FAQ'S
Here are some of the most frequently asked questions regarding Social Enterprises.
if you have any questions not covered here, please feel free to contact us with your enquiry.
- What Is A Social Enterprise?
- Are Social Enterprises Real Businesses?
- What Kinds Of Business Do Social Enterprises Get Involved In?
- Don’t Social Enterprises Just Take Jobs Off Other People?
- Why Are Social Enterprises Such A Good Thing?
- What Defines A Social Enterprise?
- Aren’t Social Enterprises Glorified Charities?
- What Does ‘Not-For-Profit’ Actually Mean?
- How Do Social Enterprises Finance Themselves?
- Can Anyone Be Involved In A Social Enterprise?
- Are Directors of Social Enterprises Liable If Things Go Wrong?
- And What About Members?
- Can Directors Be Paid?
- Are There Any Secrets To Social Enterprise Success?
- What Structures Should I Use for A Social Enterprise?
- Isn’t There A Lot of Bureaucracy Managing A Social Enterprise?
- What Is ‘The Social Economy’?
What Is A Social Enterprise?
Social enterprises are businesses with social aims. The term 'social enterprise' is used to describe a range of different organisations – such as co-operatives, credit unions, community businesses, development trusts, social businesses and social firms – with a couple of things in common:
- At least part of their income derives from trading (broadly-defined) and
- that the wealth they create cannot be distributed but must be used for the benefit of a specified community or group.
A common definition is the one developed by the Social Enterprise Unit in 2001:
'Social enterprises are 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.' Social Enterprise: A Strategy For Success, 2001
Different types of social enterprises include:
- Community Businesses - run by and for a particular community, for instance a much-needed facility such as a shop, community centre or nursery. These communities can be geographical (people living in a particular area) or ‘communities of interest’ (for instance women, artists or ethnic minorities).
- Co-operatives - businesses owned and managed by a group of people for their benefit or the benefit of the co-op’s members. Co-ops can be quite small (2-10 members) or very large (‘The Co-op’ for instance or credit unions with tens of thousands of members).
- Development Trusts – community-owned organisations which develop physical assets such as buildings or open spaces and run them for community benefit or which take a lead role in regenerating their local community.
- Social Firms - businesses with a significant number of disabled employees.
Whilst many social enterprises have a single stated social purpose, they also deliver wider benefits such as good quality employment, locking wealth into the local economy or attracting inward investment and developing ‘social capital’. The kind of social enterprise you are, and your attitude to social benefit, will have a profound effect on how the organisation operates.
Are Social Enterprises Real Businesses?
Yes, they offer goods and services to markets, just like other businesses. They seek to be viable organisations, making a surplus from trading. A lot of this trading looks like things that - traditionally - charities, local authorities and government have done but its still trading. While they have social aims such as job creation, training and other things benefiting the community, they aim to be self-sufficient and not to depend on grant funding forever.
Some social enterprises will have received start-up and capital grants or soft loans from the local authority. And they may be revenue-funded, but this funding is nowadays linked to delivering specific activities on behalf of the funder, such as training, community empowerment, environmental clean-ups or other socially-beneficial activities.
What Kinds Of Business Do Social Enterprises Get Involved In?
Social enterprises can do any kind of business you can imagine – so long as its legal! But because they have particular social aims (reducing unemployment, for instance, creating better environments for people or enabling them to take training through offering childcare) they are often shaped by local problems.
Typically, social enterprises get involve in labour-intensive activities requiring lots of employees with a distinctive community benefit. But this leads them to be over-focussed on what funders or the community wants rather than their customers or what opportunities the market might offer.
Don’t Social Enterprises Just Take Jobs Off Other People?
They may do. But the social benefit they also deliver could off-set this ‘dis-benefit’. More importantly, social enterprises often end up delivering goods and services that the public and private sector don’t want or can’t do. You can’t ‘take a job’ which has never been created in the first place!
Why Are Social Enterprises Such A Good Thing?
Social enterprises are growing in importance because:
- Like other businesses they create wealth but more of this wealth gets spent or invested in particular communities, contributing to an improvement in qualities of life, neighbourhood renewal, economic and environmental sustainability. They employ people like other businesses, but this is more likely to be local employment or employment of people who need or benefit somehow from employment.
