Posted by Regie Anne Gardoce on 12 August 2019
What Is A Social Enterprise?
Traditionally, businesses are set up to make a profit. Not-for-profits are set up to do social good.
But what if you want to do both?
Social enterprises sit right in the middle of this spectrum – they are a rising group of organisations who want to create profit and social impact.
Starting a social enterprise is a great way to create both financial and social value.
But, just with starting any organisation, the first challenge is always choosing the right structure.
What Is The Right Structure For A Social Enterprise?
In Australia, there are legal structures for corporations making a profit and for not-for-profits.
But in Australia there is no specific legal structure that’s called “social enterprise” or one that is specifically designed for social enterprises.
Instead, social enterprises must use any of the existing legal structures to achieve their objectives.
But, choosing the right structure is an important first step.
You’ll need to make sure your structure complements your purpose, growth strategy and the sources of finance you’d like to pursue.
More importantly, you’ll need to ask yourself: do you want to make a profit?
We’ll walk you through some of the most common structures for social enterprises.
And, we’ll also talk about how some innovative social enterprises are changing the game in this space and creatively utilizing their legal structure to complement their strategy.
Pty Ltd Company
Most social startups and new social enterprises are jumping into a Proprietary Limited (Pty Ltd) company structure.
This is the most common business structure under which most normal profit-driven businesses operate.
A company is a separate legal identity to its owners, which means that you won’t be personally liable for any debts that the business incurs.
There are shareholders (the owners of the company) who are paid dividends, while the directors are the ones who make the decisions.
A company structure is good if you need to raise some capital to grow your social enterprise because most investors are familiar with the structure.
Companies are regulated by the Australian Securities & Investments Commission (ASIC) under the Corporations Act.
You can read our Business Legals 101 Guide to help you understand what you’ll need to get started.
Company Limited by Guarantee
A common option for not-for-profits is a ‘Company Limited by Guarantee’ (CLG) structure.
In a CLG structure, there are no shareholders or dividends.
Instead, there are “members” of the association who come together for a purpose that’s not profit-driven.
A CLG structure is attractive for government grants and philanthropic donations because you have a social purpose.
CLGs are also regulated by ASIC unless you register as a charity.
If you become a registered charity, you’ll need to report to the Australian Charities and Not-for-profits Commission (ACNC) instead.
An Incorporated Association (IA) is another option for not-for-profits and runs a little like a company.
It is a separate legal identity, and its “members” have rights.
But, they do not have a right to make a profit the same way as shareholders.
Instead, those under an IA structure are driven by purposes and rules.
And it is run by an elected management committee and secretary.
Therefore, this structure also helps attract grants and donations.
There is a different regulator of IAs in each state, so these purposes and roles must be lodged with the relevant regulator (find out more here).
If you want to find out more about setting up a charity and the difference between CLGs and IAs, we’ve written an article on how to set up a charity.
The Hybrid Structure
While there are structures for not-for-profits on one end, and structures for businesses on the other; social enterprises kind of need to be both at the same time.
So – how can social enterprises do this?
Recently, social enterprises have discovered a new way of looking at it: The Hybrid Structure.
This essentially involved setting up a not-for-profit (CLG or IA structure) and a Pty Ltd company separately.
Under this hybrid structure, the social enterprise typically operate under both entities using a web of legal documents to ensure strong governance.
It can be very tricky to manage two entities – so why do social enterprises do it?
This structure is popular because having a private company on the one hand means that you can raise capital from investors.
On the other hand, the CLG structure can also attract grants as well as lower administrative burdens.
That being said, managing two entities can be a big challenge – and we can help you understand how to do it!
A New Legal Structure?
In the United States, there is a ‘benefit corporation’ legal structure that mandates both profit-making AND creating social impact and value.
In Australia, however, there is no specific legal structure like this.
Yet, some social enterprises are pushing to make this happen.
Australian crowdfunding platform – Chuffed – are currently pursuing what they call a ‘Social Benefit Company’.
Essentially, Chuffed is set up as a Pty Ltd company.
But, the social purpose that drives their social enterprises is embedded in their Shareholder Agreements and Company Constitution.
This means that they can make a profit and attract capital investment while still upholding the integrity of their social mission.
Now backed by Blackbird Ventures, you can read more about Chuffed’s story to a Social Benefit Company on their blog post.
On top of legal structure or rules embedded in legal documents, you may also want to consider certification for your social enterprise.
To encourage using business as a force for good, and also push for a Benefit Corporation model in Australia, B-Lab certifies social enterprises to verify their leadership in social innovation and entrepreneurship.
They are active all around the world – with big names such as Ben & Jerrys, Patagonia and Etsy all certified as B-Corps.
To attract investors, community awareness and also support the move towards a Benefit Corporation model, this is a great way to help your social enterprise’s growth.
What To Take Away…
We’ve discussed the most common legal structures for social enterprises, and the new ways of doing it too.
There are also other types of legal structures available to social enterprises (we’ve only discussed the most common!).
From co-operatives to Indigenous Associations, you can read more about them in this guide.
Choosing the right structure for your social enterprise is important to get right from the outset.
Your structure will determine what kind of finance you can source, whether you can make profit and how decisions are made.
Particularly, there are a number of regulations on what you can and cannot do depending on your structure.
So, you’ll need to make sure your structure also suits your long-term strategy as a social enterprise.
And there are different regulators with a range of reporting obligations and minimum standards.
The size and financial position of your social enterprise may also influence which structure is most suitable for you.
This can be a lot to think about but don’t worry, we can help!
If you’d like to book a consultation to help you decide on a structure, or you’d like to get started with the relevant legal documents – let’s chat.
You can get in touch with us at 1800 730 617 or email@example.com.