What is a social business and what is a social enterprise?

What is a social business?

A social business is a business that integrates two objectives:

• A commercial objective: To achieve and increase profits and realise growth (like any traditional business) and...

• A social (and ethical and environmental) objective: As set out in our list of social benefits

A social business can be large or small, a start-up or an established player, it can take any legal form (CICs, co-ops, Ltd companies, and so on) and can operate in most industrial sectors (it's difficult to imagine a social arms manufacturer/trader). 

So do companies with grand corporate social responsibility (CSR) projects count as social businesses?

No.  A further test of social businesses is to think whether or not an investment into the business which advances the commercial activity of the business will also increase its social impact (i.e. is there a clear correlation between the two and are they of equivalent importance?). If the answer is yes they are a social business, if the answer is no then they are not. Investing in Kraft or BP will not increase their social impact so, despite their efforts, they are not social businesses. 

What if a business fits the definition above but does not identify itself as social?

It is still a social business. We have identified two types of social business:

• Those where the social benefits are intentional and the business pro-actively integrates the two objectives (commercial and social).
• Those where the social benefits happen by virtue of its commercial objective not requiring a pro-active approach in integrating the social objective. It's a business that integrates commercial objectives (growth, profits) with a social, ethical or environmental one, but they may not call themselves a social business.

Investment perspective:  Social businesses can, in the case of financial surplus, return all or a portion of it to investors (in the form of capital appreciation or dividends) as well as what is known as the ‘social return’.

There are many types of social business covering many sectors; you can explore them here.

Disagree? Email us your definition!

What is a social enterprise?

Social enterprises mix social, environmental and commercial objectives but, unlike social businesses, they place a clear emphasis on the former.  The other big difference between social business and enterprise lies in the treatment of financial surpluses, or profits. According to the UK Government:

"A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.”  Social Enterprise Action Plan 2006

Investment perspective: Social enterprises must ‘principally’ direct financial surpluses back into the business or the cause it serves, whereas social businesses can distribute dividends or create value through capital appreciation.

What about a charity?

The traditional vehicle for creating social or environmental benefit is a charity.  However, an increasing number of charities are exploring and developing entrepreneurial activities to generate new sources of income.  Many social enterprises are actually trading subsidiaries of a charity.

Investment perspective: Charities can only receive donations, not investment.  All returns are social, not financial. Any profits made through a trading subsidiary must be invested in addressing the charity’s core cause.

What about CICs, social firms, and co-operatives?

The Community Interest Company (CIC) is a legal vehicle which was created in 2005, and was specifically designed for businesses with a social mission.  A CIC is a limited company established for community purposes which has passed a ‘community interest test’ (ensuring it is for the community and not just for profit), and undertaken an ‘asset lock’ (ensuring the company uses its assets and profits for the public good). CICs do not receive the same tax benefits as charities but face a lighter regulatory burden.  
Investment perspective: Dividends for investors are capped. The CIC is still, we would say, at an early stage of its development.
A social firm 'aims to create employment opportunities for disadvantaged people through the development and support of Social Firms'. Social Firms are market-led businesses that are set up specifically to create good quality jobs for people severely disadvantaged in the labour market.“ Social Firms UK

A co-operative is a company run and owned by its workers and/or consumers where each member has one vote; it often takes the form of an Industrial and Provident Society. There are many types of co-op, including worker or producer co-operatives, consumer or retail co-operatives, housing co-operatives, credit unions and secondary co-operatives - for more information see the Co-operatives UK website.

ClearlySo sees CICs, Social Firms and Co-operatives as 'social' in nature.

Investment perspective: Outside investors (non-members) in co-operatives have no control and limited returns. 

Comments & Opinion

The Yunus Perspective

Muhammad Yunus, Nobel Laureate and founder of Grameen Bank, has a different definition for social business which closely resembles the UK government’s definition of a social enterprise.  We are holding to our definition because we believe that there is a clear difference between the two, particularly in terms of potential financial return on investment.

Reader comments

"As I understand it, what MY calls a social enterprise you call a social business, and what you call a social enterprise he calls a social business.

He says social enterprise is much wider, he would include Body Shop, for example, but he says you can't pay dividends on a social business, so I suppose he wouldn't include Body Shop.

He says it's difficult to 'mix' social and financial objectives, because in the current world the financial objectives would always come first.  That's why he doesn't include companies that pay a dividend.

A bit confusing for the moment, while Social Business is a fairly marginal concept.  I think I'll go with MY for the moment, because he's more famous than you are!! (sorry).

It's only words though, it's what you do that counts."
Mark Holdsworth

"I have to say, I couldn't agree more with your definition of what a social business is.  I also belive that investors and partners should be able to pull a "reasonable" return from socially minded business that they participate in.  It really comes down to picking the right investors and partners and setting the right expectations from the start. 
 
I particularly like how at the end you state that Muhammad Yunus's definition is not the same as what you and I believe.  While I greatly admire Mr. Yunus's work, I think there is still more innovation and deliberation to be done on the subject as a whole and that we will be able to change the world, make money, and be happy."
Thomas Stewart