Third Dimension – Social Enterprise: A Solution To Uncertain Times?

March, 2016

By John-Vaughan Williams, Lawyer

Social enterprise is a quickly growing phenomenon in Australia, gaining particular momentum within the not-for-profit sector. This piece will set out the structural characteristics of social enterprise, examine its potential utility for the not-for-profit sector, and also detail some successful examples.

Australia has no set legal definition of a social enterprise, but generally it is defined as an organisation that:

a) is driven by a public or community cause, whether that be social, environmental, cultural or economic;

b) uses trade to fulfil its mission;

c) obtains most of its income from trade, rather than donations; and

d) applies the bulk of its profits towards its social mission.

Some nations do have specific legal corporate structures that are to be used by social enterprises such as the UK’s Community Interest Company structure. In Australia, a social enterprise may adopt almost any legal structure, including that of a public company limited by guarantee, a public company limited by shares, an incorporated or unincorporated association or a co-operative.

Not-for-profit status

A social enterprise may either operate as a for-profit or not-for-profit, however many incorporate elements of both to achieve their mission. The functioning structure of a social enterprise will typically be a commercial trading branch of a charity, a community or member owned business, or a privately owned business designed to achieve a social, cultural or environmental aim.

Some social enterprises will adopt a for-profit structure, allowing them to seek investors to fundraise. Profits are partially distributed to investors, while the rest reverts to the social mission. This can be used, for instance, in social enterprises that serve to promote employment for the disadvantaged. While they achieve their social mission by operating a business that employs the disadvantaged, some of the profits are paid back to shareholders as dividends.

Charity status

Social enterprises incorporate some characteristics that can be found in charitable organisations, but they have the following recognisable traits:

a) they are connected to the open market, selling products and / or services to derive revenue, and they are strongly influenced by changes in the market;

b) the goods and / or services sold may be aimed at different people from those they are trying to assist;

c) they do not primarily rely on funding, donations or grants for income; and

d) they use the same tools and expertise as their commercial competitors to run their organisation – they are commercialised.

A social enterprise may be eligible to be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC). However, this will depend on whether its aims meet the statutory purposes of a charity, including whether it operates as a not-for-profit.

Social enterprise within a charity

A social enterprise will sometimes be created as a branch of an existing charity, while not itself being a charity. An example of this is the chain of Big Heart retail shops, operated by Mission Australia (a charity registered with the ACNC). These retail shops are op-shops, which provide employment opportunities to the disadvantaged. The profits of these shops are put towards both the running of the shop and the community programs of Mission Australia.

When a charity wishes to operate a social enterprise as a branch, it may be eligible to receive certain government grants to be used for this purpose. If a charity wishes to incorporate a social enterprise within its existing structure and operations, it must ensure that this is consistent with its charitable purposes and also does not jeopardise its existing tax endorsements.

Utility of social enterprise for not-for-profit sector

In the current economic climate faced by the Australian not-for-profit sector, many organisations are considering structural changes, such as mergers for increased financial viability. The establishment of a social enterprise within a charity is one way to boost financial prosperity whilst retaining the charity’s previous operations.

This strategy in essence creates an operational offshoot of the organisation, therefore reducing risk. Charity boards can be apprehensive about including trade in the organisation’s structure, because of a perception that it will alter the organisation’s fundamental brand and public perception. The benefit of this model, however, is that the social enterprise can be formed as a separate by-product of the charity operating under a different name, so that it does not interfere with the unique identity of the charity.

In order to do this successfully, the organisation should ensure that it has an adequate framework in place to support it, and that it will not involve an initial investment that is too risky.

Examples of social enterprises

(a) The Big Issue Magazine

The Big Issue Magazine is an independent magazine that is sold on the streets by homeless and disadvantaged people Australia-wide. The magazines are bought by the sellers from the producer and then sold at a profit, allowing them to gain employment and income. It remains a business for the producer, deriving income from trade, but this helps to address the social issue of unemployment for the disadvantaged.

(b) Fair Trade Coffee Company

The Fair Trade Coffee Company runs a fair trade exclusive café in Sydney. Fair trade is a global social movement that aims to alleviate poverty by promoting fair trading conditions and local sustainability in the developing world. By exclusively selling products that have this certification, the company promotes poverty reduction while still running a commercially sustainable business model. Profits from the company go to a parent company, Palms Australia, which is an organisation that places skilled international development volunteers around the world.

(c) Salvos Legal

Salvos Legal is a unique and dynamic law practice situated in New South Wales and Queensland, entirely operated by the Salvation Army. The practice is split into two legal practices (which are both separately registered public companies): Salvos Legal Ltd and Salvos Legal (Humanitarian) Ltd. The first of these practices is a commercial firm, advising and representing clients regarding such matters as corporate and commercial law, intellectual property law and conveyancing. All of the fees (less expenses) from this firm then fund the second law firm, which provides free-of-charge legal services to the disadvantaged.

(d) Cleanable

Cleanable is a cleaning company based in Melbourne that strives to provide employment to those who are otherwise unable to gain it due to mental illness. The company provides cleaning services across Melbourne, running under a viable business model with several major contracts. The company allocates a set proportion of employees to those who are otherwise unable to gain employment due to their disability.

Conclusion

The primary features identifying a social enterprise are that (a) it derives its income mainly from trade rather than donations; and (b) it is driven by a public or community cause.

A social enterprise may be a not-for-profit organisation, depending on how it applies its profits. It also may be a charity, if it is not-for-profit and its purposes meet the statutory definition of a charity. Meeting these requirements will allow the entity to gain registration with the ACNC. There is no clear distinction between a social enterprise and a not-for-profit organisation or charity, as a social enterprise may incorporate elements of either.

In the current economic climate, which has recently driven talks of change within the sector, the social enterprise is another structure that will likely be further explored, both within existing charities, and as new charities and not-for-profits are formed.

This article originally appeared in Third Dimension – Summer 2016

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vera-visevic

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