Introduction to social enterprise

1. Understanding social enterprise

When you start trading for the community benefit you effectively become a social enterprise, so it’s important that you know what exactly we mean by the term ‘social enterprise’.

A social enterprise is an organisation that is:

  • Trading (selling goods or services)
  • Delivering on community benefit
  • Run on democratic principles

This loose definition means that many community sector organisation involved in trading can call themselves a social enterprise.

3. Starting a social enterprise as an individual

Starting up a small business or as a sole trader and starting your social enterprise are very similar. In fact, running a social enterprise is just another way of saying that you are running a not-for-profit business.

This means that, like a traditional business, you can make money for yourself. However, unlike a traditional business social enterprises deliver community benefit and are held accountable for proving that community benefit.

4. Why set up a social enterprise and not a small business?

There are a variety of advantages of choosing to be a social enterprise rather than a private business. These include:

  • More free business support
  • Access to some grant funding
  • Specialist loan finance for Social Enterprises
  • The opportunity to run grant funded projects
  • The opportunity to seek donations of time, skills, money and stock
  • Opportunities to recruit volunteers
  • People and other organisations may be more willing to offer your social enterprise free support

5. Being accountable

Social enterprises need to be accountable, but there are many ways that a group can achieve that accountability.

Individual accountability

On one extreme you can have a single director of a company with social aims and a not-for-profit clause in its governing document. In this case a single individual is responsible for all executive decision making.

This model only works if a group’s income comes exclusively from trading. If a group wants to pursue other types of funding – like grants – being accountable to only a single person may be a problem.

Community accountability

On the other extreme you have a charity where the executive decision makers are the trustees who are also from the community that is being served.

This type of social enterprise is fully accountable to the community it serves. It is run for the people by the people. This is a great for community empowerment and securing donations, but it could be slow when it comes to decision making.

Other types of accountability

There are many variations between these two extremes. For example, you could make a single director more accountable by adding a team of non executive directors to advise the director. You could also add more directors or a service user steering group.

6. Community benefit

Community benefit simply means that your work has a positive impact on the community in some way. Community benefit can be financial, social, environmental or any combination of the three.

There are two types of community benefit:

  • Direct community benefit: Community benefit can be inherent in the trading activity. For example, a community centre that trades through renting out its rooms to community groups has direct community benefit. So does a community café where people with learning disabilities make and serve food.
  • Indirect community benefit: An indirect benefit occurs when trading activity produces money that supports a social cause. For example, Oxfam shops pass their profits to the charity.

Guidance surrounding community benefit

There is no rule that social enterprises should have direct community benefit, though some people expect this to be the case. This means that if your social enterprise’s benefit is indirect, you should be ready to defend and explain your group’s benefit.

7. The rules of trading

The rules of trading for a social enterprise are the same as for any other business: the level of income needs to be greater than the expenditure.

A ‘not-for-profit’ business still needs to make a profit to be a sustainable organisation. The only difference is that your social enterprise’s profits will be used for community benefit rather than for owners and shareholders’ benefit.

A social enterprise won’t succeed without paying customers. If your business idea is to sell a product or service to people who either can’t afford it or wouldn’t pay for it, this may simply be a bad business model. The reality is that a social enterprise needs both a good business case and great community benefit.

Once you have a basic understanding of trading, you’re ready to develop your business idea and start generating income.

More in Social enterprises

  1. Legal structures for social enterprises
  2. Introduction to social enterprise