterprises need enough money to set up and start trading. Some of the most common options for getting funding for a social enterprise include:
Social enterprise accounting
Like other types of businesses, social enterprises need to keep full, accurate records of their company accounts. Social enterprise accounting should follow the same principles as accounting for regular companies, and this means complying with the UK GAAP or International Financial Reporting Standards – depending on the legal structure of your social enterprise.