Social Enterprise: An organization that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximizing profits for external shareholders. Social enterprises can be structured as a for-profit or non-profit, and may take the form of a co-operative, mutual organization, a social business, or a charity organization.

Non-Profit: An organization that uses its surplus revenue to help achieve its purpose or 'mission', rather than distributing its surplus income to the organization's directors (or equivalents) as profit.

So, a non-profit is an organization that puts all the money it raises towards a social issue. On the other hand, a social enterprise uses the money it makes from selling a good or service towards furthering a cause.

As you can see, the two are very similar and their difference can vary based on how each specific non-profit organization or social enterprise is structured. The divergence occurs here:

First, they differ based on how they attain money. Non-profits acquire money through fundraising efforts whereas social enterprises operate like a for-profit business by selling a product or service to the public and acquire funds through sales.
Second, their methods of operations are distinctly different. Non-profits operate in a unique manner, seeking support from governments and donors. Social enterprises, on the other hand, use the same methods and disciplines as for-profit businesses, working to establish big margins and generate high revenue.
Third, the return on investment (ROI) is also a divergent point for the two types of firms. For every firm there is a spectrum of ROI: from 100% financial return, to 100% social return. Non-profits operate with an almost absolute social ROI, putting almost all revenue towards its mission statement. Social enterprises have traditionally operated on a blended ROI, which is a mix of social and financial ROI. They put part of their revenue towards a social cause, and part of their revenue towards furthering their good or service.

With all that said, they are only textbook definitions and the divergent factors can vary a lot based on each individual company. For example, one social enterprise might operate with 75% financial ROI, whereas another might operate with 20% financial ROI.

Though technically social enterprises and non-profits differ, the two are becoming more and more aligned in today's world. In the end, both types of organizations operate to create a better world, and that's what really counts.

Atul Tandon, past Executive Director of United Way and founder of a global advisory firm working with non-profits/social enterprises to maximize their effectiveness and impact, believes "every non-profit is a social enterprise...the non-profit label in my mind is simply a label that denotes the tax system."

INTERVIEW WITH ATUL TANDON

I deliberately changed the word from fundraising to donor-engagement. “Donor-engagement” I dreamt up one morning, at home getting ready to go to work. It came out of a realization and it was pretty simple: it’s to get people excited and engaged in my cause. As a result, funds come.

But I’m not focusing on the money, what I need to focus on is engaging and exciting them, so really what a good fundraiser needs to do is to be an expert in engaging and exciting a constituency of potential and current donors.

Fundamentally when a non-profit starts to think, well, my job is actually two-sided: my job, my mission is on the one side to change the life of the beneficiary, so I’m changing lives; on the other side, I’m changing hearts. When the non-profit starts to think of itself as a bridge and a connector between the donor on the one side and the beneficiary and the cause on the other, well you suddenly find yourself not in the role of an activist – you’ll find yourself in the role of a bridge-builder.

Essentially that’s what they are: they are bridges between donors and the cause and the beneficiary; and they have to get effective at building the bridge on both sides and in between.

So long you keep looking at the donor as simply a cash machine, which is what the word fundraiser denotes to me, you are going to run into all the problems that you just spoke about. And there’s only incremental advance that can be made to improving techniques.

People say, okay guys, you tripled the revenue at World Vision, well there’s complex reasons but I do believe that the starting point was the organization’s self-realization that they had a two-sided job, and they actually changed the mission statement to reflect it.

I think we are focused on the wrong thing – on changing the tactics. We have to get focused on the right thing, which is changing ourselves, within in the non-profit industry.

I think Charity: Water does a very good job of doing this. Kiva, with Premal Shah, they do a very good job at constantly engaging. Clearly I came from them, but I do think that World Vision does a good job at continuously improving that interaction. It’s a long journey, regardless.

Social entrepreneurs are finding innovative ways to challenge the traditional thinking about nonprofit organizations (by focusing on economically sustainable models) and for-profit businesses (by focusing on solving social issues). As you set out on your mission to change the world, you will have to decide if you want to form your venture as a for-profit or nonprofit–or perhaps some hybrid of the two. The answer will largely depend on your best guess as to source of funding and your activities.

Option 1: Only For-Profit Company

A for-profit can be structured as a regular C-Corporation, an S-Corporation, aLimited Liability Company, a Benefit Corporation, or Social Purpose Corporation(CA only).

Advantages:

Ability to Take in Investments. Unlike a nonprofit, a for-profit company can have private owners. The ownership of the company, or its equity, can be divided and allocated among different individuals. For this reason, one advantage of a for-profit company is that it could allow you to bring in investors ranging from friends and family to angel investors and venture capitalists. The best legal structure for receiving investments is a C-Corporation. S-Corps have certain restrictions on who can own the company’s stock. It is unclear how being structured as a Benefit Corporation may impact your ability to raise funding from VCs and angels. While some investors are quite unfamiliar with this new entity type and have questions about the exposure to risk due to the company’s social obligation, there are impact investors who are drawn to triple-bottom-line businesses because of their emphasis on social impact.

No Limits on Revenue Generation. Unlike a nonprofit, there is no limit on a for-profit company’s ability to generate revenue through providing goods and services. This may be an important factor for enterprises that have a substantial expected source of revenue, as too much revenue can actually jeopordize your nonprofit status (see below).

Disadvantages:

No Ability to Receive Grants or Offer Tax Deduction to Donors. One big drawback with a for-profit company is that, unlike a nonprofit, it is not generally eligible to receive foundation and government grants (one exception is Program Related Investments). Similarly, a for-profit company cannot offer tax deduction to donors. While some individuals may donate regardless of the tax deduction, this effectively eliminates large donors since they almost always require a tax deduction as a condition for donation.

Taxes. Another drawback with for-profit businesses is that they pay taxes (see Fees/Costs below). This factor, while somewhat relevant, should not be an overriding factor in deciding your entity type, as the costs could be small relative to the loss of certain opportunities by selecting a nonprofit organization.

