Social enterprises

What is a social enterprise?

A social enterprise is a specific type of business that has a social or environmental purpose. For example, a social enterprise may aim to help individuals or communities by providing:

• training through employment to individuals who have traditionally found it hard to enter the labour market (eg long-term unemployed individuals, homeless individuals or ex-offenders)

• opportunities to experience and partake in new sports and activities

• food at affordable prices in supermarkets to help tackle food poverty

• public transport that is powered by renewable energy sources

Social enterprises are still businesses and, therefore, want to make a profit and achieve commercial success. However, their distinctive characteristics lie in how they conduct their operations, whom they employ, how they allocate their profits, and the positive impact they bring to lives and communities in the UK and abroad.

Why set up a social enterprise?

If you want to run a business that aims to make a positive social or environmental impact, a social enterprise may be the right business model. Unlike charities, which rely on donations or grants, a social enterprise is a business which seeks to financially sustain itself and re-invest its profits towards its main purpose. Not only are social enterprises more likely to be self-sustaining than charities, they are also less restricted than charities (eg because they do not need to meet specific criteria to be eligible for grants or charity status).

While managing multiple bottom lines (ie financial bottom lines in addition to social/environmental bottom lines) may be challenging, making a positive impact on people and communities can be very rewarding. Moreover, highlighting your social enterprise’s social and/or environmental credentials may give you an edge over competitors.

What are the requirements for a social enterprise?

A business can only be a social enterprise if it:

• has a clear social or environmental mission set out in its governing documents (eg its articles of association) and is focused on achieving/working towards this mission

• is not subject to government control

• earns more than half of its income through trading

• re-invests or donates at least 50% of its profits (or surpluses) towards its mission

• is transparent in the way it operates and regarding the impact it has

How are social enterprises different from other businesses and charities?

Consumers and businesses alike are increasingly placing greater emphasis on the need for ethical and sustainable business models and practices. Many businesses now try to take steps to be more ethical and sustainable (eg by using fair trade products, adopting clear environmental and sustainability policies or registering as B-corporations). 

While any business can take steps to become more ethical and sustainable, a social enterprise is a business with a primary purpose that is social and/or environmental. In other words, social enterprises are explicitly established to address specific social or environmental issues, with at least half of their profits being reinvested or donated towards their missions. 

Unlike businesses, charities operate as non-profit organisations registered with the Charity Commission. They focus on advancing specific charitable purposes and rely on donations and grants for funding. On the other hand, social enterprises make money through business (eg by selling goods or providing services) and do not rely on volunteers, grants or donations to survive. In other words, as charities and social enterprises may both work towards achieving a mission which isn’t making a profit, the key distinction between them lies in how they fund themselves (and their mission), with charities relying on external funding and social enterprises trading (and aiming to make a profit) as businesses themselves.

How to set up a social enterprise

Limited companies

Private limited companies (LTDs) can be limited by guarantee or by shares. An LTD offers a greater degree of protection to its members or shareholders as the company is considered to be its own legal entity. Read Private limited companies to find out more about LTDs. 

All LTDs must be registered with Companies House. For more information on how to start a company, read How to register a company in 5 steps.

Sole traders

The term ‘sole trader’ refers to anyone who operates a business as an individual (either with or without a trading name). As a sole trader, you will be personally liable for your business's obligations, debts and losses. 

The process for becoming a sole trader is simple and generally only involves registering with HMRC for self-assessment. For more information, read Operate as a sole trader.

Business partnerships

A partnership involves 2 or more people (known as the ‘partners’) carrying out a business with a view to making a profit. The partners are personally liable for the partnership’s obligations, debts and losses. The process for starting a partnership depends on the type of partnership in question. For more information, read What is a partnership, Types of partnerships and Running a partnership.

Community interest companies (CICs)

This is a very popular vehicle for social enterprises when the entrepreneur establishing the organisation wishes to remain in control and receive a salary from their venture. A CIC is a special type of LTD that exists to benefit the community rather than private shareholders. CICs can be established either as companies limited by guarantee or shares. 

In order to set up and register a CIC, you need:

• a community interest statement - this explains what your business plans to do

• an asset lock - a legal promise that the CIC’s assets will only be used for its social objectives. The asset lock also limits the money the CIC can pay its shareholders

• a CIC constitution - the rulebook for how the CIC will be run (eg the CIC regulator’s model constitutions)

• approval from the CIC regulator - applications are automatically sent to the CIC regulator

While CICs are regulated by the CIC regulator, they must still be registered with Companies House. This can be done online or by post.

For more information, see the government’s guidance on CICs. 

Co-operative

A co-operative (co-op) is a member-owned business. The members may be local residents, customers, employees or suppliers. This legal structure gives wider membership an equal stake in the organisation and an equal say in the management and other affairs.

You can register your co-operative with a relevant regulatory body. As the process for registering a co-operative is complex, you should seek legal advice before beginning.

For more information on co-operatives and how to register them, see Co-operatives UK’s guidance on registering a co-operative.

Unincorporated associations

Unincorporated associations are groups that come together for a particular purpose, such as a sports club. 

Usually, they would have a constitution that sets out the rules governing their relationship and a broad membership that elects the management committee. Unincorporated associations do not have a separate legal entity and so members of the management committee can carry personal liability. 

For more information, see the government’s guidance on unincorporated associations.

For more information on social enterprises, read the government’s guidance and Social Enterprise UK’s guidance on social enterprises. If you’re based in Scotland, you can seek advice and assistance through Social Enterprise Scotland and Just Enterprise.  Ask a lawyer if you would like to set up a social enterprise or need further assistance with your social enterprise.