Social Enterprise: What You Need to Know

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Social Enterprise: What You Need to Know

Whether you run a for-profit or non-profit business, your company may be considered a social enterprise if your commercial strategies contribute to advancing a social cause. The social enterprise sector is growing fast. In recent years, the provincial governments of Ontario and British Columbia have responded with initiatives to help social enterprise organizations grow and scale their objectives.

Among other things, the government is making an effort to provide social enterprises with better access to business fundamentals. It’s also working to promote the value of social enterprises among investors, government bodies, and communities by drawing attention to their business potential. 

What is a social enterprise organization?

Until recently, the term social enterprise had no official definition in Canada. In fact, social enterprises are notoriously difficult to identify due to the vague nature of “contributing to a social cause.” That being said, great strides have been made to regulate this industry in recent years.

Not too long ago, the progressive politics, ideas and culture magazine this.org defined a social enterprise as:

“An enterprise that seeks to achieve social, cultural, or environmental aims through the sale of goods and services. The social enterprise can be for-profit or not-for-profit but the majority of net profits must be directed to a social objective with limited distribution to shareholders and owners.”

More specifically, a social enterprise can generate profits, but most of these profits must serve to fulfill the company’s social mission. For example, a company like Amazon wouldn’t be considered a social enterprise just because it sells eco-friendly products. Similarly, global fashion retailer H&M can’t call itself a social enterprise just because it makes an effort to recycle clothes. When defining a social enterprise, we need to look at the company as a whole.

What’s the difference between an enterprise and a company or business?

An enterprise is a project or undertaking that requires effort, such as a business, company, or entrepreneurial economic activity. Enterprises can be for-profit or not-for-profit, whereas companies must necessarily be for-profit.

If you have a venture with a social mission – also known as having a double or triple bottom line – or if you own a business that aims to address one or more of the many challenges that plague society today, you may very well be a social entrepreneur.

Social enterprises have come a long way in recent years. We even have events like Social Capital Markets (SOCAP) in San Francisco that help social enterprises resolve some of the world’s most pressing problems. Among other things, social enterprises can fight for access to things like clean water, education, and food. Many social enterprises are also dedicated to fighting climate change.

male doctor listening to heart beat of elderly woman in remote area

Why start a social enterprise?

There are a number of impact investors, social entrepreneurs, corporations, foundations, and global non-profits that want to get involved with eco-friendly and economically sustainable solutions to global issues. For some, it’s a matter of core values and the desire to make a difference in the world. But not all social entrepreneurs are social reformers. In fact, many companies, investors, and entrepreneurs become interested in social enterprises for financial reasons rather than ethical ones.

Recently, certain companies have turned to the social enterprise model in an effort to appeal to millennials – who usually prefer to support businesses that match up with their values. Canadahelps.org reports that 87 percent of Millennials purchase products with a social or environmental benefit, 67 percent would rather work for socially responsible companies, and 45 percent want to use their financial resources to help others. In other words, a business that provides a product or service that will “do good in the world” may be more likely to appeal to younger consumers, who are not always easy to market to

The challenges of social enterprise models

But in Canada, there’s a problem with adopting a social enterprise model in hopes of appealing to a more conscientious demographic. According to Elisa Birnbaum, author of In the Business of Change: How Social Entrepreneurs are Disrupting Business as Usual, Canada has implemented very little policy to regulate social enterprises compared to the U.S. and the U.K. In her words, “Where any specific policies do exist (…) there’s a lack of consistency among jurisdictions. What’s more, there’s no distinct incorporation (and thus no distinct legal entity) for social enterprise, which makes it difficult to develop policies.”

Without a governing body to regulate the social enterprise industry, there is no way to differentiate genuine social enterprises from false ones. As a result, the Canadian social enterprise sector is vulnerable to corruption. For example, misleading social enterprises might adopt practices akin to a form of greenwashing (i.e., the use of marketing to portray an organization’s products, activities or policies as environmentally friendly when they are not). Consumers need protection from companies that make false claims to attract customers, with no intention of following through on their mission.

Government policies, on the other hand, would contribute to regulating and defining the industry. They would help prevent greenwashing by ensuring that social enterprises are acting with honesty and integrity. Policies and action plans can also encourage entrepreneurs to embrace an alternative business model that falls under the social enterprise umbrella, thus increasing the number of companies that impact the world in a positive way.

