Social enterprises are businesses with a clear social, environmental or community purpose. They trade, generate income, make surpluses and reinvest those surpluses to support their mission. If you are starting or running a social enterprise, you still need business discipline, financial control and the right legal structure. Doing good and making profit are not opposites. For a social enterprise to survive, thrive and create impact, it needs both purpose and strong business foundations.

About this episode

Social Enterprises are businesses explains what a social enterprise is, why trading matters, and why social purpose needs to be supported by sound business thinking.

We look at the difference between social enterprises and charities, the role of profit, and the main legal structures that a social enterprise may use, including Community Interest Companies, sole traders, co-operatives and companies limited by guarantee.

If you want the wider CIC and social enterprise context, our episode on Social enterprise and Community Interest Companies is a useful next step.

Why social enterprises are businesses

Social enterprises are sometimes misunderstood. Because they have a social mission, people may assume they should not make profit or should not think commercially.

That is not the case. A social enterprise needs income, planning, pricing, records, tax awareness, cash flow and financial discipline. Without those foundations, it becomes harder to sustain the mission and serve the community.

The episode makes the point clearly: social enterprises are fundamentally businesses. That means they need to be run with the same care, structure and accountability as any other business.

Key points from this episode

What is a social enterprise?

A social enterprise is usually understood as a business with a clear social, environmental or community mission.

It normally generates most of its income through trade, by selling goods or services. It also has an ethos of reinvesting most of its profits or surpluses back into the business or mission.

That means a social enterprise is not simply a charity, and it is not simply a private profit-focused business. It sits in a different space where trading activity and social purpose work together.

Purpose and profit can work together

The primary purpose of a social enterprise is linked to its social mission. However, that does not mean profit is a dirty word.

Profit helps a social enterprise survive, grow, build reserves, employ people, deliver services and increase impact.

The important question is how that profit is used. In a social enterprise, the surplus should support the mission and the people or community the organisation exists to help.

Social enterprises are not necessarily charities

A social enterprise is not automatically a charity, and a charity is not automatically a social enterprise.

One key difference is trading. A social enterprise usually earns a significant part of its income by selling goods or services. Many charities, by contrast, may rely more heavily on donations, grants and fundraising.

There can also be differences in tax, rates relief, Gift Aid and legal responsibilities. Those areas need careful checking before choosing a structure. Our episode on Gift Aid and Charitable Giving: Understanding the Impact is useful if donations are part of your thinking.

Why legal structure matters

If you are setting up a social enterprise, one of the first questions is which legal structure fits the work you want to do.

The structure affects ownership, control, tax, accountability, funding options, personal risk, decision-making and what happens to surpluses.

There is no single answer for every organisation. The right choice depends on your purpose, trading model, funders, governance, risk and long-term plans.

Community Interest Companies

A Community Interest Company, or CIC, is one popular structure for social enterprises.

CICs were introduced in the UK in 2005 to support organisations that want to operate for community benefit while using a company structure.

A CIC has social credibility, but it still needs commercial discipline. It must be clear about what it does, what happens to its surpluses, and who it exists to help.

For the tax side of this structure, listen to Community Interest Companies and Tax: What CICs Need to Know.

CIC limited by shares or limited by guarantee

The episode explains that CICs can be structured in different ways.

A CIC limited by shares can have shareholders, and dividends may be possible subject to CIC rules and restrictions. This was designed partly to encourage investment into community-focused organisations.

A CIC limited by guarantee does not have shareholders in the same way. Directors may be paid through salary or may invoice for their work where appropriate, but dividends are not paid because there are no shareholders.

Because CICs involve community purpose, asset protection and regulator rules, it is important to understand the structure before forming one.

The three CIC questions

If a CIC feels like the right model, the episode highlights three important questions:

• What will your CIC be doing?
• What will happen to the surpluses it generates?
• Who will your CIC help, and how?

Those questions matter because they test the purpose, motivation and community benefit behind the organisation.

Asset lock and community benefit

CICs are linked closely to the idea of community benefit and asset protection.