The Nitty Gritty:

Fees/Costs. The government filing fee to form a for-profit business can be a bit over $100. This is a one-time fee. In addition, a company will have to pay a minimum franchise tax in every state in which it does business ($800 in California and $350 in Delaware). This is an annual tax.

Formation. To form a for-profit business, you will have to do the following:

Decide in which state you want to form your business. Here is some information on the factors that go into that decision.
File your organizing document with the Secretary of State to formally register as a corporation, LLC, or other entity.
Adopt all other necessary papers. Depending on the entity type, they may include bylaws, an operating agreement, consents of directors, stock issuances, confidentiality and invention assignment agreements, indemnification agreements, and others.
Make any other applicable filings (such as a Statement of Information in California).
Qualify to do business in any state in which you do business.

Option 2: Only Nonprofit Corporation

A nonprofit is generally still a corporation (a nonprofit corporation), although it can take the form of other types of entities as well. However, it is very different from a regular for-profit corporation. There are a great variety of nonprofits, and each can do different things, but the most common type of nonprofit is a 501(c)(3).

Advantages:

Ability to Receive Grants and Offer Tax Deduction to Donors. A 501(c)(3) nonprofit allows you to get government and foundation grants and to offer tax deduction to any donors. Other types of nonprofits (such as a social welfare organization under 501(c)(4)) are technically tax exempt but they do not have this capacity. This may be an especially important factor for businesses that operate in a field where there are a lot of opportunities for receiving grants (such as education) and questions as to the enterprise’s ability to generate enough revenue to sustain itself without grants.

Disadvantages:

Limit on Revenue Generation. Perhaps the biggest drawback with a nonprofit for social enterprises is its limitations on revenue generation. Here is our earlier article discussing how a nonprofit can sell goods and services. To summarize, a nonprofit can sell products or services. However, if those sales are unrelated to itsexempt purposes (as described to the IRS in its tax-exempt application), those parts of the organization’s activities will be subject to tax.

And if the unrelated revenue is too substantial a portion of the organization’s income, then the nonprofit risks losing its tax-exempt status. Unfortunately there is no clear definition of what is “substantial” for purposes of this analysis. The permitted amount is dependent on the facts of each case, and it can range from 5% to 75% of income, although it is good practice to keep it at no more than 20%. See the IRS regulations for more information.

If possible, the best way to avoid the problem with generating substantial revenue is to craft your IRS tax-exempt application in a way that anticipates the activity as part of your exempt purpose. But letting the IRS know that you intend to generate substantial revenue may delay the processing of your application if the IRS wants to ask questions about it.

No Ability to Take Investments. Because a nonprofit does not have owners, there is no equity to give out. This means you would not be able to bring on equity investors such as angels and VCs (although loans are still available).

The Nitty Gritty:

Fees/Costs. A nonprofit does not pay tax, but the government filing fee for the IRS application is close to $1,000 (this is a one-time fee).

Formation. To accurately think of nonprofits, you have to envision a two-step process. First, the entity is formed with the state as a nonprofit organization. Second, the entity applies for tax exemption from the IRS. Until the organization actually receives a determination letter from the IRS, it is not a tax-exempt organization and cannot raise offer tax deductions to donors. To form a non-profit, you would:

File your organizing document with the Secretary of State to formally register as a nonprofit corporation.
Submit your IRS application for tax exemption (this is called the Form 1023), which can take a few months on the low end and a year or more on the long end (especially if the IRS has questions about revenue generating activities).
Adopt your bylaws.
Register with the California Attorney General.
Follow ongoing reporting requirements.

Option 3: Both a For-Profit and a Nonprofit (Hybrid Structure)

Advantages:

Ability to Take Investments, Receive Grants, and Offer Tax Deduction to Donors. This will allow you to carry out the pro bono services of the organization under the nonprofit and the paid services under the for-profit business. The non-profit will have access to grants and donation, and the for-profit will be able to take on investors, so there’s access to more sources of funding.

No Limit on Revenue Generating Activities. As long as the revenue generating activities are carried out under the for-profit, there is also no limit on generating revenue.

Disadvantage:

Complicated Structure. The tricky thing about these hybrid structures is how they are structured. There are 2 options:

Parent-Subsidiary. Have the nonprofit as the parent organization, and the for-profit as a subsidiary owned by the nonprofit. To do this, the non-profit would have to qualify as a “public charity”, which means that it has to get most of its funding from public sources to satisfy the public-support requirement.
Brother-Sister. Operate the nonprofit as for-profit as entirely separate entities.

Under either structure, money can flow from the for-profit to the nonprofit, but not from the nonprofit to the for-profit. The for-profit entity can donate money to the nonprofit (and lower its tax liability by up to 10% of its net income). However, because all assets of a nonprofit must be permanently dedicated to charitable causes, a nonprofit could not give away its funds to the for-profit. However, the nonprofit can purchase goods and services from the for-profit at reasonable rates. This requires the enterprise to maintain very good records of the transactions between the two entities (see below).

The big drawback with this hybrid approach is that you would have to essentially run 2 separate organizations, each with its own boards, which might be a hassle administratively since it is best to avoid too much overlap of boards.

Costs/Fees. You would pay tax on the for-profit business’s activities, and the filing fees would include both of the fees described above in options 1 and 2.

Nitty Gritty

Typically, if an entity is unsure if it should go with a nonprofit or for-profit or the hybrid approach, one option is to start with the nonprofit entity (as outlined in option 2 above), and wait to form the for-profit entity (as described in option 1 above) when it becomes possible/necessary to generate substantial unrelated income or take on investors.

Are Social Enterprises Viable Models for Funding Nonprofits?

Solving basic social problems requires a level of sustainable investment that donors and government cannot provide alone. Social enterprise models may well offer an answer.