- Social enterprises can often provide goods or services the community needs but the public and private sectors can’t offer. They can also offer pathways back to employment by engaging the community in economic activities.
- They offer forms of local economic development different to developing industrial estates or trying to attract inward investors with grants and incentives which might not be sustainable or which often don’t employ local labour (which may have been de-skilled).
- Run well, social enterprises capacity-build and empower people who often then go on to other employment, set up their own businesses, start new projects etc; they can have a significant ‘multiplier effect’.
What Defines A Social Enterprise?
Social Enterprises have three defining charecteristics which, mixed together, shape who they are and how they operate. The empahsis within the organisation on each of these three things, their relative importance, defines the business. They are:
Enterprise Orientation – the extent to which the organisation understands it is directly involved in producing goods or providing services to a market. One aspect of this is how it uses its surpluses and the relative weight given to investing in the business year on year or trying to maximise social benefit by keeping prices and costs low or spending surpluses on non-business activities.
Social Aims – the extent to which social aims such as job creation, training, the provision of local services or the organisation’s ethical values define what it does and how it operates. An important aspect is the extent to which the organisation feels it should be or actually is accountable to its members, stakeholders or the wider community for its social, environmental or economic impacts.
Social Ownership – An aspect of accountability is ‘social ownership’, that is the level of ownership by and participation in the affairs of the organisation by (for instance) employees, service-users, clients, local community groups and social investors or by trustees or directors who control the organisation (nominally) on behalf of a wider community.
Aren’t Social Enterprises Glorified Charities?
Because of when they were formed and the social problems they were asked to tackle, many social enterprises were involved in local government initiatives about unemployment and poverty and needed ongoing subsidies to operate.
Increasingly however, social enterprises are seen as vehicles for creating sustainable (social) wealth in local communities and supporting efforts to get people into work; they need to be viable, trading organisations employing people using real skills valuable in the labour market. And with grant-regimes such as Objective 1 or SRB running down, trading is the key to survival. As with other businesses, finding viable markets is the key to sustainability and long-term survival.
What Does ‘Not-For-Profit’ Actually Mean?
It should read ‘Not-For-Private-Profit-Distribution’. Like any business, social enterprises need to make profits on their operations and the more profit they make – responsibly, socially, ethically – the better because it increases the amount of good they are doing. But social enterprises can’t usually distribute these profits to the benefit of their members or directors – unless they’re a co-op – but can only use profits to support its social aims. And if the business closes, any remaining assets can’t be shared amongst members or directors but only given back to the original funders or given away to other socially beneficial organisations.
How Do Social Enterprises Finance Themselves?
Apart from a grant from the local council or regeneration agency and revenue-funding in return for delivering services and social benefit, social enterprises raise capital to commence operating from a variety of sources. Nowadays will lend money to social enterprises on the same basis as to other businesses and some have special programs for assisting kinds of social enterprises, whether credit unions or co-operatives.
Triodos Bank, Industrial Common Ownership Finance or the Charity Bank all specialise in lending money to social enterprises to help with start-up costs or to bridge between grant funding. In some areas there are ‘Community Development Finance Initiatives’ (CDFIs) which can fund social enterprise development. To find out about CDFIs, contact the Community Development Finance Association on 020 7430 0222 or email info@cdfa.org.uk
Can Anyone Be Involved In A Social Enterprise?
Anyone can be a member of a social enterprise who qualifies for membership or who shares certain characteristics – for instance they live in a particular community – and who supports its aims. But to also be a director of a social enterprise you must be 18 at least and not be disqualified under company law (e.g. an undischarged bankrupt). How you’re involved in a social enterprise, as employee, director, member, supporter or whatever, is up to you.
Are Directors of Social Enterprises Liable If Things Go Wrong?
Most social enterprises incorporate themselves as companies with limited liability (Company Limited By Guarantee, With No Share Capital). What this means is that provided directors have met regularly, received reports on the business’ situation, considered its finances and prospects and acted reasonably, they will only be personally liable for the debts of the business up to the limit of the ‘guarantee’ specified in its rules (usually £1 each).
