In the last decade, many more people working to create social change in Canada have been calling themselves social entrepreneurs. The phrase is no longer a mystery for most, as programs in social enterprise spring up at universities and colleges, social innovation incubation spaces proliferate across the country, and young leaders are increasingly looking to create meaningful work for themselves.
However, not all efforts to improve the human condition are social enterprises. Literally, an enterprise can be defined as any “project or undertaking, typically one that is difficult or requires effort” (as in the enterprise of training for a marathon). A social enterprise, under this definition, could be construed as involving any effort that has a social purpose. But, in fact, a social enterprise is not simply any social movement or activity.
There are a multitude of definitions of the term “social enterprise” in countries and markets across the world. All of them include the principle that an enterprise is a business that, at the very least, includes a transaction of value in which a customer pays cash for a good or service in a marketplace.
And then there’s the matter of social value. Here’s the thing: if you are creating social value but not selling anything, you are effectively operating a charity.
If you are creating limited social value (or social value as a happy by-product) through the sale of your product or service, you are a business – a regular, traditional business.
But, if you are in business primarily to create social value through the sale of a good or service, then—and only then—are you a social enterprise.
To be clear, there is nothing wrong with being a charity or a business. However, it is the direct, concerted effort to use a financial transaction to maximize social improvement that characterizes and differentiates a social enterprise.
Improving livelihoods, communities, culture and well-being is not only the responsibility of one type of actor. Governments, non-profits and charities, co-operatives, businesses and the informal sector (families, clubs, collectives, collaboratives, etc.) can all contribute to making our world a better place. One actor is not implicitly better or worse than another at making that contribution; how they operate dictates how much of a contribution they make.
However, social enterprise is a way of conducting business in which creating social value is a primary goal. It is a tool for social change that can pay for itself through earned revenues. This sustaining revenue offers an alternative to charity, voluntarism or tax-funded activities. It is a unique mechanism for which it is expected that the revenue-generating operations will always be seeking to improve the world around us.
To be clear, in Canada today there is very little benefit to calling yourself a social enterprise. There is no tax relief, no designated employment programs and limited start-up capital. Even grant opportunities are far more related to the form of incorporation and the prescribed outcomes than to the label “social enterprise.” In fact, there is no way to legally define an entity as a social enterprise in Canada.
Nonetheless – and perhaps as a result— many people are calling their project, program, or idea a social enterprise, which is actually making the term increasingly meaningless for policy makers, funders, employees, or even the purchasing public.
So, if you still want to call your work a social enterprise (in spite of lack of clear benefits currently) ask yourself the following four questions:
- Are you selling something?
- Is the sale of that good or service directly helping you to address a social problem or gap in our society?
- Do you have a systematic tool in place to quantify how your sales are directly reducing that social problem?
- Do you have a strategy to grow your business, and thus increase your (positive) social impact over time?
If you answered yes to all these questions, then you are a social enterprise. If you didn’t, then you may be doing fantastic work or providing a service that can prove both important and beneficial, but you are not a social enterprise.
This article was co-written by Jonathan Wade and Elisa Birnbaum.
Jonathan Wade is the principal at Social Delta and Elisa Birnbaum is writer and publisher who has recorded the advancement and achievements of social entrepreneurs in Canada both online (at SEE Change Magazine) and in print (her first book, In the Business of Change, will be published in May)
Social Entrepreneurs: Get Professional Advice
There are a growing number of individuals who approach us here at Social Delta with a business idea that is going to make a social change through the sale of goods and/or services. Many of these prospective clients ask if it is necessary to hire professionals to help them launch their business correctly. Of course, we first assure them that hiring Social Delta would be a good choice to invest in professional guidance (offered half in jest, wholly in earnest).
However, in full seriousness, Social Delta recommends that all starting entrepreneurs should hire the professional services of both a lawyer and an accountant.