The traditional reliance of nonprofits on governmental and charitable funding is increasingly unsustainable. Shrinking government budgets and greater competition for ever-fewer dollars are reducing the scale and effectiveness of nonprofits in meeting the nation’s growing challenges and intractable problems. It may be time to rethink how these important social organizations are funded.

Should nonprofits become more aggressive in adopting new business models that can add needed revenue? Could this ease nonprofits’ dependence on government and charity and better position them to fulfill their missions? What are the downsides and dangers in pursuing new models?

One answer to these questions may be the social enterprise model, which has the potential to revolutionize both the nonprofit and for-profit sectors. Social enterprises are for-profit or nonprofit businesses whose products and services address major unmet needs of society. Social enterprise efforts can range from selling merchandise to support the charitable functions of the nonprofit (Resolving Poverty) to creating a new entity that merges the for- and nonprofit operations into a hybrid form (Touring | 12.5% zakat/tithing). These social enterprise efforts can add a business model by creating sustainable revenue. The core mission is thereby freed from total dependence upon the decisions of donors.

These models has been rising in the United States, but they are much more common in Europe. Eventually, nonprofit and for-profit sectors in the United States began to adopt some of the concepts from the social enterprise and social entrepreneurship movement.

Social entrepreneurs argue that they can be change agents in both the for-profit and nonprofit sectors. In contrast to traditional approaches, they are able to recognize and pursue new opportunities to meet socially impactful missions, while implementing funding strategies that ensure that their work has the resources needed to be effective.

Researchers have often referred to social enterprise structures as the “fourth sector” (after private, public, and nonprofit) because they combine charitable missions, corporate methods, and diverse social and environmental philosophies in ways that surpass the traditional business and philanthropy models. Though the resulting structures can be complex, social enterprises are increasingly transforming traditional nonprofits and corporate philanthropy into new hybrid organizations.

While businesses have traditionally focused narrowly on generating profits for shareholders, many nonprofits (despite their skills and dedication to their missions) have lacked adequate marketing skills, often resulting in financial hardship. The social enterprise model that connects marketing and financing has shown some success in addressing social problems with revenue not solely generated from donors and the government.

Historically, federal and state laws have viewed nonprofit and for-profit entities as mutually exclusive organizations whose work rarely, if ever, overlapped. Entrepreneurs who believe companies can pursue profit while also addressing social problems have challenged this legal distinction. The traditional method of receiving tax-deductible donations is to file for 501(c) status with the Internal Revenue Service, an application for 501(c)(3) status designed for a religious, charitable, or educational purpose.

With the emergence of the social enterprise movement in the United States, new forms of corporate structure are being created to ensure that these new hybrid approaches are operating legally. A growing number of states have prepared the ground for the creation of such enterprises by recognizing a new class of business entities. The two most common are the benefit corporation (B Corp) and the low-profit–limited-liability company (L3C).

Both represent “forms of for-profit business,” but “they represent a shift toward greater consideration of the environmental and social concerns of an enterprise’s stakeholders”. The L3C is a partnership or joint venture between a for-profit and a nonprofit, with the charitable component of the organization being freed from income taxes and maintaining its separate identity.

L3C allows companies to achieve modest profits while operating under a business model that emphasizes impact over profits. L3Cs were specifically designed to help social entrepreneurs raise capital from a much broader range of investors.

Benefit corporations (B Corps) differ from L3Cs in that they are required to operate under specific standards set forth by B Lab, itself a nonprofit organization. The B Lab “promotes socially aware business practices by providing an opportunity for a business to voluntarily adopt responsible standards of decision making”. By meeting the levels of social responsibility set by B Lab, any entity can become a B Corp.

Being certified by B Lab recognizes the good intentions and social responsibility of companies, encourages responsible investing by providing sustainable ratings, and promotes a new legal entity meant to be more socially responsible, purposeful, accountable, and transparent. A certified B Corp uses a set of rating standards that support corporate responsibility in crucial areas of business endeavors that are not based solely on a profit-seeking model. While both L3Cs and B Corps can be used to support emerging social entrepreneurs, each fails to address challenges addressed by the other; namely, L3Cs do not offer the transparency and legal protections of B Corps, while B Corps will not receive the broad capital-market access enjoyed by L3Cs. <------- Resolving Poverty shall be a B Corp. Why? Transparency is of essential essence. And thy ability to bypass "broad capital-market access", I fathom is referring to investment opportunities -- which, if I am able to generate profit via TOURING and selling Merch - shall be more than enough capital raised.

Efforts supporting social enterprises can range from selling merchandise to creating a separate for-profit enterprise, or even a hybrid structure, to support the core mission of the non-profit (Thy touring | 12.5% tithing/zakat). The number and variety of selling opportunities presented to nonprofit organizations, especially through the Internet, is growing rapidly.

While there are clear benefits to social enterprises, such as those organized through the Benefit Corporation and L3C, clear risks also exist. Some IRS rules, for example, severely limit the circumstances under which L3Cs can be used for donations and tax exemptions. This supports the perception that “social enterprises organized as for-profit businesses find it difficult to attract donations because individual donors do not receive the same tax benefits compared to donating to a 501(c)(3) nonprofit organization”. Such concerns about raising capital led to the creation of the L3C, but tax benefits for donors can still be questionable for social enterprises. This issue demonstrates that “given social enterprise’s lack of guaranteed shareholder primacy, social enterprise faces inherent challenge in attracting capital from profit-seeking investors”

Among the tasks faced by social entrepreneurs and their corporate partners is finding the balance between creating a true social enterprise and constructing an organization whose purely profit-making goals are masked as a social enterprise. Such organizations may be motivated more by the public-relations value and commercial returns of the relationship than the charitable mission. So far, the advantages of social enterprise organizational structure include minimal restrictions on configuring the type of capital and funding needed for their organization. As noted earlier, however, the United States has been slow to adopt this model. However, local governments and foundations can be key in accelerating growth of social enterprises by providing capacity building and developing the management expertise within nonprofit organizations.