If a CIC is dissolved, surplus assets should not simply be handed out to founders or members. They are generally protected for community benefit.

This is why the asset lock matters. It helps make sure assets continue to support the social purpose. Our episode on Asset Lock in Community Interest Companies explains this in more detail.

Sole trader social enterprises

A sole trader can operate with a social enterprise purpose, although the episode notes this is less common in practice.

If you trade, generate income, reinvest surpluses and use the business for community benefit, the social enterprise idea can still apply.

However, a sole trader remains personally responsible for business losses and obligations. That is why structure and risk should be considered carefully.

For wider structure planning, listen to Sole Trader or Limited Company: Which Is Best for You?.

Co-operatives and companies limited by guarantee

Another route is a co-operative structure, where members own, control and benefit from the organisation.

Co-operatives may share profits, losses or benefits among members, depending on the model. Housing co-operatives and retail co-operatives are familiar examples of this approach.

A company limited by guarantee is another option. Instead of shareholders, it has members who give a guarantee, often a nominal amount such as £1, if the organisation cannot meet its debts.

Business discipline still matters

Social purpose does not remove the need for business discipline.

Social enterprises still need budgets, pricing, cost control, cash flow planning, financial records, tax awareness and reporting systems.

The better those foundations are, the stronger the organisation becomes. That means more resilience, more accountability and more impact.

Social enterprise checklist

• Do you have a clear social, environmental or community mission?
• Will most of your income come from trading?
• How will surpluses be reinvested?
• Who exactly will your social enterprise help?
• What goods or services will you sell?
• Which legal structure fits your purpose and risk?
• Do you understand the difference between a CIC and a charity?
• Have you considered tax, Gift Aid, rates relief and reporting?
• Do you understand what happens to assets if the organisation closes?
• Are you applying proper business discipline to your social mission?

FAQs about social enterprises as businesses

What is a social enterprise?

A social enterprise is usually a business with a clear social, environmental or community mission. It trades, generates income and reinvests most of its profit or surplus to support that purpose.

Are social enterprises businesses?

Yes. Social enterprises are businesses. They need income, customers, systems, planning, financial control and profit to sustain their mission and create impact.

Is a social enterprise the same as a charity?

No. A social enterprise is not automatically a charity, and a charity is not automatically a social enterprise. The differences can include trading activity, tax, Gift Aid, rates relief, legal structure and purpose.

Can a CIC make a profit?

Yes. A CIC can make a surplus or profit. The key issue is how that surplus is used, because the organisation should operate for community benefit rather than simply private shareholder gain.

Episode Timecodes

• 00:00 – The I Hate Numbers mission
• 00:28 – Introducing social enterprise
• 00:51 – What the episode covers
• 01:06 – Working definition of a social enterprise
• 01:32 – Social enterprise and charity differences
• 02:01 – Profit, purpose and reinvestment
• 02:28 – Scale and importance of social enterprises
• 03:17 – Legal form and structure questions
• 04:00 – CICs, sole traders, co-operatives and limited by guarantee
• 04:33 – Community Interest Companies explained
• 04:54 – CIC limited by shares and limited by guarantee
• 05:42 – Three key CIC application questions
• 06:53 – Social enterprise versus charity
• 07:34 – Corporation Tax, rates relief and Gift Aid differences
• 08:23 – Community purpose and asset lock on dissolution
• 09:14 – Sole trader social enterprise structure
• 10:02 – Co-operatives and member control
• 10:56 – Final structure recap

Related episodes

• Social enterprise and Community Interest Companies
• Community Interest Companies and Tax: What CICs Need to Know
• Asset Lock in Community Interest Companies

Key takeaway

Social enterprises are businesses. They need purpose, but they also need trade, profit, structure, financial control and discipline.

If you are starting or running a social enterprise, choose your structure carefully. Think about your mission, your trading model, how surpluses will be used, who you help, and what rules apply to your chosen legal form.

Plan it, Do it, Profit.

“Social enterprises are businesses with purpose. The stronger the business foundations, the stronger the impact.”

