Social enterprise is a term which gets thrown around without much thought into its true meaning. The usually means that there is some confusion about where social enterprise stops and business starts.

The first step to spot the difference is to look at legal statuses.

Small business can have three different statuses.

Sole Trader – This is an individual who runs a business and gets taxed on the basis that the business and the individual are the same. They can employ people if they wish, and their taxes are dealt with under PAYE.

Limited Company – This is a business which exists in its own right. It has a director and a company secretary who are responsible for what the business does. They are employed by the business, and so there are two tax bills. One for the company, one for the director.

Community Interest Company – This is a type of company, designed for social enterprises that want to use their profits and assets for the public good. There are tax benefits to funding a CIC, however, its main difference to a Limited company is that it must use the majority of its profits on a defined project with a community benefit.

There is also the possibility to set up a charity. However, charities have a number of rules and definitions which are very strict over the use of money, the structure of the organisation and the aims of the organisations. Charities cannot be political. There are tax benefits in setting up a charity, however, the costs of operating make small charities financially unsustainable.

A CIC is a mix of a charity and a limited company. It has similar rules to a limited company, however, it must have stated aims like a charity. Unlike a charity, the scope of what these community benefits are can be much wider. It can include political ideology.

However, many people are unaware that legally, a limited company could have the same results for the community as a CIC. Limited companies can ensure they have a social mission written into their Memorandum and Articles of Association. This is a legal document which makes the directors responsible for the actions of the company. If a company doesn’t do ‘what it says on the tin’ – the director can be fined or prosecuted.

The only downside would be that the limited company can change their mind at a later date – CIC has more stability for the community because it can’t change its aims!

Financially, there isn’t a limit on what a director can earn at a CIC, however, the CIC cannot spend more than 35% of its profits in share dividends. This means that 65% of its profits must be spent on its stated aims. Finally, the assets of a CIC cannot be transferred to a non stated community benefit use – unless it is at market rate.

In plain English, a director of a social enterprise can earn whatever the project can afford. Of the profits, only a third can be used to pay shareholders. The rest has to be used, forever, on what the organisation was set up to do. They can’t buy a bunch of laptops for (insert charitable choice here) and then sell them to a family member for a nominal sum some time later.

Social Enterprise is also known as the third sector, and have a lot of support within the public sector. Many are looked upon favourably when it comes to funding opportunities. A cynic might suggest that they can become political organisations doing what governments are not accountable for!

However, in local communities they can have a place. A self financing organisation with a legal status and a fixed stated aim makes CIC a very useful format. This should be for long term aims where more than just a single company benefits.

What do you think?

Have you set up a social enterprise or do you think there is a need for you in your area?

Look forward to your comments!

Originally posted 2009-03-12 11:48:36.