Social Enterprise

Updated on May 21, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Social Enterprise?

A social enterprise is an organization with a prime motive to do social work. It aims to maximize profits and use the money to fund various social programs. Nevertheless, its primary goal is to create a social impact.

Social Enterprise

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These enterprises are mission-driven to support social and ethical needs. They work with the cause to cater socio-economic benefits to the communities. Social businesses have strong networks with charitable trusts to increase the impact of the social cause. But, at times, corporates might find it difficult to manage their operations.

Key Takeaways

  • A social enterprise is a business catering to social causes from its commercial profits. Social enterprise funding is through government grants, donations, and surplus profits of the business. 
  • There are four types of social businesses: trading, financial, community and NGOs. 
  • Every social enterprise business model has two major goals: Earning profits from the normal course of business and using the same amount for social causes.
  • Countries like the United States, Australia, and Singapore allow social businesses to receive tax deductions from the government.  

Social Enterprise Explained

Social enterprises or businesses are a hybrid structure of commercial and non-profit organizations with a prime purpose of fulfilling specific social objectives. In other words, they work as a corporation to generate profits and use their maximum amount to work for a social and environmental cause. Social enterprise funding is flexible and fixed through various sources. Like traditional businesses, maximizing profits is not the prime goal of these enterprises. Instead, they reinvest profits for a social cause whenever they are profitable, instead of paying shareholders dividends.

Many social businesses, social enterprise business model and other firms are a part of some or the other social cause. The only difference is that corporate social responsibility (CSR) is necessary for adding a social angle to the brand image. However, the various social enterprise business model has adopted corporate practices. Both are collaborating to enhance their primary goals. So, in short, it is an intersection of the volunteer/social and private sectors. They balance the social goals by often providing monetary benefits to the lower class of society having lower income. Examples include education, job training, healthcare, and housing.

Although the government provides grants to these social enterprise business model, they carry out various endeavors, like selling goods and services to generate funds in the form of revenue. They carry out their operations differently than the standard firms and organizations, as profit maximization for private use is not their prime target. Although profit is not their significant goal, they need to raise and maintain revenue to sustain the venture. So, unlike charities, they pursue tasks and endeavors like selling goods and services to boost their revenues to fund social objectives. Traditional charities depend on external funding to carry out their activities.

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History

The concept of social enterprise companies started in the late 1970s in the United Kingdom. They aimed at countering traditional commercial enterprises and businesses. Prior, the financing of these firms was primarily dependent on government support. However, social enterprise companies felt it difficult to finance their social needs. Moreover, even the number of societal problems was rising high. Thus, in 1844, the Rochdale pioneers started providing quality food to underprivileged people from their commercial profits.

Nowadays, various countries provide social enterprise grants and benefits to the communities. For example, enterprises in Singapore can apply for tax grants if it has used 100% of the profits for a social cause. Likewise, federal law also follows a similar rule. However, the United Kingdom law does not exempt social enterprise grants from corporate tax and value-added tax (VAT).

The United Nations report in 2020 stated that social corporations account for 2-3% of the Australian GDP, generating more than 200,000 people jobs. Another report by Echoing Green states that in 2020, most (40%) of the U.S. social businesses targeted the regions of the African continent like Nigeria, Kenya, Uganda, Ghana, and Cameroon to improve the climatic change.

Types

Let us look at the types of social businesses existing in the industry:

#1 – Trading Enterprises

Cooperatives, partnership firms, and worker or employee-owned firms are a part of trading enterprises. The working of these organizations is the same as the traditional corporations. They might differ in size, but the social motive remains the same.

#2 – Financial Institutions

Financial institutions like banks and credit companies also constitute social businesses. For example, various credit unions provide higher deposit rates and lower interest rates to the public. Also, some banks work on a cooperative and microcredit basis to cater the customer needs.

#3 – Non-Governmental Organizations (NGOs)

NGOs are charity groups that aim to help and donate to social action. They operate on both small and large-scale levels. They receive certain grants from governments and investors to fulfill their purpose.

#4 – Community Organizations

These are registered social corporations that form a part of a community. These enterprises aim at serving the public through commercial profits. The members of the enterprise also support the cause. Some examples are community centers, cooperative housing societies, community clubs, etc.

Examples

Let us look at the social enterprise examples to comprehend the concept better.

Example #1

Suppose Raison Fellows is an enterprise working to help black people in Africa. Every month they donate certain school and electronic supplies to them. Also, they keep job openings for them in their company. And to support this social cause, they profit from their dairy business. The government also provides grants and donations to them.

Example #2

Bill Drayton’s “Ashoka” is one of the most popular social businesses in the world. They strive hard to create and bring positive changes to the world. And for this, they cater to the needs of the younger generation. They have created a social community that works to bring positivity around themselves. Recently, Ashoka has partnered with Ikea to imprint a positive change in individuals.

The above examples explain the main concept of social organization and social enterprise alliance and how they work in different fields to create a positive impact in the society as well as expand the business through delivery of quality goods and services and earning profits.