Another factor worth noting regarding the need for nonprofits to adopt the new social enterprise models is the identification and recruitment of board members with relevant experience. Nonprofits have a unique governance and regulatory structure designed to ensure that the board is accountable to society through their donors, funders, staff, clients, and the larger community. Their board members typically include, among others, members of the organization, individuals who share the same goals, donors, business partners, and legal counsel. Social enterprises should reflect a similar composition along with an emphasis on board members who possess both business acumen and a social awareness that fits with social entrepreneurship. In Europe, many social enterprises have a board that is legally accountable for fulfilling the organization’s mission as well as supervising its financial performance.

The blending of for-profit and nonprofit organizational characteristics reflects an integrated hybrid form that could address the serious burnout factor and problems with talent retention in many nonprofits. According to a recent survey, the greatest staffing challenges faced by nonprofits include insufficient time to recruit qualified staff and inadequate resources to compensate staff in a competitive environment. These survey findings reflected worker dissatisfaction with wages and with the organization’s inability to retain employees who could go elsewhere for better compensation. In this context, it is conceivable that social enterprises could offer staff, especially millennials, both the prospect of a challenging career choice and the opportunity to customize their careers based on experiential learning and maximizing choice. In other words, the social enterprise model could attract a wider range of individuals who are interested in doing good by acquiring entrepreneurial skills to also do well and assist the human service field by pushing forward on improved client outcomes and impacts.

Source.

Nonprofit boards of directors are moving their organizations towards social enterprise structures in an effort to increase revenues as they face simultaneous challenges of diminishing governmental funding, uncertain philanthropic funding, and increased competition for limited resources. For-profit entities are similarly operating in an increasingly competitive market and are seeking to differentiate themselves and generate goodwill by self-identifying as social enterprises, sustainable businesses, and/or certified B corporations. And social entrepreneurs are moving towards sector agnosticism as opposed to limiting pursuit of their charitable goals to traditional nonprofit structures.

⚠️

As the differences in the activities of nonprofit and for-profit organizations continue to blur with the increasing commercialization of charities and the growth of socially purposed taxable entities, the nonprofit sector will see stronger pushback from regulators and critics. The IRS will place greater scrutiny on unrelated business taxable income; nonprofits will respond with increased use of taxable subsidiaries; and critics of the “hybrid” entities will become increasingly vocal, warning legislators of the risks of charity-washing and encouraging attorney general oversight. As a result of this shifting regulatory environment, boards of nonprofit organizations seeking to launch social enterprise ventures must ensure thorough compliance with the applicable laws and regulations and should give careful consideration to the legal structure best suited to the goals and needs of the organization.

Before kicking off a social enterprise venture, the initial threshold questions a nonprofit organization’s leaders should ask are whether the idea is viable and whether the organization has the capacity to make the venture successful. In evaluating its capacity, the organization should look not only at its financial resources, but also its human, systems, technology, time, administrative, and space resources, and should consider what resources in each of these categories it currently has available, what resources it will need in order to successfully operate the social enterprise venture, and what modifications to its operations it may need to make in order to adjust its available capacity. The nonprofit should also conduct significant research regarding the relevant market, as well as develop a thoughtful business plan and financial projections. The organization’s board of directors will also want to take certain steps to ensure that each director has satisfied her or his duties to the organization, including by conducting a reasonable investigation of the contemplated venture, identifying and managing potential conflicts of interest that may arise, and ensuring ongoing legal compliance.

Once an organization’s board has decided to pursue a social enterprise venture, it must determine whether to conduct such activities in-house or through a separate entity. If the business is related to the organization’s exempt purpose (which is often a complex determination requiring legal advice), or will constitute a small part of its overall activities, it may be easiest to keep it in-house. However, if the earned income is generated by a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose, it may generate unrelated business taxable income subject to the unrelated business income tax (UBIT). Moreover, and more fundamentally, under the commerciality doctrine, an exempt organization cannot engage in more than an insubstantial amount (which is not clearly defined) of unrelated business activity without risking the loss of its 501(c)(3) tax-exempt status. If the board is concerned about the possibility that the venture’s activities are unrelated and substantial, structuring the social enterprise in a subsidiary or affiliate organization may be an attractive option and may also provide the existing organization with greater protection from a venture with a higher risk profile and better preservation of the existing organizational culture of the nonprofit.

If, after reasonable investigation, the board determines it is in the organization’s best interest to create a for-profit subsidiary, it again has multiple options as to the legal structure of the entity. It may choose from among traditional business forms like a corporation or a limited liability company (LLC), which offers fewer formalities than a corporation, but is typically set up as a pass-through tax entity and therefore may not be an appropriate vehicle in which to house a substantial unrelated income-generating business. Either a corporation or an LLC may also seek to become a Certified B Corporation — a certification provided by the nonprofit B Lab to entities meeting certain social and environmental criteria.

Alternatively, the subsidiary may be structured in one of the newer “hybrid” forms, which currently include the low-profit limited liability company (L3C), the benefit corporation, the flexible purpose corporation, and the social purpose corporation. The L3C is a form of LLC, but is governed by statutory limitations that are harmonized with the program-related investments (PRIs) regulations and therefore may be more attractive to some private foundation funders, though that has yet to be evidenced on a widespread scale. Nineteen states and the District of Columbia currently permit corporate entities to be formed as benefit corporations, which must pursue the general public benefit in their corporate activities and whose boards must consider the impact of their business decisions on their employees, their suppliers, the environment, and the community at large. A social purpose corporation must similarly be organized to promote positive effects (or minimize negative effects) on the corporation’s employees, suppliers, or customers; the broader community; or the environment and is permitted, but not required, to state a specific social purpose for which it is organized. In contrast, the flexible purpose corporation requires the entity to pursue a stated specific public benefit. In making a determination regarding the legal form of an entity, the most important thing to bear in mind is that form should always follow function.

