Social Enterprise

There is no legal definition of social enterprise.  The term ‘social enterprise’ refers to a means of operating - a business model – rather than an actual legal structure. Third Sector organisations that choose this model for trading are often referred to as social enterprises, specifically when over 50% of their income is generated from trading.

Social enterprises are businesses that trade specifically for social and/or environmental purposes. They operate in all markets, selling goods and services to local authorities, central government, private businesses and individual consumers.  Social enterprises exist to make a profit just like any private sector business. However, instead of paying dividends to shareholders, any profits or surpluses they make are reinvested into social and environmental purposes; for example providing employment opportunities to the long term unemployed.  

Without making a profit, social enterprises cannot meet their social and environmental objectives; they must trade, to be sustainable.

Legal Structure

Social Enterprises can take many forms and the best legal structure for a social enterprise depends on the aim of the social enterprise. Many social enterprises are set up as a company limited by guarantee, a community interest company or an industrial and provident society and many are registered as charities.

Types of Social Enterprise:-

  • Co-operatives and mutual’s - democratically-owned businesses which give employees, customers or members a stake in the business

  • Credit Unions - a type of cooperative which provides financial service to members

  • Housing Associations - voluntary-managed companies which provide affordable housing for those in most need, with profits being reinvested into building up housing stock

  • Social Firms - commercial businesses that provide integrated employment for people who are disadvantaged or have a disability

  • Development Trusts - owned and managed by the local community, their focus is on economic, environmental, cultural and/or social needs in the community. They aim to generate income through trading activity in order to become self sustaining

Criteria for a Social Enterprise in Scotland includes:-

  • having a social mission

  • able to measure social and environmental impact

  • set up as a trading business, evidenced by the enterprise earning 50% or more of its income from trading. This can include income from contracts but not grants.  This criteria marks the boundary between Social Enterprise which can be defined as a "more-than-profit" organisation and the rest of the voluntary sector which is defined as "not-for-profit"

  • reinvests all its distributable profits into activities that further its social mission

  • no more than 35% of profits being distributed in dividends (for enterprises that have shareholding investments)

  • constitutionally independent from any public sector body

  • operates in a competitive market but deals in an social and ethical manner