Advantages And Disadvantages

Social businesses have some pros and cons associated with them.

Let us look at the advantages of social enterprise ideas first.

  • Since along with profit motive a major part of their woking is centred around bringing a change to the society, they are able to contribute a lot to the community infrastructure in a positive and meaningful manner, and bring about a significant change.
  • The solutions that they promote are typically of sustainable nature, which addresses social problems and successfully creates a change on a long term basis.
  • Since social enterprise ideas are also a business structure, generating profits in the work process, they do not have to depend a lot on fundings in the form of donations and grants. They can reply on their own resources to quite an extent.
  • These organization use a lot innovative skills and ideas that help them to expand and grow and make a positive impact in the society as a whole.
  • Such organizations follow healthy employee motivation skills that not only creates job satisfaction through employee empowerment but also encourages them to come forward with new ideas for betterment of joint objectives that will help the organization in future.

Some notable disadvantages of the social enterprise organizations as given below:

  • Although these enterprises make profits, they will never keep with themselves, and they use that surplus profits to fund social programs and activities. Therefore, there are no dividends declared for the shareholders.
  • Funding for social enterprise and business is from various organizations and governments. However, fulfilling commercial and social objectives might be hectic as they have explicit rules and regulations.
  • Sometimes they may not have immediately accessible resources which may hinder their progress over time. To get grants and outside funding they need a strong portfolio and good future opportunities, which may not always be available.
  • Bring a positive social impact can be challenging and time taking. It is also a subjective idea and cannot be measured in numbers. Therefore, the success may not always be easy.
  • Managing the social responsibility as well as reaching the objective of earning good revenue to maintain profitability can be challenging and complex. Social enterprise organizations are two completely different twos of operational process. It is demanding to be able to manage financial sustainability along with social objectives.
ProsCons
Making a social impactLimit on revenue generation
Chances of receiving grantsCompetition with corporates
Employment opportunitiesStrict rules and regulations
Tax deductionsConstant monitoring
Benefiting communities 

Social Enterprise Vs Social Entrepreneurship

Although social business and social entrepreneurship look the same, they are far different. While the former aims to solve a societal problem, the latter aims to create a positive societal change. The former is a social business, whereas the latter is a social activity.

The former uses profits for the community’s benefit. However, the latter uses profits to solve a societal problem. Social entrepreneurs can form social enterprises or other organizations.

DescriptionSocial EnterpriseSocial Entrepreneurship
MeaningA social business aims at solving a societal problem through profits.Refers to social activities where entrepreneurs aim to create a positive societal change. 
PurposeTo use profits for the benefit of society.Uses profits to solve a specific problem.

Thus, from the above it is clear that the former is an organization in itself that helps in social change along with profit motive, but the latter is an initiative for social change, that is beneficial for the upliftment and well being of the society as a whole.

Social Enterprise Vs Nonprofit

Both the above are organizations that whose main objective is social welfare. But their approaches are different. Let us study the differences between them as follows:

  • The main objective of the social enterprise alliance is to promote social growth by addressing environmental and social issues, but along with generation of revenue in the process. But for the latter, the main aim is only to bring about social welfare through humanitarian work or advocacy for the same.
  • For the above point we can derive the fact that the former hhas a dual objective while the latter has a single objective.
  • Due to their business mindset, they have financial resources generated from their own business and along with that they also get donations and grants. The latter, on the other hand only depends on donations and grants which they get from individuals and other institutions due to their good work and tireless efforts to bring social change and upliftment.
  • Compared to the latter, the former is more financially sustainable because they can generate their own resources through revenue earnings. The latter has to depend totally on donations. Therefore, they need to be very careful with their limited resources and use them efficiently.
  • The former basically has a more of market-based approach and they take advantages of opportunities fro the market to meet their needs as well as bring social change, unlike the latter, which never aims for commercial profitability.

Thus, the above are some noteworthy differences between the two topics.

Frequently Asked Questions (FAQs)

1. How to start a social enterprise?

Following are the steps for starting a social enterprise:
– Researching the company
– Finding the unaddressed social cause
– Writing a mission statement
– Discuss the plan with other members
– Develop the social enterprise business model
– Reach out to investors for initial funding
– Take the step to action.

2. What is the most famous social enterprise?

According to Forbes, Ashoka is the most famous social business in the world. Starting in 1981, Bill Drayton’s enterprise aimed to support social businesses for a positive change.

3. How do social enterprises make money?

Social businesses make money through the profits of their primary business. However, they cannot distribute this profit to the investors. Therefore, if the profits are insufficient, they reach out to investors and the government to finance their social cause.

4. Can social enterprises apply for grants?

Social entrepreneurs can reach out to many groups to finance their operations. They include corporates, angel investors, crowdfunding, and incubators.

This has been a guide to what is Social Enterprise. We explain with examples, types, vs non-profits, advantages & disadvantages, vs social entrepreneurship. You may also find some useful articles here –