Creativebias Helpsheet: What is a Social Enterprise?

What is a Social Enterprise

A Guide for Creative Industries Entrepreneurs

When starting your own business, you may decide to operate as a social enterprise. This help sheet will explain what is involved in becoming a social enterprise and will highlight the different legal structures that are available to your social enterprise in the start-up stage.

Before you make any decisions on your business structure you should talk to a personal business advisor and follow some of the links within this document to explore in more detail the technical and legal implications of your chosen structure.

The Social Enterprise Coalition defines a social enterprise as:

"A profit-making business set up to tackle a social or environmental need."

Generally, the majority of the profit that a social enterprise is re-invested back into the business to further their social and environmental goals.

Why do they matter?

There are numerous examples of social enterprise at work in the UK today. Some are well known - such as the Big Issue newspaper or the Eden Project in Cornwall. Some are multi-million pound organisations that have become successful at marketing and delivering their products or services.

Many others are community-based businesses, often owner-managed, working on a smaller scale to serve the needs of their local community such as businesses that provide music, dance or DJ workshops for children in the local area.

In recent years the government has focused on social enterprises as a key growth area. They are seen as key to:

• Helping to drive up productivity and competitiveness.
• Contributing to socially inclusive wealth creation.
• Enabling individuals and communities to work towards regenerating their local neighbourhoods.
• Showing new ways to deliver public services, and helping to develop an inclusive society and active citizenship.

What are the characteristics of a social enterprise?

Social enterprises have three common characteristics:

• Enterprise orientated: They are directly involved in the production of goods and/or the provision of services to a market. They seek to be viable trading concerns, making a profit from trading. Many start-up social enterprises make the mistake that because they have social aims, they should not aim to make money. A social enterprise must still aim to sustain itself in the same way as any other successful business.
• Social aims: They have explicit social aims such as job creation, training and provision of local services. They have ethical values including a commitment to strengthening the local community. They are accountable to their members and the wider community for their social, environmental and economic impact.
• Social ownership: They are autonomous organisations with a governance and ownership structure based on participation by stakeholder groups (users or clients, local community groups, etc.) or by trustees. Profits are distributed as profit sharing to stakeholders or used for the benefit of the community. More information on what a board does and how to put one together can be found in the Creativebias Board Governance helpsheet.

To exist as a social enterprise you should be able to demonstrate how you fulfill these three criteria. If your business does not fulfill the criteria, choosing to be a social enterprise may be the wrong decision.

"One of the problems we come across regularly with creative people starting a social enterprise is that they have not defined their social aims clearly enough. It is important to work out exactly how your social enterprise will create revenue as well as helping your community."

Frank Titley - Social Enterprises Consultant, Blue Orchid.

What are the aims for your social enterprise?

You should choose the structure for your social enterprise based on what your aims are for the business, and which legal structure will most benefit your long-term plans.

Depending on your aims for the business, you can operate under a variety of different headings as a social enterprise:

• Employee owned businesses - creating jobs and rescuing jobs as part of economic development strategies
• Co-operatives - associations of persons united to meet common economic and social needs through jointly owned enterprises - www.cooperatives-uk.coop
• Development trusts - working in community based regeneration, development trusts are defined as organisations which are engaged in the economic, environmental and social regeneration of a defined area or community - www.dta.org.uk
• Social firms - providing employment and training to people with disabilities and other disadvantaged groups - www.socialfirms.co.uk
• Community businesses - social enterprises that have a strong geographical definition and focus on local markets and local services. Community businesses are organisations that are established to provide services and/or employment in a local community. Their focus is on building the community and the local economy, but doing so in a business-like way, aiming to be independent ands self-supporting - www.can.coop

One of the social enterprise sector's greatest strengths is its diversity, and this is reflected in the complex legal and regulatory framework under which many social enterprises are currently required to operate.

The MDA, which operates the Creativebias business support service and Bitbiz I.T. suite is a social enterprise and a company limited by guarantee. It aims to generate revenue whilst also serving the community. As the business has developed, the MDA has become more self-sufficient and aimed to reduce dependency on funding.

How do I decide which legal structure is best for my social enterprise?

The choice of legal model is often determined by:

• The nature of the activities being undertaken by the social enterprise.
• The requirements of the key stakeholders.
• The appropriate governance structure.
• The ability to access the required finance.