Further Support

The I Hate Numbers podcast helps business owners, social enterprise founders and CIC directors understand accounting, tax, finance, profit, cash flow and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

If you want support with your social enterprise, accounts, tax affairs, budgeting or planning, you can contact us for an initial chat.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks, and welcome to another episode of I Hate Numbers. In fact, it's episode 29. My name is Mahmood. I'm your host of I Hate Numbers, the show that is there to spread more number-loving love, so your business can prosper, survive, and thrive. What's on today's podcast? You may ask. Well, today's podcast is all about social enterprise.

We're going to introduce the idea of what social enterprise actually is. We are going to talk about the different forms of a social enterprise, and I'm going to give you a heads up for the future episodes and some of the things that you need to know about a social enterprise for it to be successful and to make

an impact. Social enterprise is a term that's been around pretty much since the mid nineties, and the definition, the working definition of a social enterprise in business is that it has three things. It has a clear social and/or environmental mission. It has a way to generate the majority of the income through trade, and it has a motto and ethos of reinvesting the majority of that profit back into business.

As a heads up at this stage, a charity is not necessarily a social enterprise, and a social enterprise is not a charity. They are two independent things here, and the two things we've got to focus on, as far as social enterprise is concerned, it has a business, brackets trading element. It's the use of those profits to what purpose is actually put for, and there's effectively a business motivation behind these social enterprise.

The recap, the primary purpose of a social enterprise is it's making profits, has a social mission, a social purpose, and those profits that are generated are put for that particular aim and objective. Those profits can be made by selling products or services, and social entrepreneurs make a good profit for themselves and benefit others by reinvesting those profits back into their business.

There is no set legal definition, by the way, for a social enterprise, and they can be of varying size from national to international, small community-based businesses. Don't run away with the idea that these are small-scale businesses. The Big Issue, for example, Divine Chocolate and the Eden Project are three very well known examples of social enterprises. In terms of numbers,

there are over a hundred thousand that exist in the United Kingdom and they contribute to the economy 60 billion pounds plus, and they employ in excess of 2 million people. So, we're not talking small fry here. Since social enterprises are fundamentally businesses, it's really critical and important that business disciplines are applied to how those social enterprises are run, how they grow, how they sustain themselves.

Having outlined what a social enterprise is, given you an overview, what I want to do is to flag up the key questions that any aspiring or ongoing social enterprise has to address. One of them is the legal form. In what format, in which shape should that social enterprise deliver its goods and its services?

We've talked about legal structure before on previous podcasts. So, 14 of I Hate Numbers was on your business structure. Very well worth checking out again. If you're contemplating setting up a social enterprise, then a key question at the very start is the different form of the legal structure that you should adopt.

We have a number of choices, and the choices are as follows. You can be what's called a CIC. CIC is a community-interest company. More of that in a few moments. You can also be a sole trader. And the other two main options are a co-operative or a company that's simply limited by guarantee. Again, check out episode 14 of I Hate Numbers, to find out more about your business structure where we talk about limited-by-guarantee companies.

Let me talk about the CIC first of all. That the CIC is a community-interest company. Now, it was first introduced in 2005, mainly due to a growing interest to offer support to social enterprises. It's as the name implies, owned by the local community and operated to benefit those people who reside in that community.

It's not geared towards private shareholders, even though you can have a shareholding CIC. Within the CIC world, there are two forms. You can have a CIC that is effectively a private company, limited by shares. When the CIC model was first introduced, in order to encourage the external investors to invest in their local communities,

a CIC limited by shares was introduced whereby directors and shareholders can actually withdraw some of the surpluses as dividends. A CIC that's limited by guarantee doesn't actually have investors, doesn't have shareholders, so dividends can't be paid out. It’s effectively, directors can extract remuneration by the conventional salary route

or by invoicing those organisations for their time. If you think a CIC is the model for you, and it has a great big badge of social credibility, then you have to do the requisite application form. And it's typically three questions that need to be addressed, which identifies your motivation and underlying purpose behind why you want that CIC.