The growth of social enterprise

Although social enterprise governance is a relatively new thing in Canada, it has come a long way in the past ten years. According to a recent survey, Canada now has more than 7,000 social enterprises. These companies employ more than 254,000 people and serve another 5.5 million. Increased government support means that more social enterprises are likely to see the light of day.

male doctor listening to heart beat and breathing of elderly woman

How to set up a socially responsible company

Starting a social enterprise is no different than setting up any other type of business. You can use many of the tools and resources that regular companies do to implement and manage their operations. Canada also has programs and services to help you achieve your social mission and business goals. These include business planning resources and tips on how to promote your business.

Futurpreneur.ca has a list of steps you can follow if you are looking to start a social enterprise. Here are a few of the most important ones.

1. Choose a social issue you care about

If you’re not sure where to begin, try to think of something that has the potential to affect many people, such as reducing the amount of plastic we use or the amount of fossil-fuel burning vehicles on our roads. For inspiration, check out this list of social enterprises prepared by HEC Montréal.

2. Do your homework

Even if you are thinking of starting a business in a field you know a lot about, it’s important to do your research. This will help prepare you for any and all surprises. Canadabusiness.ca has a number of resources to help you with market research. You should also check out the competition to see what others are doing. The process might help you identify how you can fill a need that has yet to be met.

3. Select a legal structure for your business

The legal structure you choose for your social enterprise will have a direct impact on taxation and distribution of profits. You can retrieve a list of documents you need to file to create a non-profit organization from the Government of Canada.

Other options include registering as a for-profit organization, charity, or co-operative. Each of these categories come with their own pros and cons. It can be a good idea to consult with an accountant and talk to other entrepreneurs about their experiences. The more information you have, the more likely you will be to choose the best option for you.

4. Create a solid business plan

Developing a business plan is a great way to create a professional document that you can use as a marketing tool to convince potential investors and partners of your business’s potential. Your accountant may be able to help you with this process.

There are also a number of organizations that offer free writing guides, templates, and sample plans to help you create a business plan. For starters, check out the CBDC, the Business Development Bank of Canada, and Futurpreneur Canada.

5. Get a mentor

Whether or not you have a background in business, it’s a good idea to find a mentor who can help guide you and give you advice and encouragement. Ideally, your mentor should have experience in your specific field. At Futurpreneur, for instance, all entrepreneurs are assigned a mentor before they receive their loan.

Male Doctor listening heart beat and breathing of Elderly Woman with Stethoscope with First Aid Medical Box.

How does a social enterprise differ from a charity?

As we already know, a social enterprise can either be for-profit or not-for-profit. A charity, on the other hand, can only be a non-profit organization. From this perspective, all charities are social enterprises, but not all social enterprises are charities.

If you’re struggling to decide whether you should operate as a non-profit organization or as a charity, consider how you are planning to raise money. In Canada, all registered charities receive a charitable registration number once they are approved by the CRA. Non-profits do not. This registration number will allow you to issue donation receipts, which can entice donors to donate.

Registering as a charity means your business can only operate for charitable purposes. Non-profits, on the other hand, cannot operate exclusively for charitable purposes and must offer something to the community. This can be social welfare, civic improvement, sports or recreational activities, or any other non-profit activity.

Where the revenue goes matters

Charities must spend a minimum amount on their charitable activities or gifts to donees. That being said, they are exempt from paying income tax, and although they must pay GST/HST on purchases, they can get a partial refund on these sales taxes.

Non-profits, on the other hand, have no minimum spending requirement, and cannot issue donation receipts. Generally, these organizations are exempt from paying income tax, though they may need to pay tax on property income or capital gains. They are not exempt from paying GST/HST, but if they receive significant government funding, they may be able to claim a portion of these amounts. Since most non-profit supplies are subject to sales tax, this creates an additional opportunity to claim input tax credits. 

Whether you run a non-profit or a charity, you cannot use the organization’s income to benefit your members. In other words, you will need to reinvest all profits into the company. If your goal is to generate significant income with your business, you might be better off registering as a for-profit business. This will allow you to have shares, and you will be able to redistribute profits among your members in the form of dividends.

If there is a social cause you are passionate about, social entrepreneurship can allow you to earn income while making a difference in the world. The Canadian government has yet to implement a series of rules or tax breaks for social enterprises, but that may change soon. It will certainly be interesting to see how the field of social entrepreneurship develops in Canada over the next few years.

Victoria Morrison

Victoria Morrison is a freelance translator, editor and small business owner from Montreal, Canada. You can find out more about her work at VictoriaMorrison.ca

MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.

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