Social enterprise is not just part of governments and charities anymore. Sophie McGrath explains how the line between social good and business is blurring.
The concept of a social enterprise is not new, but recent trends have shown the industry is beginning to change.
Increasingly, social enterprises are taking over issues that have traditionally been seen as the responsibility of governments and the charity sector.
Attitudes and perception towards something has changed: where does social good originate? The line between "doing good" and running a business is blurred, and we increasingly hear social entrepreneurs talking about “sustainable profit” or “proportionate profit”.
As companies become more socially conscious, so too are individuals.
This has seen a rise in "philanthropic angels" looking to invest and, subsequently, organisations are going beyond the stark choice of for-profit or not-for-profit legal structures as they seek to attract this investment.
How an organisation is structured greatly influences the types of capital available to it, which in turn determines how that organisation can operate and grow in the future. This applies just as much to a social startup as it does to a mature enterprise. Deciding on a legal structure may not set an entrepreneur’s world on fire, but it’s necessary if he or she wants to attract the startup capital and expand in the future.
The decision of many social entrepreneurs to look beyond solely charitable structures is driven largely by the desire of these entrepreneurs to have revenue generating businesses, which are self-financing, reducing the need to rely on charitable donations, and meaning that these social enterprises can return value to their investors.
The diverse make-up of social enterprises means that there is no "one size fits all" legal structure, as different social enterprises have different demands. Some require initial substantial investment – for example those looking to manufacture a product – while others may simply require consistent, small-scale funding.
Another trend we are seeing at the moment is that many philanthropic investors want to use the Enterprise Investment Scheme (EIS), where investors receive tax relief for investing in small startup companies. In order to qualify for EIS, the companies need to be structured in a certain way; so, again it is important to understand how this structure differs from others.
Morrison & Foerster recently joined forces with TrustLaw from the Thomson Reuters Foundation to publish a free guide for social entrepreneurs to help them find the right legal structure for their social enterprise.
The guide gives an overview of the various legal structures and includes a decision tree to help guide social entrepreneurs on their way.
It is a very positive sign that the number of social enterprises, and those looking to run them and fund them, is on the up. But to make a real success of your social enterprise, social entrepreneurs will need to take the necessary time away from the day job to structure their enterprise in a way that will allow it to attract investment and grow.
Sophie McGrath is an Of Counsel lawyer at Morrison & Foerster. She advises on mergers and acquisitions, general corporate and governance issues amongst other issues. A strong focus of her practice is in the venture and growth capital sector, acting for companies seeking growth through financings involving combinations of both debt and equity.