We have started to see, and will continue to see, shifts in the landscapes of the nonprofit and for-profit sectors due to the increased momentum of the social enterprise movement. As nonprofit organizations navigate the social enterprise space and as the regulatory environment continues to change, it is particularly important that organizations carefully ensure compliance with applicable laws and statutes and that their boards of directors make informed decisions throughout the process.

Source.

Turning a charity into a social enterprise is principally about changing the funding / business model of the organization. This means moving away from being dependent on grants and donations to generating more of your income by selling goods and services.

A social enterprise is a business created to further a social purpose in a financially sustainable way.

Social enterprises: Provide income opportunities for people living in developing countries. Have a double bottom line and reinvest income from sales into the business of improving lives.

Social enterprises contribute to our society by promoting an economic, social, cultural or environmental mission for the public’s benefit.

The next generation of social entrepreneurs is on the rise, applying business strategies to achieve philanthropic goals through a non-government organization (NGO) business hybrid.

Social entrepreneurship in America seeks to solve vexing social problems. It builds bridges to those who have otherwise been left behind. And social entrepreneurship isn’t limited to the developing world -- it’s a global movement. In the developed world, social entrepreneurs can take aim at societal problems at home or abroad. They’ve established companies that provide aid in Darfur or even next door.
How do they do it? The for-profit space uses consumer markets to power change at home and abroad. The nonprofit sector develops innovative programming and partnerships to deliver lasting and meaningful results. And when it all comes together, the results can be extraordinary.

Although defining a social enterprise is a difficult task, they typically:

possess clear social objectives which serve and benefit the public
act as a not-for-profit with a surplus being reinvested (not distributed to shareholders)
take a variety of legal forms
have economic value that produces goods and services with elements of social innovation and addressing social needs, distinguishing themselves from corporate social responsibility
are an independent entity with a strong element of participation

How are Social Enterprises Funded?

Social enterprises address a social need through their products and services.

Furthermore, they attempt to bring change through their product and service offering. Both altruism and profit motivate these structures.

A social enterprise relies on generating revenue while a traditional not-for-profit receives funding from grants.

However, the ultimate goal is self-sufficiency through profit but also measuring the business’ success through Social Return on Investment (SROI).

What Are Their Purposes?

Social enterprise and social entrepreneurship highlight the idea that an individual can create change, via Sustainable Development Goals that aim to:

alleviate poverty; ✅
improve health care;
improve training;
achieve environmental protection;
improve governance;
achieve peace.

Importantly, these structures must educate the public through awareness campaigns about their product or service. That is, the public must know about a certain product or plight to determine whether they need it in their life. ✅

How Do They Grow?

The social venture may be growing, breaking even and maybe even returning a profit as it expands. If so, you will likely consider raising capital from other sources such as:

donations;
grants;
social investment bonds;
crowdfunding;
micro-donations;
membership fees.

Social enterprises cannot raise capital from investors purchasing equity.

Therefore, you should think about finding new product lines or refining your current offering to scale and maintain self-sufficiency.

Social enterprises can have potentially conflicting objectives and interests as their dual goals do not necessarily align and may be contradictory.

Therefore, it is important to choose a board whose long-term strategy prioritizes social results over financial gain.

Strategic Partnerships

Forming purposeful partnerships can be beneficial for both social enterprises and profits. Ranjit Voola, explains that “the solution to the big questions of our time needs to come from us all, working together”.

Creating a Micro-Economy

A successful social enterprise works with local communities to solve problems and create a sustainable micro-economy.

Social enterprises tackle the big questions of our time, aiming to facilitate social progress through the global market economy.

If they can continue to execute their social goals while remaining a viable, self-sustaining organization, they will be an invaluable player in helping to achieve goals.

If you have any questions or need help setting up your social enterprise, contact LegalVision’s charity lawyers: https://legalvision.com.au/scaling-and-social-enterprises-the-lifecycle-of-a-social-enterprise/

ELIMINATING POVERTY THROUGH MARKET-BASED SOCIAL ENTREPRENEURSHIP, by Muhammad Yunus

• Poverty is not created by people who are poor. So we shouldn't give them an accusing look. They are the victims. Poverty has been created by the economic and social system that we have designed for the world. It is the institutions that we have built, and feel so proud of, which created poverty.

• The essence of my argument is that in order to reduce, and ultimately eliminate, poverty we must go back to the drawing board. Concepts, institutions, and framing conditions which created poverty cannot end poverty. If we can intelligently rework these framing conditions, poverty will be gone, never to come back again.

• five issues which need to be urgently revisited:

(a) widening the concept of employment;

(b) ensuring financial services even to the poorest person;

(c) recognizing every single human being as a potential entrepreneur;

(d) recognizing social entrepreneurs as potential agents for creating a world of peace, harmony, and progress;

(e) recognizing the role of globalization and information technology in reducing poverty.

• I became involved in the poverty issue not as a policymaker or a researcher. I became involved because poverty was all around me. I could not turn my eyes away from it.

• I wanted to find something specific that I could do to help another human being just to get by another day with a little more ease than the previous day. That brought me to the issue of poor people's struggle and helplessness in finding small amounts of money to support their efforts to eke out a living.

• The first thing I did was to try connecting the poor people with the bank located on the campus. It did not work. The bank said that the poor were not creditworthy.

• I offered to become a guarantor for the loans to the poor. I was stunned by the result. The poor paid back their loans every single time! But I kept confronting difficulties in expanding the program through the existing banks.

• Several years later I decided to create a separate bank for the poor, to give loans without collateral. Finally in 1983 I succeeded in doing that. I named it Grameen Bank, or village bank.

