What exactly is a social enterprise?

We look at the business model that balances creating a healthy profit with a social mission to see if you’ve got what it takes to be the next John Bird…

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Who says that being good doesn’t pay? With UK businesses such as globally recognised Divine Chocolate, The Big Issue and Cafédirect successfully managing to combine ethics with profits, it’s hard to think why all aspiring entrepreneurs aren’t dreaming of launching a socially focused start-up.

And this may increasingly be the case. Social Enterprise UK’s biggest report into the business community (the Social Enterprise Survey) found that nearly a third of the UK’s social enterprises (which totals approximately 70,000) are start-ups, meaning that more and more new companies are being launched with the aim to make the world – or at least Britain – a better place.

While some start-ups are focusing on longstanding institutes, such as healthcare and reforming education, others are using tech to battle new problems. The constant change and evolution that has become the norm in society today – nowadays most things are on-demand, have short life spans and are disposable – means that our ecosystem and communities often bear the brunt.

Many start-ups are reacting to this, utilising the continuous avalanche of new technologies, business models and general innovation to tackle poverty, environmental damage, or to improve some aspect of society.

For instance, ‘Tech for Good’ is now an emerging business sector, with many companies creating apps, services and software to not only turn a profit but to make a real difference, such as Startups 100 winner WeFarm, that has created an SMS alternative to Google to help developing farmers share vital agriculture advice, and London-based Medical start-up IanXen, with its innovative app xRapid that turns a smartphone into a portable tool for digital malaria diagnosis.

Here, we take a look at what a social enterprise actually is, as well as the advantages and disadvantages of running one, to help you decide if launching a company with a conscience is the right way to follow your business dreams…

So what is a social enterprise?

A social enterprise is a company that’s core mission is to benefit and improve society – be that via the community or environment. However, unlike a charity, it is still a business looking to run and grow independently and make a profit.

As with any company, a social enterprise will need a solid business plan, however alongside having an aim to balance the books, equally important will be its ongoing contribution to its social goal. While the definition of a social enterprise is constantly developing and evolving, it can be more or less identified as a business that generates its own income through a trade while the majority of its profits are reinvested back into a social mission.

Social enterprise business structures

Like other business owners, social entrepreneurs must set their business up in a legally recognised structure. A community interest company (CIC) is a legal form that was introduced for social enterprises, it’s a type of limited company that is regulated so that a business’ assets are protected from being sold privately, and it cannot deviate from its social mission. However a social enterprise can also be set up as a sole trader business, a limited company, business partnership, a charity or charitable incorporated organisation (CIO), or a mutual organisation (owned by its customers and run for their benefit).

Social enterprise business models

Some popular examples of social business models include trading arms of charities, co-ops and employee-owned businesses, development trusts, housing associations, and social firms. Social entrepreneurs have launched businesses in a wide range of areas from brewing, to food and construction. The most popular areas to launch in are business support, education and employment and skills but recently, an increasing number of start-ups have begun to move into healthcare and community development.

Social enterprises can also be ethical traders, firms with a charitable element (such as a certain profit percentage going into a charity/worthy cause) or a Fairtrade business. It is worth noting that not all of these types of companies are social enterprises though – for instance, an exclusively ethical/Fairtrade company is run with a goal of reducing its negative impact on people and the environment but does not necessarily benefit society.

Be careful which structure you choose, while launching a charity may sound ideal – as you can get certain tax exemptions and grants – the rules surrounding charities are complicated. And you cannot conduct a mix of charitable and non-charitable work as a charity must be set up and run with a goal that is entirely philanthropic.

So, if your goal is to start a revenue-generating and profitable business that has an added bonus of helping society or that donates a portion of revenue towards a social goal, then a CIC – which has some of a charity’s benefits but is more flexible – or a standard business structure may be a more suitable option.

What does it take to be a social entrepreneur?

According to the Oxford dictionary, a social entrepreneur is a ‘person who establishes an enterprise with the aim of solving social problems or effecting social change’ – sounds perfect for anyone who grew up with superhero aspirations.

The challenges of running a social enterprise

However, running a social enterprise is no easy feat, as your business will have to compete with both charities and purely commercial businesses for financial support, market share, and attention. It involves many of the same steps as running a normal business such as researching your market, testing your idea, establishing a strong brand, monitoring cashflow and managing staff – all whilst trying to hit a social target.

Therefore as a social entrepreneur you must be prepared to be flexible, able to balance a multitude of tasks, and – as your business is advertising itself as having a ‘social mission’ – you must be transparent in communications, and attentive to the law and red tape set out for both social enterprises and regular companies. As Craig Dearden-Phillips, who runs a competitive and highly creative social enterprise Speaking Up (now VoiceAbility), puts it, running a social enterprise “doesn’t mean abandoning business disciplines”.

Support and funding for social businesses

However, don’t be discouraged just yet – there are many advantages to running a social enterprise. These include different types of tax and business rate exemptions, grants and resources. Social Enterprise UK is the industry body for social enterprises, but there are many other incubators, investors, and business support organisations that focus on helping ethical companies such as early-stage tech social accelerator Bethnal Green Ventures, members group PwC Social Entrepreneurs Club and support provider UnLtd.

Vicki Hearn, director at Nominet Trust – which provides grant funding and support to tech companies that address social challenges –believes that the level of support for social enterprises will increase, as ‘impact investing’, whereby capital is put into projects that return social and environmental value rather than financial, continues to rise.

Hearn told Startups: “There is certainly movement in the sector that gives some grounds for optimism for increased levels of social investment.

“For example, Social Investment Scotland reportedly provided a record £7.5m of funding to social enterprises, charities and community organisations in the year to March 2015. UK legislative changes are also helping to create a more conducive social investment environment, for example Social Investment Tax Relief (SITR) now encourages individuals to support social enterprises and helps them access new sources of finance, while the new Social Venture Capital Trust announced in the 2015 Budget should promote investment in companies that invest in social organisations.

“Finally, only this month, the call to boost social investment by introducing social pension funds came in Big Society Capital’s report, with the aim of allowing individuals to use their own pension choices to invest in social enterprises.”

PR and media attention for social enterprises

As well as specialised support and finance, businesses that focus on positive social change also tend to get increased media and consumer attention. According to Sinead Mac Manus, founder of Fluency – a company that teaches young people digital skills in order to help them get jobs – media channels come to you, “when you are running a business that changes people’s lives and makes a difference, the story sells itself.”

Social and green businesses made up the fourth highest sector in our 2015 Startups 100, including energy group bio-bean – which moved up 90 places to 16th – and ethical coffee subscription service Pact Coffee, and there are a number of feature and award opportunities specific to social enterprises. Nominet Trust is running its third NT100 list, which names the top tech for good ventures in the world, and every year RBS SE100 Index picks out five social enterprises from its list and awards each firm with prize money.

Overall as funding, recognition and support continues to increase, it seems the upward trend of entrepreneurs using business as a force for good will only gain further momentum.

So, if you have a burning business idea but want to launch a start-up with a social conscience, why not start your very own social enterprise today…

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