What is Social Enterprise?
Social enterprise is any business venture primarily used to address a purpose other than profit. The idea is that a business can be profitable enough to be self-sustainable and therefore have greater resources to have a stronger impact than a standard registered charity. The concept challenges a standard view that the primary purpose of a business is to make a profit. Trade Aid is an example of a successful social enterprise, having operated in New Zealand for nearly 50 years, putting ethical supply at the heart of doing business. The main hindrance for all pursuing this form of business is finding a suitable business structure to make the concept work.
The Elusive Perfect Business Model and access to funding
The social enterprise concept does not typically align with access to funding for charitable purpose and availability of finance for standard business operations. As an example, the popular Eat My Lunch business is a limited liability company. Many have come to think of Eat My Lunch as a charity because of its purpose (to give lunches to children) but it is not a registered charity and does operate for a profit. Social enterprise can be difficult, because it sits in a grey area between ‘for profit’ and ‘for purpose’ which are generally treated as completely separate ideas.
A recent report, by the Impact Initiative produced for the Social Enterprise Sector Development Programme, addressed the difficulties surrounding running a successful social enterprise in New Zealand, ‘Structuring for Impact: Evolving Legal Structures for Business in New Zealand’. The report had a strong emphasis on how the absence of a fit-all business structure for social enterprise severely restricted scalability, funding and impact of such businesses. Many social enterprises will automatically reinvest their profits into their causes, as opposed to distributing profits to shareholders. This limits access to standard business finance. Some social enterprises are also barred from receiving access to charitable funding or tax benefits because their business is not a registered charity.
What models do work?
Two key questions to ask are how does the business intend to source funds (both to get started and to continue to grow) for example loans, equity or crowd funding, donations, debt equity, or a combination)? Does the business concept involve a level of grass-roots community buy in (for example asking for donations, utilising volunteers, or working for an educational purpose)? The choice of business model is instrumental in how a company is able to secure investment, scale and grow. Eat My Lunch has created its own solution, by factoring in the cost of making the meals that it gives into the price of the standard product available for purchase. It also engages volunteers to help run the kitchen for the ‘gifted’ meals to keep the ‘for purpose’ activities running at no additional cost. This model works for Eat My Lunch but will not be suitable for all social enterprise concepts. For those who see their growth and development all at community level and there is less focus on profit as there is on impact or education, an incorporated society or registered charitable trust may be appropriate.
Some lesser known entity structures such as industrial and provident societies or cooperative companies or even a combination of different business structures may also be suitable for a social enterprise. The Community Business and Environment Centre Cooperative Society Limited is an industrial and provident society with additional registered charitable status. It operates in Northland and works with local businesses to minimise unemployment and to create an environmentally conscious community. Clothing business Little Yellow Bird is involved in ethical clothing production, having a focus on fair pay, ethical production and sustainable materials. Little Yellow Bird reinvests its profit for the purposes of local sanitation, healthcare, and community development in the areas where the cotton is grown for Little Yellow Bird manufacture. The business sources its funding through equity crowdfunding and ongoing sales of their products. It has also obtained benefit corporation certification (B-Corp), which is granted to businesses and entities who can demonstrate high standards of social and environmental performance, transparency and accountability about their production and manufacture. This certification provides certainty about the businesses commitment to sustainability for both consumers and investors.
Where to from here?
The absence of an easily workable social enterprise business structure presents an opportunity for New Zealand. In 2018 the Ākina Foundation (registered charitable trust) partnered with the Department of Internal Affairs to create a three year program called The Impact Initiative to address this and other issues facing social enterprise in New Zealand. The program was intended to feed back to government about this and other legal challenges. More information about the program is available on the website: https://www.theimpactinitiative.org.nz
If you or someone you know is interested in establishing a social enterprise, be sure to contact your lawyer to get sound advice about the best structure for your business concept.