• It now works all over Bangladesh, giving loans to more than 4 million poor people, 96% of whom are women. The bank is owned by its borrowers.

• Over the past two decades, the bank has loaned a total of more than US $4.8 billion. Generally the repayment rate has been nearly 99%. The Grameen Bank makes profits, and financially it is self-reliant.

• Impact studies done on the Grameen Bank by independent researchers find that 5% of borrowers come out of poverty every year, children are healthier, education and nutrition levels are higher, housing conditions are better, child mortality has declined by 37%, the status of women has been enhanced, and the ownership of assets by poor women, including housing, has improved dramatically.

• If poor people can achieve all this through their own efforts within a market environment, why isn't the world doing more of this?

• Grameen-type micro-credit has spread around the world over the last two decades. Nearly 100 countries have Grameen-type micro-credit programs.

Source: www.globalurban.org/Issue1PIMag05/Yunus%20article.htm

Challenges faced

But the biggest problem for expanding the outreach is not the lack of capacity, but strangely, the lack of availability of donor money to help micro-credit programs get through the initial years until they reach the break-even level.

Beyond that level, these programs can expand their outreach with loans from the market or from savings deposits. In most countries, micro-credit NGOs are not legally permitted to take deposits.

If micro-credit NGOs can open the door to taking public deposits, expansion of their outreach could be very rapid, because this would free them from the dependence on donor money.

Self-employment is the quickest way
The most important step to ending poverty is to create employment and income opportunities for the poor.

Self-employment is the quickest and easiest way to create employment for the poor. I have been arguing that credit should be accepted as a human right, because it is so important for a person who is looking for an income.

Credit can create self-employment instantaneously. Why wait for others to create a job for you? A person can create his or her own job. And this is so much more convenient for women who would prefer to work out of their homes.

Since economics textbooks do not recognize them, there are no supportive institutions or policies to help them. That's why the money-lending business thrives.

The money-lenders' business is as old as money itself.

We read about the cruelty of money-lenders in our religious books. We condemn them as a part our religious duty.

We read the great classics about making payment with a ‘pound of flesh’ and get horrified by it, but we had done nothing significant about addressing that problem until Grameen credit came around.

While we keep hearing about the spread of micro-credit around the world, about its 98% repayment record, about poor people getting out of poverty with micro-credit loans, about women’s empowerment, it has had no impact whatsoever on conventional banking.

These banks continue to practice the same old banking as they have been doing from the very start of their business — as if nothing new happened in the world! Probably they still shield themselves by arguing that the poor are not creditworthy.

A big step towards eliminating poverty is to make sure that we offer financial services even to the poorest people, that nobody is rejected by a bank on the ground that he or she is a poor person.

The level of well-being of the working people depends on the level of their wages.

It will be an uphill task to end poverty in the world unless we create new economic thinking and get rid of the biases in our concepts, institutions, policies, and above all, our mindsets created by the existing orthodoxy.

Unless we change our mindsets, we cannot change our world.

Poverty and the human species just do not go together.

Poverty has persisted because we created wrong mindsets which did not allow poor people to know how much potential they truly have. All we have to do is to remove the heavy crust that keeps their abilities unknown to them.

Enabling people to explore their full potential is an agenda we must take up seriously.

Muhammad Yunus on Social Entrepreneurship

The behavior pattern of a social-objective-driven entrepreneur, i.e. a social entrepreneur, is as follows:

1. He or she competes in the marketplace inspired by a set of social objectives. This is the basic reason for being in the business.
2. He or she may earn personal profit as well. This personal profit may range from zero to a significantly large amount, even larger than the personal gain-driven competitors. But in this case, personal profit is a secondary consideration, rather than the prime consideration. On the other hand, a personal profit-driven entrepreneur may contribute in achieving some social objectives. But this will be a by-product of the business, or a secondary consideration in the business. This will not make him or her a social entrepreneur.
3. The higher the social impact per dollar invested, the higher will be the market rating of the social entrepreneur. Here ‘market’ will consist of the potential investors who are looking for opportunities to invest their money in social objective-driven enterprises. Social investment dollars will move from low social impact enterprises to higher social impact enterprises, from general impact enterprises to specific and visible impact enterprises, from traditional social enterprises to highly innovative and efficient social enterprises.

Social-objective-driven investors will need a separate (social) stock market, separate investment rating agencies, separate financial institutions, social mutual funds, social venture capital, etc. Almost everything that we have for-profit-driven enterprises will be needed for social-objective-driven enterprises, such as audit firms, due diligence, and impact assessment methodologies, regulatory frameworks, and standardization, only in a different context, and with different methodologies.

Because of the way the orthodoxy of economics has given shape to the existing world, all the investment money now is locked up in only one category of investment: investment for making personal profit. This has happened because people have not been offered any choice. There is only one type of competition: competition to amass more personal wealth. The moment we open the door for making a social impact through investments, investors will start putting their investment dollars through this door, too. Initially some investors will divert a part, maybe a small part, of their investment money to social enterprises, but if social entrepreneurs show concrete impact, this flow will become larger and larger. Soon a new type of investor will be appearing on the scene who will put all or almost all their investment money into social investments.

Some of the existing profit-driven entrepreneurs may start revealing another dimension of their entrepreneurial ability. They may successfully operate in both worlds, as conventional profit-seekers in one, and as dedicated social entrepreneurs in the other.

If social enterprises can demonstrate high impact and creative enterprise designs, a day may come when personal-profit-driven enterprises will find themselves hard-pressed to protect their market share. They will be forced to imitate the language and style of social enterprises to stay in business.

I don't think I need to work hard to convince anybody that there are millions of investors right now who would gladly put their money into a social enterprise if they can be assured that their investment will at least retain its original value, while making a significant impact on the lives of poor people, deprived people, or any group of disadvantaged people. I receive many letters from people around the world asking me if they can invest in the Grameen Bank. Obviously none of them are looking for an opportunity to make money by investing in the Grameen Bank. Why has our business world failed to offer opportunities to people who want to invest for the benefit of the people?