Many social enterprises point out that the legal model is only the vehicle for their activities, not the defining feature of what they do.

The most important thing is that the choice of legal structure accurately reflects the aims and needs of the social enterprise.

Some social enterprises use group structures, making use of a variety of legal forms in order to carry out the full range of their activities.

Careful planning must take place before the establishment of a new social enterprise or before making changes to an existing enterprise to ensure that the most appropriate legal structure is chosen. Investing time and resources in selecting the right structure is vital and the decisions taken should be based on long-term considerations for the enterprise.

Take some time to plan how your business will work in practice; although certain structures may look appealing on paper you must be sure that it is the right choice for your business.

"Before choosing a structure for your social enterprise you need to decide a number of things; What are your aims? What funding will be available to you? How will the structure you choose affect the way other businesses look at you? And what restrictions would you face with that structure?"

John Ekubia - director, Black Music Academy

Which legal structures can I choose from?

The following section details some of the options for legal structures that have proved successful with social enterprises in the past. The table Legal Structures for Social Enterprise at a Glance, available below to download (created by Business Link) breaks down in detail some of the structures most commonly associated with social enterprises. Legal structures are highly complex and you should follow the links provided at the end of the helpsheet for more details on each one.

Limited Companies

There are several legal models available for setting up a social enterprise. They include companies limited by guarantee, industrial and provident societies, and companies limited by share. Some organisations are unincorporated and some are registered charities.

The majority of social enterprises are set up as a limited company. There are three ways to do this:

• Register your social enterprise as a company limited by guarantee - the most common type of set-up for organisations in this sector.
• Register your limited company as an industrial and provident society.
• Register your business as a company limited by shares.
  

What's the advantage of this structure? There is a large amount of flexibility availaible within the structure and it can be adapted to suit most aims and purposes.

Community Interest Company (CIC)

A new type of limited company - the Community Interest Company (CIC) - was introduced on 1 July 2005. A CIC has exactly the same form as a normal limited company, with its liabilities limited by shares or guarantee, and must be registered at Companies House. The CIC is a new legal form dedicated to social enterprises. CICs are regulated by an independent Regulator of Community Interest Companies, who approves all applications for CIC status to ensure they operate for the benefit of the community

What's the advantage of this structure? They are more lightly regulated than charities but do not have the tax advantages of charitable status as they cannot apply for it.

Charitable Status

For social enterprises that are emerging from the voluntary sector the question of charitable status will be of particular concern.

A charitable social enterprise has to be established with exclusively charitable objects, falling under one of these headings:

• To relieve poverty.
• To advance education
• To advance religion
• For other purposes beneficial to the community.

Before considering applying for charitable status for your social enterprise you need to ask yourself:

• Is your social aim charitable?
• Is the nature of your activity likely to attract grants or donations?
• Are you confident that charitable status will not interfere with your trading activities?
• Is your vision of social enterprise unrelated to the economic participation of your stakeholders?

If you answer yes to these questions, you may want to apply for charitable status.

The key features of a charitable social enterprise are:

• The trustees of a charity are the persons responsible for the administration and management. They can be called trustees directors, committee members and other names too. The trustees are normally unpaid. It is possible to have one paid trustee but this is unusual.
• A further crucial feature of a charity is that any profits or surplus cannot be paid out to its members but have to be ploughed back into the charity and used to fulfil its charitable aims. Consequently all charities have a non-profit distribution clause. Charities are public benefit organisations. They are established to benefit the public and this means they have to be careful about not giving disproportionate levels of private benefit to any particular group or person.
• Once assets have been applied to a particular purpose they have to continue to be applied for that purpose.
  

What's the advantage of this structure? On the one hand, charitable status offers potential savings in tax and the opportunity to raise additional funds. On the other hand, it places very clear limitations on what the business can lawfully do under charity regulations. Different legal structures are eligible for charitable status; see the table for more details.

Links to General Advice

• Business Link and search for social enterprise, charities or CIC
• CIC Regulator
• Social Enterprise Coalition - UK's national body for Social Enterprises
• Association of Chief Executives of Voluntary Organisations
• Consultation and training packs for social enterprise managers and social enterprise advisors from the Social Enterprise Partnership
• For tips on managing a social enterprise from DIY Committee Guide (search for social enterprise)

Legal Advice

• Tax and Legal advice on setting up a business from Companies House
• General information and guidance www.co-active.org.uk search via library, the social enterprise