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How to Set Up a Social Enterprise

Max 28th Jul 2020 No Comments

Reading Time: 5 minutes

Have you ever wanted to start up your own business? Want to make a profitable living, but also have a desire to make the world a better place? If so, a social enterprise might be exactly what you’re looking for.

Whilst the term ‘social enterprise’ is unknown to many, this fairly new business model is ever-increasing in popularity. If you’ve bought the Big Issue, visited the Eden Project, or dined at Jamie Oliver’s ‘Fifteen’ restaurant before, then you’ve contributed to a social enterprise. These are just a few examples amongst over 70,000 others operating in the UK today!

However, before you go about setting one up yourself, there are a few key points you’ll need to understand.

Social Enterprise vs. Limited Companies & Sole Traders

Social enterprise business model vs others

The defining characteristic of a social enterprise is that its aims must relate to social and/or environmental objectives. To give a few examples, these objectives can range from sustainable energy, to health improvement, to providing employment or training for those disadvantaged in the labour market.

This objective needs to be clearly outlined in the social enterprise’s governing documents – and all the organisation’s activities must be focused on achieving this objective. Social enterprises also have to reinvest the majority of their profits into achieving their objective.

On the other hand, if you’re a Limited Company or a Sole Trader, and you’re not a Social Enterprise, your objective can be purely commercial. There is no obligation to relate your goal to social or environmental issues, and you’re allowed to do what you please with your profits. If it’s just money you’re after, this could be the better option for you!

Social Enterprise vs. Charities

Having read this information, you may now be thinking that a social enterprise seems just like a charity. Truth being told, they are fairly similar! However, the two shouldn’t be confused. Here are some significant differences to note.

Crucially, a charitable organisation has to comply to Charity Law. Amongst many other things, this means that the organisation must not operate for the benefit of trustees – that is to say, the charity cannot make a private profit.

This is not true of a social enterprise. Whilst it is expected that a social enterprise should reinvest the majority of its profits back into its objective, this still leaves potential for substantial private profit. According to the Department for Business, Innovation and Skills, a social enterprise can pay up to 50% of its profit to owners and shareholders.

The other key difference is that a charity tends to rely on grants and donations to raise money for its operations. A social enterprise, on the other hand, primarily sells services or products to generate its income. This is why charities often switch to a social enterprise business model if they encounter financial hardship, or if funding dries up. It can be a much more efficient way to generate income!

Setting Up Your Social Enterprise

So, you’re interested in starting your altruistic business venture, and are ready to set up a social enterprise! What are the next steps?

As is to be expected, there are a few formalities you’ll need to undergo to get the ball rolling. However, this is nothing to fret about. Just follow the instructions we’ve laid out below!

Step 1: Choose the Right Legal Structure

There are a number of reasons why this is an important step to get right. The legal structure which you choose should be the one which best fits your business and its social purpose.

This decision could be influenced by the type of activities you plan to engage in or the stakeholders you plan to work with. Equally, making the right decision on your legal structure can enhance your credibility and protect your employees from personal liability.

You can set up as a community interest company (CIC), a charitable incorporated organisation (CIO), a co-operative, a sole trader, business partnership and limited company amongst many other options. This decision is likely to require some research, and it’s often a good idea to seek legal advice. Have a read of UnLtd’s website, which offers comprehensive support on how to make this choice.

Step 2: Set Up Your Business

This process will differ depending on which legal structure you choose.

As an example, here’s how to set up a CIC: one of the most popular legal structures for social enterprises.

Firstly, you’ll need a ‘community interest statement’. This will outline the way in which your business plan relates to your social/environmental objective.

You’ll also need an ‘asset lock’: this is a legal promise that your company’s assets can only be used for your objective. It also limits the amount of money you’re allowed to pay to shareholders.

Once you have both of these, you’ll then need a constitution (you can use the CIC regulator’s model constitutions for this) and your company will need to be approved by the community interest company regulator.

All the information you need is on the GOV.UK website!

Getting Funding for Your Social Enterprise

How to get funding for your social enterprise

Once you’re all set up, you might be wondering how to get your business off the ground financially. It’s no secret that starting a business doesn’t come cheap! Thankfully, there are plenty of schemes in place to financially kickstart your social enterprise.

As with any business, it’s a good idea to look into sources of investment, such as angel investors, seed funding firms, and venture capital funds.

However, as a social enterprise, you’ll have access to more specific support. Impact investing is specifically tailored towards organisations with social and environmental objectives, with Root Capital being a great example.

Similarly, look into social impact bonds. These are outcome-based financial support schemes for organisations which look to solve problems which the government struggles to address (such as homelessness and youth unemployment). See Social Finance and the Young Foundation for more.

Finally, for organisations which are already up and running, the Social Enterprise Support Fund are providing essential financial support for social enterprises during COVID-19. Thanks to the National Lottery, grants of between £10,000 and £300,000 are available, and the next round of applications opens on 13th August.

More Business Tips

There’s a whole lot that goes into running a social enterprise! Check out these articles next for more business tips.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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