If socially motivated people can dedicate their lives in politics to bringing changes in their communities, nations, and to the world, I see no reason why some socially-motivated people will not dedicate their lives to building and operating social objective-driven enterprises. So far they have not done so because neither the opportunity nor the supportive framework exists. We must change this situation.

A completely new world can be created by making space for social entrepreneurs and social investors in the business world. This is a very important agenda for all of us. Eliminating poverty will become so much easier if social entrepreneurs can take up the challenge of ending poverty, and social investors can put their investment money into supporting the work of social entrepreneurs.

Who is a social entrepreneur?

Let me define social entrepreneurs in a broad way and then divide them into two categories: market-based and non-market-based.

Anybody who is offering his or her time and energy to address any social or economic problem of a group or community is a social entrepreneur. The problem addressed may be a small local problem or a big global problem. The action of a social entrepreneur may need money, or may not need money. It may be a personal campaign for or against something. It may need cooperation and coordination with others.

It may need fund-raising. It may be organized as a sustainable business, ensuring 100% cost recovery. It can generate very attractive profits, although making profits is not the goal of the enterprise. In terms of cost recovery a social entrepreneur can work within a scale ranging from zero cost recovery to 100% cost recovery, and even far beyond cost recovery. If a social entrepreneur distributes food to the hungry, he or she is operating at zero level of cost recovery. If he provides health services and charges a fee which covers part of the cost, he is operating at a positive point on the cost recovery scale. Once she reaches 100% cost recovery, she becomes a market-compatible or sustainable social entrepreneur. This is the most critical point on the cost-recovery scale. If a social entrepreneur can stay on the correct side of this point he or she can become a legitimate player in the marketplace. He can grow as much as he wishes and has the capacity to manage. She can draw on the resources of the market. The more that social entrepreneurs are in the category of market social entrepreneurs, the more powerful they become as a business community. They can start gaining access to the trillions of dollars of market capitalization money, part of which will find market social entrepreneurs just the right kind of investment.

Social entrepreneurs operating on one side of this critical point are dependent on subsidies and philanthropy money to carry out their noble mission. We may call them non-market social entrepreneurs. The size of their operations will always be limited by the size of the donor money they can obtain. Obviously, the total donor money in the world is only a small fraction of the total business money. In addition, uncertainty about donor money always remains a big problem for non-market social entrepreneurs. Donor priorities and procedures change frequently, and put non-market social entrepreneurs into serious difficulties.

From non-market to market social entrepreneurs

Given all the limits of non-market social entrepreneurs, it must be recognized that they have the longest tradition of social entrepreneurship, almost as old as human beings on this planet. Market social entrepreneurs have a lot to learn from them. Together both types of social entrepreneurs can form a very strong coalition to bring changes in the ways that people do things, that policymakers make policies, and that institutions treat people. Some social entrepreneurs may operate on both sides of the scale, creating different types of socially-oriented programs. Some non-market social entrepreneurs will continue to operate at the same point on the scale all the time, because of their philosophy, availability of funds, or other considerations. Some non-market social entrepreneurs will find it advantageous to move gradually towards self-sufficiency, to get a better grip on their finances and reduce outside dependence. Some will make deliberate efforts to cross the critical point and become internally sustainable. Transforming from a non-market social entrepreneur to a market social entrepreneur is almost like converting a bicycle into a race-car; one can go so much faster in reaching the goal.

But there may be some cost to this conversion. You may gain some, while you also lose some. Social entrepreneurs must be very innovative in this conversion process in order to pursue the maximum extent of their social agenda while gaining economic power to scale up and ensure large outreach.

Global efforts should be organized to help the interested non-market social entrepreneur cross the critical point by giving him or her legal support, access to business capital, marketing skills, and technology, connecting him or her with mentors among the successful market social entrepreneurs, and providing advisory services.

Social entrepreneurs are not characters in an economic fiction. They exist in the real world. But we refuse to recognize them because we have no place for them in our analytical framework. So they carry out their mission as some kind of misfits or freak characters. We should change that viewpoint immediately and turn them into heroes of our economic endeavors.

The future of the world lies in the hands of the market-based social entrepreneurs. Leaving the business world exclusively in the hands of the personal profit-driven entrepreneurs and investors will create more and more social and political tension within and among countries than ever before. With the advance of technology the world is getting smaller, almost distanceless. Businesses are getting bigger and more powerful, while governments are shrinking in power and prestige. Through globalization the whole world is turning into a gaming table of the extraordinarily rich people and extraordinarily rich countries.

We cannot cope with the problem of poverty within the orthodoxy of capitalism preached and practiced today. With the failure of many developing country governments in running businesses, health, education, and welfare programs efficiently, everyone is quick to recommend ‘hand it over to the private sector’. I endorse this recommendation wholeheartedly. But I raise a question with it. Which private sector are we talking about? The personal-profit-based private sector has its own clear agenda. It comes into serious conflict with the pro-poor, pro-women, pro-environment agenda. Economic theory has not provided us with any alternative to this familiar private sector. I argue that we can create a powerful alternative — a social-consciousness-driven private sector, created by social entrepreneurs.

Globalization and the role of social entrepreneurs

The role of social entrepreneurs becomes very important in the context of the race for globalization. Globalization should not turn into an open house for bulls to enter the china shop. I am an ardent supporter of the process of globalization. I think globalization can bring more benefits to the poor than its alternative. But it would be naive to think that there is only one architecture of globalization. We can easily divide all the options of globalization into two broad classes: 'right' globalization and 'wrong' globalization, in the context of a set of objectives. If one of our prime objectives is to bring the quick reduction of poverty we must choose the global architecture which best ensures this result. Unless we go through this exercise and make serious efforts to build it, the most likely architecture that will emerge is the anti-poor people, anti-poor country globalization. This dreadful outcome must be checked forthwith. That's what anti-globalization demonstrations are trying to tell us. The least the world should do is to set up a global regulatory body to stop globalization from going in the ‘wrong’ direction, and to encourage and facilitate it to go in the ‘right’ direction. Globalization needs traffic rules and traffic police. Without that, the highways of globalization will be littered with ugly sights.

