In recent years, Australia has faced many social, economic, environmental challenges that have demanded innovative responses and the social enterprise has been one solution. There is a general lack of awareness and understanding of social enterprise. They are not always seen as legitimate businesses despite providing many benefits to the public and their members. A social enterprise is an organisation that operates somewhere between a traditional business model and a charity, raising questions about which governance model and legal structure should be used to manage its activities.
What is a social enterprise?
Vanguard Laundry Services is a social enterprise commercial laundry service. Its biggest client is St Vincent’s Hospital in Brisbane Australia. The organisation has expanded both nationally and internationally, creating 52 jobs in the process. Vanguard also runs a training centre that supports the local community and reinvests profit to reduce unemployment. The Queensland Government described Social enterprises as “businesses guided by a social purpose” and operating for the benefit of shareholders, owners, and the public.
There are more than 12,000 social enterprises in Australia, employing over 200,000 people, 1.6% of the workforce. Social enterprise has a huge economic impact, contributing $21.3 billion to the economy every year, according to Social Enterprise Australia. A social enterprise is different from a standard business or corporation. It has six characteristics:
- A social or environmental mission.
- Re-invests the income from sales into the pursuit of its mission.
- Usually controlled by members who are invested in the mission and committed to serving the community.
- May operate under a for-profit structure and can be owned by one or more non-profits.
- More transparent and accountable to the public.
- Generates income from the sale of services or products rather than grants and donations.
Social enterprises tend to hold basic principles and ethical positions when it comes to their work. They are usually committed to improving individual and collective capacity, rejecting discrimination, and supporting diversity initiatives. Enterprise directors also believe in good governance, fairness, respect and dignity. In addition, they are interested in innovating and finding novel solutions to societal problems that may fall outside the mainstream. In some cases, they may even employ disadvantaged individuals in higher numbers than regular corporations.
What types of legal structures should a social enterprise establish?
While there is no set or preferred legal structure for a social enterprise in Australia, most entities use a hybrid business model focused on generating revenue and achieving social, cultural, or environmental change that benefits the public in a similar way to traditional not-for-profit organisations.
The type of legal structure a social enterprise may choose varies across regions and industries. Part of the strength of social enterprise as a model is its diversity of approaches and purposes, which has a high transferability globally and plays an important role in Australia’s third sector. Because some organisations place more emphasis on participation and emerge from the non-profit sector, they may prefer registering as a traditional charity to have access to tax incentives. Others that emerge from the for-profit sector may register as corporations to avoid restrictions to their business activities.
According to the Centre for Social Impact in Swinburne Australia, most social enterprises are small organisations. While there is no established standard legal structure for a social enterprise, most operate as an incorporated association, company limited by guarantee, or proprietary limited company. A few prefer to use other legal structures such as unincorporated association, co-operative, trust, or sole proprietorship.
What type of activities do social enterprises do?
In Australia, more than 60% of social enterprises say they exist primarily to fulfill a public or community benefit. Social enterprise entities tend to focus on three types of activities:
- Providing a service for a fee,
- Selling wholesale or retail goods, or
- Producing goods for the purpose of selling them.
The reach of most social enterprises tends to be limited to local markets (75.4%), although several do operate regionally, nationally, and even internationally. This tendency has increased since 2010, up from 62.3%. In addition, 34.2% of social enterprises want to create meaningful employment opportunities for people from a specific group and develop solutions to social, cultural, economic, and environmental problems. This type of mission focus has steadily declined since 2010, when 44.4% of enterprises cited these goals.
What challenges do social enterprises face?
The Center for Impact Innovation reports that social enterprises sometimes lack coordination between each other, are under-resourced and their value to society is often underestimated. The lack of government investment in social innovation through these enterprises suggests a missed opportunity for collaborations with other sectors. For example, Buy Ability has more than 180 member disability enterprises and with a combined total of more than 20,000 employees.
It can sometimes be unclear what regulations and supports this type of organisation needs, mostly due to differences in practices and approaches. Social enterprises can also find it challenging to secure capital or funding for their projects. This is in part because they tend to be smaller organisations with less capacity to manage large projects, measure results and meet costs.
Yet, social enterprises play an important role in advancing social innovation, but are often unrecognised by government funders, leaving them reliant on risky financing models. The most underserved organisations in the social enterprise sector are those outside of Australia’s East Coast. Indeed, there is a higher concentration of social enterprise in Melbourne, Victoria and Brisbane and fewer in central and north-western Australia.
Who uses social enterprises?
The simple answer is that everyone uses social enterprises. You can find them operating as small businesses in many industry sectors. The most popular industries are health care, social assistance, administrative and support services, arts and recreation, and accommodation and food services. That said, there are social enterprises operating in sectors such as education, property and business, finance and insurance, transport and storage, retail, and wholesale trade as well. Chances are you’ve used a social enterprise’s services or purchased one of their products.
How to set up a social enterprise in Australia. What legal structure should you choose?
The term social enterprise is not related to a legal structure. It describes a specific type of business that exists primarily for social purposes. When setting up a social enterprise, you should first consider what you plan to offer and who will fund your organisation. There are many legal structures to choose from, but typically social enterprises fall under the category of company limited by guarantee or cooperative. A survey of existing social enterprises in Australia also found that many incorporated associations are social enterprises. To find out more about these legal structures, visit our non-profit fact sheet.
Do social enterprises have to follow specific rules?
No, there is currently no specific legislation meant to address or regulate the social enterprise sector as this type of entity is not considered a legal structure but rather an approach to conducting business. Australia's approach to supporting purpose-based entities is to revitalise existing laws regulating for-profit and not-for-profit organisations. However, as a for-profit or not-for-profit entity, you must still meet the legal obligations of the organisational structure you choose to adopt. To learn more about how non profits are regulated in Australia read our factsheet.
How to grow a social enterprise. What do I need in terms of financing?
If you are not using revenues from the business to grow you will need financing in the form of grants, venture capital, commercial loans, or equity finance or capital in exchange for part ownership. As a social enterprise you may decide to produce and sell products or offer services for a fee. This is the most likely option if you choose a for-profit legal structure. If you register as a charity, you may be eligible to apply for grants through private foundations or government programs. How you decide to raise your finance will depend on the types of activities you plan to undertake.
What corporate governance model do social enterprises use?
Social enterprises are normally run by a board of directors with expert skills in management, finance, business, and public relations. Social enterprise board members often have a higher degree of autonomy but also take on a significant level of economic risk. Most organisation leaders tend to place importance on strategic partnerships with government and non-government organisations to maximise their impact and reduce costs. Because social enterprise crosses several industries and sectors, corporate governance approaches will vary. Typically though, governance models will depend on the legal structure you choose.
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