It is always our belief that social entrepreneurs should remain operating in the informal sector for as long as possible. However, once the business matures to the point where it is appropriate to incorporate as a formal legal entity, it is worth contacting a lawyer to help with the incorporation. It is not difficult to incorporate a business in Canada, but a lawyer can help you shape the language you use to help enshrine your social value proposition as a non-profit corporation, a co-operative, or as a private sector business. Good legal advice is not always cheap, but a one-time consultation can be cheap in the long run as it will inform you of your rights, obligations and the benefits of the various legal incorporation forms to host your social enterprise.
Hiring an accountant early in your business operations will pay for itself many times over. As with the field of law, the field of accounting (and specifically tax codes) is perpetually changing, and getting good advice on how to set up your books, track your expenses, defer taxes, charge and claim GST or PST will make your first year of operations (and every year after) so much easier.
So what should every social entrepreneur ask their lawyer and accountant? Here is a short list of recommended questions, although of course every entrepreneur may also have specific questions related to their specific case:
“How and when should I incorporate my business?”
What are the benefits and limitations of a sole proprietorship, a limited liability company, a multi-stakeholder co-op, or a non-profit? Should I incorporate federally or provincially? Is there hybrid legislation in my province, and if so, what should I be sure to include in my bylaws or articles of incorporation to assure that I could register as a hybrid company in the future?
“Where do I get the money to run my business?”
A qualified accountant who understands your business model will help you choose whether you want to take on debt, sell equities, or self-finance your new venture. Note that not all forms of financing are available in every form of incorporation. Furthermore, financing creates annual operational expenses, and professional advice on how to structure the contracts, loans, equity agreements, membership shares, or other forms of financing can help mitigate cash flow challenges.
“How should I set up my books?”
It is always a good idea to separate your personal and business finances. Have a separate bank account and a separate credit card to help track business expenses. Any accountant will likely tell you that, but they can also tell you what expenses you need to track. What do you need to capture for tax or other government reporting? What are the rules around entertainment and marketing expenses? What are some of the key financial performance indicates that I should be tracking regularly to ensure that the business is healthy?
“How do I manage profit?”
Every entrepreneur thinks that they are going to make a profit, even many social entrepreneurs. However, by hiring a qualified accountant, you can help make realistic financial projections, employing their past experience with both revenue and costs with other clients. They can also help you structure your books to increase the expenses for (investments in?) activities that maximize social improvement (i.e. bursaries, salaries, community investments, philanthropy, sponsorship, and others)
“How much and when do I pay myself?”
An accountant can help structure a business to determine how best to pay yourself. They can help structure the business to minimize income taxes and they can help plan HR costs to not jeopardize cash flow.
“What about all this tax stuff?”
Accountants understand the tax rules better than anyone else. Trying to stay on top of the changes to income tax, or the payment schedules of GST, or the charging of GST in different jurisdictions is not for the under-informed. Ask your accountant about how your status as a sole proprietor, shareholder, salaried employee, or contractor affects personal income taxes. If you have staff, how do you manage payroll taxes (and source deductions, for that matter). Accountants can help you determine eligibility for tax deductions and/or credits, and can help you determine when to charge GST and how best to set up the regular reporting and payment of GST to the government.
“Is there a good time to prepare an exit strategy?”
When choosing how to incorporate your business, it is always good to consider what will happen when you aren’t there. You may want to sell the business, transfer the assets to a community organization, convert to a worker co-operative, or merge with another company. Social enterprises often seek to have an asset lock built into their initial design, in order that the business assets, intellectual property and staff remain in service to the community. Both accountants and lawyers will have advice on governance and processes to consider when you are downsizing, divesting, moving to another country, or merging with other legal entities.
It is often said that entrepreneurs should understand all aspects of their business. I couldn’t agree more…the entrepreneur is responsible for product development, market research, financial oversight, sales, social impact measurement and everything in between. You have to understand it all. Entrepreneurship is often about juggling all the plates.
But it doesn’t HAVE to be that way.
Seeking professional assistance in areas of your business which require special skills is a wise investment of money to save you time, and can prevent future problems. Professionals can help you understand your business better, and make better choices. Social Delta advises that a modest investment early in financial planning and governance will likely prevent a potentially crippling legal or financial problem down the road.