Setting Up a Social Enterprise – The ‘How To’ Guide

If you’re a successful entrepreneur, that’s all well and good, but what if you could also make a difference to your local community via giving people jobs, improving the local area and developing a brand everyone knows and loves?

If that sounds like a mighty fine idea, then why not create your very own social enterprise?

But what is a social enterprise.. we hear you ask.

By definition, it is a business with primarily social objectives whose surpluses are principally reinvested back into the business and into the local community – rather than being driven by the need to maximise profit for shareholders and owners.

When setting up a social enterprise, there are many things to consider, from its social mission and how it will be financed, to its legal form and how to get the right people involved.

Although not defined by its legal form, the choice of legal form will have a significant bearing on the way the enterprise is established and run.

Social enterprises come in all shapes and sizes and there are a variety of issues to consider when choosing the right legal form for your organisation.

Safeguarding The Chosen Social Mission

Social enterprises are driven by the need to improve things socially, rather than by profit. The social mission forms the very essence of the social enterprise and it must trade with this in mind.

The level of protection afforded to the social purpose of your organisation will depend upon its legal form. If protections are not put in place, this purpose can easily be changed.

The social mission must be very clear and must be borne in mind when choosing the appropriate legal form.

Funding (And Sourcing Funding)

There are a number of funding streams for social enterprises including grants and equity finance. Though the types of funding available will depends on its legal form.

If the organisation is likely to dependent on its own surpluses, it is important to consider the tax implications of each legal form before making a decision. I.e. charities benefit from a particularly wide range of tax exemptions and benefits.

Managing Risks

Social enterprises can be incorporated or unincorporated. These are the differences;

  • Members of an unincorporated organisation may be personally liable for meeting any liabilities of the organisation in the event of an asset shortfall.
  • Alternatively, an incorporated organisation generally has limited liability, meaning there is no wider liability for members (or owners) beyond the assets owned by the organisation.

When choosing a legal form for your social enterprise, it is important to consider the level of risk that will be faced by the organisation and its members. E.g. higher risk activities include employing staff or taking on property.

Choosing Your Legal Form

Consider the above issues in depth. It will allow you to select the legal form most appropriate for your organisation.

Unincorporated legal forms include:

  • Sole trader: individuals set up and run their business on their own, with no formalities
  • Partnerships: two or more people carry on business in common with a view to generating profit; or
  • Unincorporated associations: an organisation of two or more persons who agree, usually in a written constitution, to cooperate in furthering a common purpose.

Incorporated legal forms include:

  • Companies: the most common types of company used for social enterprise are the company limited by guarantee (“CLG”) and the company limited by shares (“CLS”);
  • Registered societies: community benefit societies or co-operative societies;
  • Community Interest Companies: a particular type of company that uses its assets and profits for the community benefit; or
  • Limited liability partnerships.

For further information, see the government’s website on ‘how to set up a social enterprise