Social enterprise

What is the definition of a social enterprise?

Social enterprises are businesses that are driven to make a positive social, economic or environmental impact, in addition to being commercially viable. Their financial performance is led by the purpose of fulfilling their mission, rather than to create a return for owners or investors. They can be described as the point where for-profit business and not-for-profit organisations meet.

Types of social enterprises

Social enterprises can exist as independent operations (such as a mutual or cooperative) or as an extended arm of an organisation that provides additional funding for a social purpose.

Social Traders, an Australian not-for-profit organisation that promotes social enterprises and helps to build their capacity and access to markets, has described a number of different categories of social enterprise:

• Intermediate labour market companies (these are commercial businesses that train and provide work for the unemployed);

• Social firms (businesses that provide employment for people with a disability);

• Australian disability enterprises (a term used by Australian government to describe businesses that employ people with a disability who are not able to work in mainstream businesses);

• Cooperatives, associations and mutuals (member-run, member-benefiting businesses);

• Community enterprises (these businesses are run solely to provide a service or benefit to the local community);

• Community development finance institutions (these provide financial products for people who would otherwise struggle to access these financial services);

• Fair trade organisations (businesses that support improved conditions and pay for producers of goods);

• Charitable business ventures (a branch of a charity which generates income).

Essentially, however, social enterprises are organisations that derive income from trade and reinvest the majority of the profit in a way that benefits their cause. They either direct profits made through commercial venture for social benefit, or operate a business that provides a social benefit to the community.

However, social enterprises are distinct from businesses that adopt performance measures which quantify their impact on their social, economic or environmental surroundings. For-profit businesses are still driven to return a profit. The mission of a social enterprise is paramount, and its legal structure is a secondary factor.

What is the difference between social enterprises and charities?

Both social enterprises and charities exist to fulfil their missions. However, there are some important differences which set them apart.

A social enterprise uses commercial trading operations to fulfil its mission. That mission may be embedded in its commercial activity, although in other instances a social enterprise might provide goods and services to a market or consumer that is separate to the cause it is serving.

Most social enterprises are not-for-profits (NFPs) and many are also registered as a charity. However, social enterprises can also be run as for-profit organisations, which charities cannot. Social enterprises can use any legal structure, where charities are restricted in theirs (they cannot be a sole trader, partnership, proprietary limited company, listed company or government entity).

Finally, charity funding mostly comes from donations and grants. Social enterprises on the other hand must be commercially viable businesses, although usually with performance measures that include environmental social and governance (ESG) criteria.

What are advantages of a social enterprise?

It is not a simple matter for all NFPs to become a social enterprise. However, some NFP organisations may look to the funding models of social enterprises as inspiration for a way to diversify or regulate revenue.

During times of economic weakness, when governments, businesses and individuals are tightening spending and there are smaller numbers of grants and donations, it is difficult for NFPs to continue their work. Boards may consider new options to diversify their revenue stream to increasing the financial sustainability and independence of their organisation. Creating a trading business might provide more reliable income than philanthropy or government funding.

Legal status of social enterprises

While some jurisdictions such as the UK and the USA do have legal definitions for social enterprises (‘community interest companies’, and ‘benefit corporations’, respectively), Australia has no settled legal definition or structure for a social enterprise.

What is a B Corp?

‘B Corp’ is a certification earned by organisations which meet a set of rigorous standards laid out by American-based B Lab (an NFP organisation that was instrumental in the lobbying of the US government to create their legal structure of ‘benefit corporations’ for social enterprises). B Corp describes participating organisations as “leading the way in using business as a force for good”.

To be eligible for B Corp certification, an entity must be a for-profit business that has high standards of social and environment performance, public transparency and legal accountability. B Corp certification is similar to other independent certifications such as ‘organic’ or ‘fair trade’, and is used as evidence to clients and consumers that a business takes business ethics, or its corporate social responsibility, seriously.

Voluntary adherence to such standards of operation play a part in increasing public trust in a company, and therefore improving its reputation and brand.