Social Enterprises are pretty important businesses. There are over 100,000 social enterprises contributing £60 billion to the economy and employing two million people.
In this weeks episode of ‘I Hate Numbers’ we look deeper into the what, how and form of a social enterprise.
Firstly, let's look at a working definition of a social enterprise.
Don’t confuse a social enterprise with a charity as a charity is not necessarily a social enterprise and a social enterprise is not a charity.
The primary purpose of a social enterprise is making profits as part of its social mission and purpose. Those profits can be made by selling products or services.
Since social enterprises are fundamentally businesses. It is critical and important that business disciplines are applied to how those social enterprises are run. How they grow. How they sustain themselves.
We've talked about legal structures before so it's worth checking out our previous podcasts. If you're contemplating setting up a social enterprise, then the key question at the very start is the different form or the legal structure that you should adopt.
There are choices, the most popular being
First introduced in 2005 due to a growing interest to offer support to social enterprises. It is owned by the local community and operated to benefit those people who reside in that community.
Within the CIC world, there are two forms.
There's three key questions to answer. These look at your motivation and purpose for behind why you want that CIC.
A social enterprise isn't always a charity, and vice versa. The main differences are to do with
Listen in to find out more
Social Enterprises are businesses. They play an important part in the business and community landscape. Contact us to find out more.
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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.