Topic overview

Setting up a social enterprise

Setting up a social enterprise

There are about 80,000 social enterprises in the UK contributing £24bn towards the national economy and employing almost a million people (source: Social Enterprise UK). Yet arguably, the contribution they make is beyond being summed up in mere financial terms.

What is a social enterprise?

A social enterprise is a business operated to benefit society or the environment, not purely to generate profits for the business owner or dividend payments for shareholders. Well-known examples of social enterprises include The Big Issue, Cafédirect and the Eden Project.

UK social enterprises include community interest companies, credit unions, trading arms of charities, employee-owned businesses, co-operatives, development trusts, housing associations, social firms (ie businesses created to employ people who are disadvantaged in the labour market) and leisure trusts.

Ethical businesses are committed to 'morally responsible' trading and minimising their negative impact on people and the environment, but not necessarily run primarily to benefit society. And just because a business gives some of its profits to worthy causes, that doesn't make it a social enterprise.

Fair trade businesses pay farmers and other workers in producing countries enough to earn a fair living, but not all of them are social enterprises (visit the Fairtrade Foundation website for more information).

Crucially, social enterprises are businesses that must generate enough revenue to survive. Most of their income must come from trade, with profits reinvested to achieve their social or environmental objective.

Social enterprise - key formation options

A social enterprise can be set up as a limited company (which must be registered at Companies House), sole trader business (registered with HMRC), business partnership, charity or charitable incorporated organisation (CIO), mutual (eg industrial and provident society and co-operatives - owned by members and run for their benefit) or community interest company (CIC).

A CIC is a type of limited company created specifically for social enterprises. CICs have a social objective and are regulated, ensuring that they cannot deviate from their social mission and their assets are protected from being sold privately.

You need to apply to Companies House to set a CIC up (it costs £35), following approval from the CIC regulator. You can convert an existing company into a CIC (£25). Each year a CIC must submit an annual community interest company report along with detailed accounts and a confirmation statement (Annual Return). The CIC regulator pages of the GOV.UK website contain a wealth of helpful information about CICs, as well as downloadable forms and handy guides.

What is a charity?

The Charities Act 2011 describes a charity as "an institution established for charitable purposes only", which is "subject to the control of the High Court's charity law jurisdiction."

According to the Charity Commission (the independent government department that registers and regulates charities in England and Wales): "Charities exist to benefit the public, not specific individuals. Because of this, charities pay reduced business rates and receive tax breaks but are restricted in what they can do and how they work." Charities must observe charity law, which includes being transparent about their activities and only do things that are charitable according to law. They are normally run by trustees who do not benefit from the charity.

A CIO is a legal form of charity launched in 2013, as the Charity Commission explains: "Created in response to requests from charities for a new structure which could provide some of the benefits of being a company, without some of the burdens." CIO's must only register with the Charity Commission. Visit the organisation's pages on the GOV.UK website to find out about setting up and running a charity. The GOV.UK website also features information about tax rules for charities.

Running a social enterprise - the business realities

You might not want to get rich and your business idea might be very worthy, but that doesn't mean you have what it takes to run a successful social enterprise. You must be able to sell and manage a wide range of other tasks - running a social enterprise requires no less hard work or commitment than any other business.

You might be able to access funding to help start or run your social enterprise (although don't take that as a given). Your business model must be economically viable. There must be sufficient market demand for your products and you must make sales if your cash flow is to remain healthy.

Before launch, you should test your idea and research your market. Creating a basic business plan might prove useful too. Consider how you will fund your business and find out whether any grants or loans are available. Different types of social enterprise are subject to different tax rules, so seek tailored professional advice will help you to fully understand your obligations.

Support and advice for social enterprises

Seek out free sources of reliable advice and support. The website of Social Enterprise UK (the national body for social enterprise) features a wealth of advice and information, including a downloadable guide to setting up and running a social enterprise [PDF]. Also find out about Inspire 2 Enterprise ("a unique, free-to-access service for the social enterprise sector providing information, specialist advice and support from start-up to initial growth and beyond").

If you are only thinking about setting up a social enterprise and wonder what the reality would be, speak to someone who already runs a social enterprise. Ask about their experiences and seek their advice. It could help you to get your new social enterprise off to a flying start.

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