We should initiate a global debate and generally agree on the features of a ‘right’ architecture of globalization rather than drift into terribly wrong globalization in the absence of a framework for action. There may be many features of this architecture, but I would like to emphasize some. They are:

(a) The creation of a level playing field for the rich countries and the poor countries, and for big powerful enterprises and small weak enterprises. The rule of the ‘strongest takes all’ must be replaced by a rule that ensures everybody a place and a piece of the action without being elbowed out by the stronger players. ‘Free trade’ must mean freedom for the weakest. The poor must be made active players in the process of globalization rather than becoming passive victims. Globalization must promote harmony and partnership between the big and the small economies, rather than become a vehicle for unhindered dominance by the rich economies.

(b) Globalization must ensure the easiest movement of people across borders.

(c) Each nation must make serious and continuous efforts to bring information technology to poor people to enable them to take maximum advantage of globalization. This is particularly important for poor countries.

(d) Social entrepreneurs must be supported and encouraged to get involved in the process of globalization to make it friendly to the poor. Special privileges should be offered social entrepreneurs enabling them to scale up and multiply. Social entrepreneurs, information technology, and microcredit can play key roles in taking globalization in the right direction, including cutting extreme poverty in half by 2015.

Globalization, the knowledge economy, Grameen scholarships, and student loans

Poor people are like bonsai trees. They could have grown as giant trees if they were supported by the right environment for growth. It is the size of the pots in which they were made to grow that turned them into sad replicas of the real trees. In a similar way, poor people are sad replicas of the real persons hidden inside of them. They cannot grow to their potential size because society does not offer them the social and economic base to grow. Poor people are condemned to survive as Lilliputians in the land of super-giants.

We should look at the emerging knowledge economy supported by the process of globalization as an unprecedented opportunity for poor people and the poor countries. The future of nations will no longer be decided by the size of financial wealth of a nation, but by the quality of human resources it has. Information technology and education will make a big impact on the capacity of poor people and poor nations to change their economic situation. A group of Grameen companies have been created to bring both information technology and education to the poor people of Bangladesh. Grameen Phone, Grameen Star Education, Grameen Cybernet, Grameen Information Highway, Grameen Software, and Grameen IT Park were created to bring information technology to the poor and to build IT capacity in Bangladesh.

Grameen Phone brings internet-enabled mobile phones to the Grameen borrowers and makes them ‘telephone ladies’ of their villages. Today there are more than 21,000 telephone ladies selling telephone services in half of the villages in Bangladesh. Many of these phones are powered by solar power because electricity does not exist in those villages. Soon these women can become ‘internet ladies’ if we can design appropriate services for them. Technology is already in their hands. While extending telecommunications services to the poor, Grameen Phone also has done very well as a business. It has expanded its services to become the largest mobile phone company in South Asia within five years its operations.

The Grameen Bank not only focuses on giving financial services; it also promotes a strong social agenda. The ‘Sixteen Decisions’ adopted by Grameen Bank borrowers commit them to making many non-economic changes in their lives, such as practicing family planning, sending children to school and making sure they stay in school, breaking away from the custom of giving dowry to the bridegroom's family, making sure everyone drinks clean drinking water, etc. Because of the Sixteen Decisions, Grameen borrowers have taken great care to send their children to school. Today not only are all of them in school, but some of them are also in colleges, universities, and professional schools. The Grameen Bank hopes to see that the second generation of the borrowers will grow up to take advantage of the knowledge economy and permanently shift away from poverty. The Grameen Bank offers nearly 4,000 scholarships every year to students of Grameen families, and gives student loans to 100% of students who are enrolled in higher education institutions. Another Grameen company, called Grameen Education, offers a scholarship management service. If a sponsor gives a recoverable grant of Taka 100,000 (US $1,724), a scholarship of Taka 500 (US $8.62) per month, or 6% per year on the grant amount, is given to any poor student, Grameen or non-Grameen, in perpetuity or as long as the money is kept with Grameen Education. Grameen Education hopes to find hundreds of thousands of sponsors for these scholarships to prepare the poor boys and girls of Bangladesh for the knowledge economy and globalization.

Information technology can be a big help. Supported by micro-credit, information technology can open doors, providing opportunities for innovative financing, connection with markets, and direct access to information. Information technology and telecommunications can eliminate layers of middlemen between the poor and the market. An individual poor person is an isolated island. Information technology can end that isolation overnight. A poor person can be at the central shopping mall of the world, gaining access not only to finance and the market but also to health, education, ideas, and friendships. Information technology, with microcredit, can bring dramatic results in eliminating poverty, if designed appropriately for the poor. It can be easily and sustainably done.

Yes, we can

Now, going back to the original question — can we really reduce extreme poverty by half by 2015? My emphatic, unequivocal answer is: yes, we can! We can do more than that. We can set ourselves on a course to eliminate poverty from the world for all time to come. We can get ready to put poverty in the museum, where it belongs. Each human being is too resourceful and intelligent to suffer from the misery of poverty. Poverty and the human species just do not go together. But in reality poverty has persisted because we created wrong mindsets which did not allow poor people to know how much potential they truly have. All we have to do is to remove the heavy crust that keeps their abilities unknown to them.
Enabling people to explore their full potential is an agenda we must take up seriously, to make sure our efforts to reach the 2015 goal become a thumping success. This goal of halving extreme poverty must be achieved by 2015 — if we pride ourselves to be sensible, sensitive, and creative human beings.