What Is The Difference Between A Charity And A Social Enterprise?

Whether you’re setting up a charity, a Not-For-Profit or a profit-making social enterprise, the structure you choose is crucial to how you conduct your business activities. 

As there is no set rule or structure in Australia specific to these organisations, the choice you make is very dependent on what you envision for the organisation. Therefore, it is important to know whether you want to be a social enterprise or a charity as this will impact your decisions. 

In this article, we’ll go through the differences between a charity and a social enterprise. This should help you decide on how your operation can be best supported. For a broader discussion on structures available for a social enterprise, you can find out more here. You can also read more about legal structures for charities here.

What Is A Charity?

Charities operate under the Australian Charities and Not-for-profits Commission (“ACNC”) and are subject to and defined in the Charities Act 2013 (Cth) and Charities (Consequential Amendments and Transitional Provisions) Act 2013 (Cth).

Under this legislation, an entity is a charity if it meets the following criteria:

1.     Not-For-Profit Organisation

This essentially means that charities cannot work for the personal benefit or profit of particular people. If leftover money is redistributed into and reinvested into the works of the charity, this definition is met. 

2.    Charitable Purposes That Are For Public Benefit

The entity can have other purposes, but these must be ancillary to and supportive of the charitable purpose. Several charitable purposes are mentioned in the legislation, some of which include “advancing healthcare” or the “protection of human rights”. 

The “public benefit” requirement is met as long as the charity’s work benefits the public in general or at least a “sufficient section” of the public. For example, the provision of goods, services, education and spiritual guidance all meet this definition.

Whether your charity fits this definition depends on your activities as well as your organisation’s governing documents, such as your constitution. So, it’s a good idea to make sure these are drafted properly and with the right help. 

3. Does Not Have A Disqualifying Purpose

Disqualifying purposes include the following:

• Unlawful or contrary to the public – unlawful activities have a wide ambit and include aspects such as tax evasion or trafficking activities. Activities that are against public policy are things such as informing people on how to break the law (however, advocating for change in the current public policy is not against public policy)
•  Promoting and/or opposing political parties or candidates in political office – to be classified as a charity, you cannot operate to fund a political campaign to support or oppose a certain party or candidate. However, you can still participate in debates about the policies provided by these political institutions which affect your work.

4. Not be an individual, political party or government entity

The last requirement is that a charity must not be a part of a political party or government entity. This is relatively straightforward, so if you’ve met all these requirements, then you’re running a charity. 

What Is A Social Enterprise?

There is no legal definition for social enterprises in Australia, hence they are subject to the usual business structures and laws applicable to businesses generally. 

Social enterprises are unique as they can seek to make a profit while creating social impact. They could essentially make a profit to provide for social benefit causes or incorporate social benefit within their operations, or some amalgamation of the two. 

An example of the former is donating a portion of profits to environmental clean up while an example of the latter could be providing greater employment opportunities to those with disabilities. 

What Is The Difference Between A Charity and a Social Enterprise?

Now that we’ve gone through the definitions and nature of a charity and social enterprise, what exactly are the key differences? 

Mission

For charities, the mission needs to be aligned with the criteria above. In other words, it needs to satisfy the charitable purpose mentioned in the legislation. 

However, social enterprises are not restricted in this way and can choose any social cause they wish to pursue.

Registration

Charities can be registered under the ACNC. While registration is voluntary, it is required to access charity tax concessions and various other benefits. 

However, there is no registration mechanism specifically for social enterprises. Both charities and social enterprises can register with ASIC for an ABN, as per their structure.

How Do Each Get Funding?

Charities raise funds through donations, fundraising activities, trading, investing and government grants. However, they cannot get funding through investors. 

Social enterprises that operate for profit gather funding from investors who may seek to make a profit. Not-for-profit social enterprises get funding from government grants or through their own profits which are re-distributed into the functions of the organisation.

Organisational Structure

Charities are restricted on what type of structure they can choose. For example, they cannot be registered as sole traders. 

However, social enterprises have no such restriction and can choose any structure based on their needs and whether they operate for profit or Not-for-profit.

Types Of Charities

When charities are registered with the ACNC, they are given a subtype to reflect the charity’s purpose. These subtypes are as follows:

• Advancing health
• Advancing education
• Advancing social or public welfare
• Advancing religion
• Advancing culture
• Promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia
• Promoting or protecting human rights
• Advancing the security or safety of Australia or the Australian public
• Preventing or relieving the suffering of animals
• Advancing the natural environment
• Any other purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned in the subtypes above
• Advancing public debate (promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a state, a territory or another country)
• Health promotion charity
• Public benevolent institution

This list is quite large, and it is important to understand what each subtype activities look like. You can read more about these individual subtypes here.  

Types of Social Enterprises

There are no set or defined types of social enterprises, but some of the following are examples:

• Businesses that help train or employ disadvantaged individuals
• Businesses that distribute profits to social causes like cleaning the environment
• Businesses that provide services that are generally not available to disadvantaged communities
• Businesses similar to a charity 

Tax Concessions

Charities registered under the ACNC can get tax concessions such as:

• Income tax exemptions and franking credits
• Goods and services tax concessions
• Fringe benefits tax rebates
• Fringe benefits tax exemptions
• Deductible gift recipient

ACNC has written more about these concessions here.  

For social enterprises, however, whether they get tax concessions outside of those provided to the business in general depends on the circumstances. So, it’s good business practice to speak to a professional. 

Is A Charity A Social Enterprise?

The short answer is that some charities are also social enterprises. For example, if a social enterprise operates Not-for-profit and satisfies the charity criteria above (including the charity purpose), it can be a charity and register under the ACNC. 

The funding comes from the operations of the organisation, including fundraising activities and redistribution of profits into the functions of the organisation. 

However, the social enterprises that seek to create a profit or have a social purpose that is not aligned with any of the charitable purposes are not charities. For example, a water bottle manufacturer that distributes some of the profits to a social cause and the rest to shareholders cannot be a charity.

Which Classification Is Right For My Business?

This really depends on your individual circumstances. As you can see, there are clear legal definitions for charities which also brings about restrictions around legal structure and social causes. 

There are also some ongoing obligations you need to be aware of if you choose to be a charity. 

However, a social enterprise may not get all the tax concessions that may be available to charities. 

Need Help?

Working out the key differences between a charity and a social enterprise can get a bit tricky, especially if you’re both! It’s important to understand the nature of each, so you can conduct your business activities in a way that is compliant with the relevant laws. 

If you need help, reach out to our team for a free, no-obligations chat at team@sprintlaw.com.au or 1800 730 617. 

Naga Aditya Koneru

Aditya has experience in consulting, reinsurance, and government. He holds a double degree in Actuarial Studies and Laws from the University of New South Wales, and has a keen interest in public sector work.