Social enterprises are innovative, independent businesses with a social and/or environmental purpose.
What is a Social Enterprise?
Social enterprises trade for the common good rather than unlimited private gain. Typically set up to address social needs, their objectives include strengthening communities, improving people’s life chances, enhancing culture and protecting the environment. Like any other business, they aim to make profit, but then invest 100% of this in social purposes. In Scotland, social enterprises are “asset locked” which means all their property, money and resources can only be used for a social mission with social impact.
Running a social enterprise can be a daunting prospect. From getting started, funding, finances and marketing, through to roles and responsibilities for directors, members and trustees and longer-term sustainability, there is a lot to learn.
Thankfully, there are several Scotland-wide organisations that offer a range of training and support. For their full training calendars, follow the links below.
The first port of call for social entrepreneurs. Firstport offer a wide variety of funding and support to fledgling social enterprises.
A consortium of 10 specialist sector organisations, with a wealth of experience in launching and developing social enterprises across Scotland.
Social Enterprise Scotland is a social enterprise and charity offering loan funding and business support for social enterprises and charities.
Learn more about Social Enterprise
Legally speaking, there’s no such thing as a ‘social enterprise’ – this is just an umbrella term covering many different types of organisations. However, to be defined as a social enterprise, an organisation needs to meet the common criteria set out in the Voluntary Code of Practice.
Social enterprises trade in all markets, selling goods and services to individual consumers, local authorities, government and private businesses. An enterprising approach is demonstrated by an enterprise earning 50% or more of its income from trading.
This will be evidenced by the accounts of the business over a reasonable period.
A high level of income from the public sector is acceptable in the form of contracts – but not grants. Criterion 2 is intended to mark the boundary between social enterprise and much of the voluntary sector. (Many voluntary orgs trade over 50% without calling themselves social enterprises)
Social enterprises exist to generate profit in the same way as private sector businesses. However, all distributable profit or surpluses must always be reinvested into the organisation’s stated social and environmental purposes.
In those few cases in Scotland where a social enterprise has shareholding investment, no more than 35% of its distributable profit may be paid out as dividends (*). In addition, the organisation’s constitutional documents must include an asset lock, a binding clause ensuring that all assets (such as buildings, land, and other resources) are permanently dedicated to social or environmental purposes, both during the lifetime of the business and on dissolution. This ensures that assets cannot be transferred for private gain at any time.
Criterion 3 is therefore intended to establish a clear boundary between social enterprises and the private sector.
The term “social enterprise” shouldn’t be confused with private businesses that operate in an ethical way, charities that don’t do business (or trade very little) or public sector arms-length companies (ALEO’s), i.e. it must be constitutionally independent from the governance of any public body. Criterion 4 is intended to mark the boundary between social enterprise and the public sector.
Practical Considerations
For those looking to enter the world of social enterprise, make sure your enterprise is a viable business in its own right. Be clear on your social mission and how your business will achieve it. Ensure you can demonstrate the social impact you are seeking to have.
Our team at VCEL can help you develop a plan and signpost you to relevant organisations for further support and funding opportunities – see Support for Social Enterprises.
What is meant by Social Impact?
Social impact/purpose can be:
- Improving health and wellbeing
- Providing a place where people can meet
- Regeneration of neighbourhoods
- Promoting a sense of belonging
- Helping people to build confidence
- Supporting people to live independently
- Encouraging learning and education
- Creating employment Opportunities
Firstly, you need to make sure your enterprise is a viable business in its own right, be clear on your social mission and know how your business will go about achieving this. You also need to be able to demonstrate the social impact you plan to have.
Social impact/purpose can be:
- Improving health and wellbeing
- Providing a place where people can meet
- Regeneration of neighbourhoods
- Promoting a sense of belonging
- Helping people to build confidence
- Supporting people to live independently
- Encouraging learning and education
- Creating employment opportunities
The social enterprise model suits those who want to make their organisation more sustainable and be entrepreneurial in achieving social or environmental change - and where personal profit is not the business objective.
They are often set up by existing organisations or charities wanting to fund their work through trading rather than a reliance on donations. They are also set up by businesses which have social aims but don’t want to restrict their activities under charity law.
As a social enterprise, the business can still clearly communicate its social purposes and assure clients, customers and supporters regarding how profits and assets are applied. However, depending on the legal structure chosen, you can have greater freedoms regarding payments to company directors, a wider range of acceptable purposes and (limited) options regarding payments of dividends.
- Less dependent on fundraising and grants
- More financially independent which can lead to greater flexibility
- Seen as a positive model both by Scottish and UK Governments
- Greater sustainability through trading
Social enterprises are diverse and their more-than-profit approach is used by a huge range of organisations. As a result they use a wide variety of legal forms and structures.
In addition to the six legal forms above, a social enterprise can also be a:
- Company Limited by Guarantee* (CLG)
- Trust*
- SCIO (Scottish Charitable Incorporated Organisations)
- Co-operative Society
- Community Benefit Society* (BenCom)
*these may or may not have charitable status
Each legal form or structure brings its own benefits, restrictions and reporting requirements. Deciding on how you’re going to fund your enterprise and what you plan to do with any profit will dictate which particular legal structure is most appropriate for your business.
Other deciding factors include whether you want to take advantage of tax breaks and how much control you want to retain over your social business.
For further guidance on which legal structure is right for you (particularly if you are setting up a charity), please consult the Scottish Council for Voluntary Organisations’ advice on ‘Choosing the Right Structure for Your Organisation’. This provides a thorough introduction to all the structures available, and breaks down all the key terms and concepts.
