What are social enterprises? And how to set up one

Want to start a business that will help others, improve the environment or support your local community? Setting up a social enterprise can be a great way to run your own business.

Social enterprise has boomed over the past decade, with an increasing number of social enterprises launched each year. According to recent government figures there are more than 70,000 social enterprises in the UK, employing more than two million people and contributing £24 billion to the UK economy.

Social enterprises exist to help people, communities or the environment. Well known examples include The Big Issue, Divine Chocolate, Cafedirect and Jamie Oliver's restaurant Fifteen - and there are thousands of social individuals launching new ventures across the UK each year.

Setting up and running a social enterprise presents some unique challenges but the core mission of bring about positive change can be immensely satisfying.

A social enterprise is a company whose core mission is to benefit and improve society. Like any business they strive for sustainability but the profits they make are always reinvested back into their social or environmental goals.

Social enterprises can be found in almost every industry, ranging from very small local projects to large service companies. They include community interest companies, credit unions, trading arms of charities, employee-owned businesses, co-operatives, development trusts, housing associations and leisure trusts.

The UK has a fantastic track record in starting up social enterprises, as this video from UK Trade and Investment (UKTI) reveals:

Many businesses backed by Start Up Loans are social enterprises, set up for differing reasons. Businesses hiSbe and The Paddock are both great examples of start ups capitalising on the growing consumer demand for ethically sourced and produced goods.

Social enterprises tend to share a similar set of characteristics:

They have a clear social or environmental purpose;
They generate an income predominately from trading;
and they reinvest the majority of their profits into their social mission.

Begin by examining your motivation for starting a social enterprise. What cause are you passionate about? What issue are you trying to address? This will help you understand what you're trying to accomplish.

Next, brainstorm and create a short list of potential business ideas based around solutions for social, community or environmental problems. Remember that the products and services you offer must be able to compete with other businesses on an equal footing and not simply rely on the company's social mission to generate sales.

Research one or two of the strongest ideas to access their feasibility. Include a detailed analysis of your industry, your target customers and your competitors. Calculate a break even point for your business and the projected profit and loss for the first year. Also decide the level of personal risk you're willing to take.

Once you decide to move forward with an idea, create a detailed business plan. Not only will this provide a roadmap for your fledgling business it will help you raise funding to get it up and running. Your full business plan should include a description of your target market, projected financials and marketing strategy along with details of all the operational elements involved in running your social enterprise, including legal structure, management team and suppliers.

There is no legal definition for what constitutes a social enterprise. Instead it's defined by its activities which means that a social enterprise can use any one of a number of legal structures for running its business.

Choosing the right legal structure for your social enterprise can be confusing so it's best to seek advice before making a decision. The type of structure you choose will determine how your business is run, how much tax you pay and the type of funding that you may receive. You'll need to consider several factors including personal liability for any debts the business may incur, funding both in the short and long term, profit distribution and how the business will be run.

Examples of social enterprise legal structures include:

unincorporated association;
sole trader or business partnership;
a limited company;
charity or a charitable incorporated organization (CIO);
a community interest company;
a co-operative society;
and a community interest company (CIC).

You can opt for registered charity status, but unlike traditional charities that fund their social mission through grants and donations, your aim as a social enterprise is to fund your company through its trading activities. While you may benefit from tax exemption and reliefs that apply to charities if you choose this structure, your trustees cannot be paid and charitable rules and restrictions may limit trading.

Many social enterprises take the form of a community interest company (CIC), which is a limited company that operates to provide a benefit to the community or environment rather than private shareholders. Designed specifically for social enterprises, this structure has proven popular with more 10,000 business registered since its introduction in 2005.

CICs must have a clear social mission and are regulated to ensure they maintain this purpose. Setting up as a CIC is similar to setting up a limited company. You apply to Companies House with a 'community interest statement' that explains your business plan and create an asset lock to protect the company's assets, along with a fee of £35. You'll also need approval from the CIC regulator.

Existing companies can covert into a CIC for a fee of £25. Once established, a CIC must submit detailed accounts, an annual return and a CIC report each year.

Learn about choosing legal structures

To learn more about CICs, visit the Office of the Regulator of Community Interest Companies page on the Gov.uk website.

Sophie McGrath of law firm Morrison & Foerster (UK) explains that choosing the right legal structure for your social enterprise can affect the types of capital available to it and how it can operate and grow in the future.

Many social enterprises are started on shoestring budgets, reliant on donations of money, equipment and time from friends, family and local business supporters. As with any business a cash injection is always welcome whether it's to fund your start up or help your social enterprise grow.

Raising finance can be a challenge however. According to a recent report by Social Enterprise UK 44% of social enterprises sought funding in 2015 and 39% reported that difficulties in finding finance was a barrier to their sustainability.

The issue often lies with the very nature of social enterprise. By definition they're set up to re-invest profit rather than distribute it to shareholders and investors so sourcing traditional finance is difficult as investors face a less attractive return compared to investing in a traditional business.

There are however lots of alternative funding sources available for social enterprises from investment schemes to grants. Schemes like Start Up Loans and the Seed Enterprise Investment Scheme are a great place to find finance.

Grants are also available from many sources including the Investment and Contract Readiness Fund (ICRF), UKIT and Nesta.

Other sources of funding include regional schemes and angel investors, like ClearlySo Angels, the first UK angel investor network for social ventures which in 2012 to provide investment and mentoring to social enterprises.

Have a look for HMRC tax relief schemes too as they can help you attract funding for your social enterprise by offering a range of tax relief strategies to individual investors investing in new shares.

Running a social enterprise takes hard work, determination and commitment. It involves the same challenges as any other business including establishing a strong brand, hiring and managing staff, bookkeeping and monitoring cash flow.

In addition you'll need to find a way to measure your success in relation to your social or environmental goals. Measuring this will allow you to manage and improve the impact you have as well as communicate your business values in a clear and consistent way.

There's lots of support and advice for social enterprise start ups:

Social Enterprise UK has a wealth of advice on its website, including a guide to setting up and running a social enterprise.
Inspire2Enterprise offers free advice and support for social enterprises.
Unltd offer support and networking for social entrepreneurs.
The School for Social Entrepreneurs (SSE) is a charity that supports people to start, sustain and scale social enterprises, charities and community projects.
Social Enterprise Scotland is a policy and campaigning organisation for Scottish social enterprises.

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