A social enterprise blends elements of traditional businesses with the social goals of a nonprofit or charity. They can be structured as for-profit or non-profit, but profit is never the main priority. While there is no established legal definition of a “social enterprise,” there are certain features that apply.
A brief history of social enterprises
For years, charities and businesses existed side by side, but the thought of balancing their goals in one entity took a long time to become popular. Businesses traditionally have one goal: profit. Social problems are left to entities like the government, NGOs, and charities. Over time, it became clear that hunger for profit in the business world leads to negative consequences for society and the environment. NGOs and charities may not be equipped to handle the problems alone. Social enterprises arose as one solution.
In the 1970s in the UK, social enterprises began appearing as an alternative to traditional commercial enterprise. The term “social entrepreneur” also became popular. Today, there are many types of social enterprises and different official standards. Certified B corporations are a good example. Awarded by the nonprofit B Labs, the B Corp certification is given to for-profit businesses that meet voluntary standards on accountability, transparency, and social and environmental performance.
Features of a social enterprise
“Social enterprise” is not a legal term, so while standards like B Corp are helpful, there are many social enterprises that don’t have an official certification. What features make an organization a social enterprise?
There’s a clear social goal
A true social enterprise will prioritize its social mission over making money. The governing documents must make this mission clear. This is a simple task for social enterprises structured as nonprofits, but if registering as a for-profit company, the social enterprise must arrange it so the social goal can’t be changed. If the social goal is not the primary focus or it’s subject to change based on the desires of shareholders, the organization isn’t truly a social enterprise. Profit ensures the organization stays financially sustainable, but it’s not about financially benefiting shareholders.
Income is primarily generated by business activities
In contrast to traditional nonprofits, which depend on donations and grants, social enterprises are self-sustaining. The majority of their income comes from the sale of goods and services. While some social enterprises start with grants or outside funding of another kind, their mission is to make enough money to cover their running costs.
There’s market demand for the organization’s goods and services
Success hinges on market demand for both traditional businesses and social enterprises. Unlike traditional nonprofits, social enterprises sell goods and services. Are they competitive? Are they meeting a need that hasn’t been met anywhere else? While having a strong social goal is appealing to many customers these days, it’s not worth much if the products/services are not of good quality. To generate income, a social enterprise needs to provide things that people want.
The majority of profits are reinvested into the organization
Even if a social enterprise has a for-profit structure, the vast majority of those profits need to be reinvested into the organization. Some profit is distributed among owners of the company or shareholders, but the social enterprise uses most of it to support its social goal. While some social enterprises cut their running costs by using unpaid volunteers, it’s not a required feature for this type of organization.
Data drives decision-making
For social enterprises, success isn’t measured by profit. Successful social enterprises are ones that make a big impact on their chosen social goal. How is that impact measured? Organizations need data. That means having solid monitoring and evaluation systems in place, so every social initiative the enterprise undertakes is tracked and analyzed. Things that work can be replicated, while mistakes can be learned from.
The business road map is adaptable
All organizations need to be prepared to change when necessary. Cultural and political shifts influence the market, while societal problems improve or worsen. To be sustainable and successful in the long run, social enterprises need to stay flexible and adaptable. A road map is necessary – organizations still need structure and a plan – but change should be built into that road map. It should be updated consistently as new information is absorbed.
Social enterprises: why they’re unique
Based on the features we described above, you can see how social enterprises blend aspects of traditional for-profit companies and social nonprofits. In terms of structure, many social enterprises look very similar to traditional businesses. They care about offering high-quality products and services, they’re subject to market demands, and they generate income that keeps the organization sustainable. The difference is that profit isn’t the end goal. Profit is just a tool to fulfill the social enterprise’s social mission. While some profit can be distributed to employees and shareholders, the vast majority is reinvested into the organization. In a world still filled with businesses where profit is the only goal and society suffers as a result, social enterprises can make a positive difference.
Learn more about social entrepreneurship.