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Posted by Sarah Brown on 06 Sept '13

When you grow up, what do you want a business, a social enterprise or a charity?

What is the difference between a business that wants to change the world, a charity that wants to change the world and a social enterprise and who decides which is which? Easy in terms of the legal charity status - after that it gets complex.

I have lots of conversations with friends and others who currently are sole traders but do lots of stuff for the community, make little profit and wonder whether they should be a social enterprise and if so what does that mean.

When I ask if they really know what a social enterprise is most are a bit confused so I end up trying to explain.

So how to choose between the world of private business, social enterprise or full charity?

I believe that businesses, social enterprises and charities have much in common, so what you are is no longer clear-cut. All can do good, as the diagram above illustrates.

As businesses increasingly think about how they can address not only the need to make a profit but also to be seen as good corporate citizens acting in an environmentally friendly way and as good neighbours working for the social good of the community the boundaries blur. Add in to this employee ownership such as the John Lewis Group or local to where I live, Gripple, which is a really inspirational company, and it becomes even more confusing – are these social enterprises?

At the other end of the spectrum are registered charities – not a legal status but a mode of operating which does not preclude them from trading, so are they social enterprises?

In the middle, with no fixed legal status, sits the social enterprise. Social Enterprises are part of the growing "social economy". The social economy is still growing despite the recession and exists between the traditional private sector on the one hand and the public sector on the other.

The social enterprise sector occupies the ground between the purely charitable and the purely private sectors. It’s not an easy option, balancing both the social mission and profitability – the double bottom line and frequently adding in the environment to create a triple bottom line. Social Enterprises have to have some understanding of both cultures and are often not understood by either. Banks are used to working with the commercial/private sector, and they often don’t understand the legal and management structures, they are just interested in the profit. Social investment is developing to fill the gap but is still limited. Grant funders often feel that trading, profit, and building reserves (i.e. operating in a more business-like manner) have less social value. Approaching advice and support agencies, which traditionally service one or other of the sectors, can be very unsatisfactory. This is changing, but it still has some way to go.

Social enterprises are attractive because there are some promising and strategic areas of opportunity:

  • The increasing desire/emphasis of the public sector in using social enterprises and charities to provide public services and their proactive attempts to ensure they tender, including legislative support
  • The rising awareness of the sector in the media and government
  • The growing consumer demand for more ethical goods and increasing interest in fair trade

Social Enterprises stand out from the rest of the social economy as organisations that ‘try’ to use trading activities to achieve their goals and financial self-sufficiency. They often are still reliant on funding. The challenge is that they are businesses that have to combine the entrepreneurial skills of the private sector with a strong social mission.

I find it useful to remember that Social Enterprise refers both to forms of organisation - and to an activity that takes place in a range of organisations of all types (including many voluntary and community organisations).

For all of them, there are many dangers, including:

  • Fulfilling the potential identified in your feasibility study and sticking to your business plan while responding to the changing world
  • Balancing enterprise and achieving financial return with social outcomes
  • Failing to explain the social impact effectively

In my experience, the issues that are particularly challenging to a social enterprise and are likely to undermine it are:

  • Too much pressure on too few individuals often volunteers
  • Lack of sales and marketing expertise
  • Focus on social rather than income generation
  • Not building on experience and existing contacts but trying something new
  • Lack of access to cashflow funding and early investment – many entrepreneurs use personal borrowing

So it’s not easy to decide which vehicle is right for you. Think is it worth the hassle? What would be the advantages? Are you already doing good, just not boasting about it? Maybe you are already a social enterprise – the problem is: who does the defining?