Legal entities for social enterprise

Last blog post we explained how the definition of social enterprise varies greatly, and the rules in each country usually also change. Therefore we thought we would go a bit further and show you an example of two legal forms of social enterprise.

In the U.K.

The first is the “Community Interest Company”, a legal form of business that has existed in the United Kingdom since 2005. As of March 2017 there were more than 13,000 CICs on the register, quite a small number in our opinion when you consider it has existed for 12 years. That said the idea of being able to set up a legal social enterprise is fairly unknown, and something we hope to share.

As a CIC you can set up in a number of different ways – such as limited by shares or by guarantee, just like a ‘normal’ company. However, there are three additional rules. Please note we’re giving a basic overview, so for more information you can head to the Government website about social enterprise.

Firstly, you need to make a community interest statement. This sets out what activities you will carry out as well as who your beneficiaries are. You also have to state how your company will make a surplus.

Next, you have to ensure there is an asset lock, so that 65% of your profits are reinvested in your social or environment goal.

Finally, you have file a community interest report to demonstrate that you are meeting what you set out in the statement.

As you can see, the rules aren’t too detailed, making things fairly straightforward to understand and set up.

In the U.S.A

The other legal form we are showcasing today is the Benefit Corporation. This legal entity started in the United States (though not all states!) and now exists in Italy and soon in Australia. Please note that a Benefit Corporation in the legal sense is different to BCorp, a certification process we will look at another week.

Benefit Corporations enforce the idea that decisions should be made for the benefit of all stakeholders, not just shareholders, so goals other than profit can be considered. It has made it a key legal element to consider stakeholders. This is written into the constitution into the corporation making it essential that operations produce a public benefit.

Also, there is a large element on reporting around transparency, therefore carrying out an annual public benefit assessment report. This shows both internally and externally what you are doing and can be used as evidence to prove you are a Benefit Corporation, for example to investors or courts. This must be audited by an external independent standard. Most states require this to be publicly and openly shared.

Since legislation can vary from state to state, it’s important you check what applies to your state here.

For both countries, you can choose to start as one or you can convert to one. Please review the websites linked above for more information. Legal forms do not exist in every country yet, but there is definitely a strong movement across the world to create something that will not only promote social entrepreneurship but provide a legal framework for them.

What actually is a social enterprise?

It’s a question we often get asked, and it’s never an easy answer.

That’s not because we don’t know, but because depending on where you are there are normally different ideas of what exactly constitutes a social enterprise.

Let’s start with some generalisations to get the ball rolling anyway:

  1. A social enterprise must be transparent and open. Social entrepreneurs effectively put the way they act into their organisations – or they should do.
  2. A social enterprise should have a triple bottom line. This involves having social, environmental and financial goals and making sure they’re all taken into consideration when making business decisions.
  3. A social enterprise should make some money through trading on the open market. If all your money comes from government grants or contracts, then you may not be a social enterprise – more of an charity or NGO.
  4. A social enterprise has to reinvest a proportion of its profits into its social/environmental goal. This doesn’t mean reinvesting it into the business and buying yourself an Aston Martin Vanquish though.

Whoever we speak to in the social entrepreneurship sphere, they always provide us with those four themes. If we take a closer look at some areas, you will see how the definition varies from person to person, organisation to organisation and country to country.

  1. In some countries, social enterprises must publicly report on their social and environmental impact, as well as their financial accounts. They must engage all stakeholders in decision making and have open membership.
  2. In certain countries, you must explicitly state what each of your goals are (for people, planet and profit) when setting up, in others you have to have one main goal, be it environmental or social, and not be too clear elsewhere.
  3. We have seen that the percentage of money coming from trading changes from country to country. Some stating a minimum of 25% gives you social enterprise status, others 50%. There’s normally special dispensation for start-ups or NGOs converting over though.
  4. This has the biggest range. In Croatia, their strategy states 75% of profits should be reinvested, in the UK CiC’s (social enterprise legal form) is 65%, and the scale goes all the way down to not stating how much of your profits should be reinvested.

Furthermore, and outside the general rules, some countries state you must employ people from vulnerable groups to qualify and others state the government can never be the owner of a social enterprise.

Now you have a bit more insight into the complexities we sometimes face in explaining, but there are a few organisations trying to make things more precise and clearer, which we will discuss next time.

Social Enterprise in Focus : VITA ANST, Croatia

This week we head to Split in Croatia to meet a local social enterprise.

Social entrepreneurship is a growing concept in Croatia. In 2015 the government launched a five year strategy which aims to develop and promote social enterprise across the nation, creating it in partnership with some key players such as ACT Grupa and CEDRA HR. A number of initiatives over the last couple of years have seen more funding opportunities for start-ups, which has also enhanced the reputation and knowledge of existing social enterprises.

One such social enterprise (in this case a social co-operative) is VITA-ANST. Founded in 2009, they have experienced ups and downs over the years, nevertheless they continue in their commitment to support people with addictions. They run both an NGO (ANST 1700) and the social co-operative to enable them to run support programs as well as work in the rehabilitation and reintegration of people recovering from addictions. The social co-operative produce bright and colourful souvenirs for the tourist market, as well as bespoke frames for pictures or posters for the home.

We caught up with Gabrijela Frakić, Vice President of the NGO, to tell us more about VITA-ANST.

Why did you decide to open a social enterprise (socijalna zadruga)?
From the very beginning we offered therapy in the form of art and craft. Through this we realised we could create a self-sustainable model and therefore the need to open a social co-operative arose. It enabled us to separate the business (in terms of product placement) and social activities. It also meant it was easier to promote and sell things since at the time it wasn’t possible to do this through NGOs.
What has been the most difficult thing in running a social enterprise in Croatia?
There are a few current issues regarding social co-operatives generally in Croatia. There isn’t a defined status of social co-operatives in the tax system and furthermore there’s a general lack of support from local administration. In addition to this there is insufficient knowledge of social entrepreneurship generally. Finally, there’s a lack of development support such as training or workshops around capacity building and there aren’t many financial tools available for market expansion.
What advice would you give to individuals thinking of opening their own social enterprise in Croatia?
In terms of a co-operative, make sure all members have common interests and there is someone who can lead or manage everything with excellence and professionalism. Then, with the right vision, there are possibilities out there but you have to persevere and learn how to deal best with external issues such as the legal and economic situation. Finally, whether you offer a service or a product, ensure you are always improving the quality of what you offer. It may be slow at times but it will enable you to expand and reach wider markets.
In our next blog post we’ll be explaining more about what a social enterprise is.