So, effectively, what is your CIC going to be doing? What's it going to do with those surpluses that it generates? And who is it going to help and how? So, let's recap, everybody. So, we've talked about what a social enterprise is, what its purpose is, how it's got that business motivation, how it uses those surpluses for the common good.

We've started to talk about possible structure for a social enterprise model, which in my experience is the more popular one these days, certainly heading that way, and that's the CIC. It can either be limited by shares or limited by guarantee. Before we address the other types of social enterprise structure i.e. the sole trader or the co-operative, let's consider the differences between a social enterprise and a charity.

I said at the beginning, a social enterprise isn't necessarily a charity, and a charity isn't necessarily a social enterprise. Why so, you may be asking. One of the foundation pillars of a social enterprise is that income must be generated by way of trading activity i.e. selling goods and/or services.

That level of income must be more than 50% from trading if you are going to meet that criteria, and typically most charities will receive their funding through grants, through donations, and not necessarily through trading activities. Therefore, that is one of the reasons they won't be classified as a social enterprise.

Other differences that it's worthwhile flagging up is in terms of taxation. Now, CICs, by the way, is a misnomer, are not exempted from paying corporation tax on their surpluses. Charities, on the other hand, are exempt from paying tax on their surpluses. CICs do not automatically get local rate relief and it's discretion of the local authority as to whether they get any rate relief or not.

Charities on the other hand though, automatically qualify for an 80% rate relief reduction, and the remaining 20% is at the discretion of the local authority. If you make a donation to a CIC, which is very laudable, the CIC cannot claim gift aid on that donation, whereas a charity that's registered can also claim gift aid.

So, a gift of a hundred pounds to a charity means the charity can claim back 25% on top. So, obviously that's more beneficial for a charity. Other differences. CICs must continue their community purpose from the day they're created to the day they're dissolved unless you actually convert to a charity. If a CIC was to be dissolved, any surplus assets are locked for the benefit of the community rather than given out to the founding

members. It's not unusual for an organisation to be founded as a CIC with a long-term objective of being converted into a charity, and if the structure is chosen correctly, that is very possible to be able to do that, to convert to a charity at some future point. Let's recap. We've talked about what a social enterprise is.

We've talked in terms of the CIC structure. We've contrasted the difference between a CIC and a charity. What I'd like to round up with now is to comment on two other more popular forms of how to structure your social enterprise. One other mechanism can be as a sole trader, so you can be a sole trader running your business and you can run that as a social enterprise.

If you reinvest those surpluses, you generate them through training activity and you give those surpluses to the benefit of the community, then you are a social enterprise. The tax rules are slightly different. You'll be treated largely as a sole trader. You are responsible for any losses that your business makes, and in my experience, a sole-trader structure for a social enterprise is not that common.

The last mechanism, the last way you can structure yourself is to be a co-operative. This is effectively a pseudo-type partnership where all the members of the co-operative will share the profits, or losses, or benefits. The co-operative approach is owned, controlled, and run by its members who subsequently benefit from that.

Housing co-operatives, supermarkets like the world famous co-op are examples of co-operative organisations, and typically a co-operative is either a company limited by guarantee, a community-benefit society, or a humble co-operative society. And if you're thinking, what do we mean by limited by guarantee, that means in the event of the company not being able to sustain itself, falling into problems in terms of debt, the members who are the founders are each exposed to maximum, typically of a pound.

That's the guarantee they make to that organisation. So, folks, let's round up what we've said. We've talked about what social enterprise is, its purpose. We've talked about the different structures that a social enterprise can take from CIC and limited by shares or by guarantee. You can be a sole trader, you can be a co-operative organisation, you can be a straightforward limited-by-guarantee company.

I hope you've enjoyed this episode of I Hate Numbers on social enterprises. If social enterprises is your thing, if you're involved in running one, if you think of founding one, then check the link in the show notes where we're happy to add you to our newsletter on Arts and Social Enterprises and keep you up to date with what's going on in the world of social enterprises.

If you love the podcast as much as I've loved doing it, please share, subscribe, and comment. Until next week, folks, have a great week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.