This is not the case if directors have personally guaranteed loans or overdraft agreements (where they are liable for the outstanding amounts) or if the social enterprise never incorporates (when they will be individually and severally liable for its debts). This is why social enterprises sometimes have difficulty raising money from banks.
Limited liability can be lost if directors have deliberately tried to defraud creditors or been negligent managing the social enterprise. Directors of social enterprises should therefore familiarise themselves with the duties of directors of companies, eg. from a health and safety point of view. For more information click her to visit the Companies House website.
And What About Members?
Many social enterprises are membership organisations and members are as liable for debts as directors if things go wrong but are similarly protected. To join they will have paid their £1 contribution to the business’ assets and debts and are therefore covered by the same limited liability – if the business has incorporated – as the directors. Members have the same responsibility as directors to ensure the business is run well or does not run up unreasonable debts so do read those minutes and do attend the AGM at least!
Can Directors Be Paid?
There’s no reason why not – so long as you tell the inland Revenue! The rules of the social enterprise will tell you whether directors or employees can be paid for the work they do on behalf of the company outside their normal contracts of employment. It will also say whether profits can be shared with members and employees (for instance in a co-operative) or only ever used for social purposes or for investing in the business (the famous ‘not-for-profit’ definition).
Are There Any Secrets To Social Enterprise Success?
The best and most successful social enterprises have some common characteristics:
- A clear and accepted understanding about the business’ purpose and overall strategy. Social enterprises fail when employees, managers, directors and stakeholders have differing views about the mission of the organisation, how it should operate and what counts as ‘success’.
- A strong business orientation, focusing on products, customers, marketing and pricing and continuous development of business and management skills.
- An effective staff development and training program, linked to the businesses operation and business plan.
- Continuous improvement in engagement with the community and stakeholders. This means speaking with a clear voice and investing in networking and promotional activities.
What Structures Should I Use for A Social Enterprise?
You need to consider the following:
Legal Status – will the social enterprise be Unincorporated (not recommended), a Company Limited By Guarantee, a Community Interest Company (CIC), an Industrial & Provident Society (I&PS), a Charity or Trust or the trading arm of a charity or other community association? You may need expert advice on your legal status.
Ownership – who will own the enterprise and therefore have ultimate decision-making power? If it’s never going to be ‘the community’, a social business with a small management board might be suitable. If it’s a definable membership group or if employees are a key to success, a co-op structure might work. Do stakeholders need to be included in the decision-making group and do they therefore partly ‘own’ the business? Who ‘owns’ the business need to be involved – somehow – in what it does and how it operates.
Management – There are two main questions: ‘who’ and ‘how’? Who does the day-to-day management, who is responsible for strategic vision and planning (leadership), who does management responsibility default to when necessary? How is the business managed? By a manger? By a group? By teams? And what is the relationship between the leadership group (the board of directors and stakeholders) and the executive group (the manager and deputies)?
Successful Social Enterprises tend to have a strong underlying sense of purpose and a structure shaped by that purpose.
Isn’t There A Lot of Bureaucracy Managing A Social Enterprise?
If people are clear that the enterprise is a business and not a ‘project’, ‘initiative’ or ‘program’ then there shouldn’t be. It’s when members or stakeholders impose a heavy information requirement or when producing statistics is substituted for effective management or business development that things go wrong.
The social enterprise will need a Board of Directors to run its affairs and some form of written agreement between the members – a constitution - is advisable. Accounts must be kept and submitted regularly. Managers will need to update policy and working practices as markets and legislation change. However, a small social enterprise with a relatively stable Board shouldn’t require a lot of paperwork or red tape.
What Is ‘The Social Economy’?
Beyond the public and private sector, there is a ‘Third Sector’, consisting of voluntary organisations, co-operative and mutual associations, charities, trusts, foundations and so on. There are – literally – hundreds of thousands of organisations in the Third Sector.
Within the ‘Third Sector’ are organisations – co-operatives, social enterprises, business mutuals (like BUPA!) - that charge for service delivery as part of their normal operations and which have social aims; taken together, they make up the ‘Social Economy’. It includes small or local and voluntary organisations at one end of the spectrum and very large businesses that – typically - have grown out of the co-operative or mutual movements at the other.
