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What is a Social Enterprise?

| Hilary Alexander | SEC Blog

A business model for good

A social enterprise is a business that uses commercial strategies to achieve positive social change, guided by its social objectives. Rather than maximising profits for shareholders, social enterprises aim to create value for communities, improve society and help the environment, in line with their specific agenda. There are a few key characteristics that define social enterprises.

At the core of any social enterprise is its clearly defined mission, focused on its contribution to society or the environment. This could involve creating jobs for marginalised groups, producing environmentally sustainable goods, offering education to disadvantaged youth or supplying affordable essential services lacking in communities. Despite their philanthropic nature, social enterprises do make profits – but the difference is that they reinvest those profits towards driving their mission forward rather than distributing dividends to owners or shareholders.

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South African legislation makes provision for establishing social enterprises. They are structured as non-profit companies (NPCs) or co-operatives with reasonable economic activities that promote their social objectives. The NPC is the most common legal structure used. NPCs are incorporated under Section 10 of the Companies Act and governed by both the Act and their Memorandum of Incorporation (MOI). Their MOI must contain a provision related to reasonable economic activities that promote their social objectives. Registered under the Co-operatives Act 6 of 2013, co-ops are membership-based enterprises owned, managed and controlled by members pursuing shared economic and social benefits. Profits are distributed among members or community beneficiaries through projects or direct contributions.

Most registered social enterprises are exempt from income tax but can be liable for other taxes like VAT. Unlike charities or non-profits that rely predominantly on grants and donations, social enterprises generate a substantial portion of their income from business activities related to their mission. This business revenue allows them to pursue social goals in a financially self-sustaining manner without ongoing dependence on fundraising. The majority share of profits made are then reinvested to further the social purpose, rather than distributed among owners or shareholders, as would happen in a traditional enterprise. If there is a surplus, this could be used in various ways; to fund the expansion of products and services, extending their reach to more beneficiaries, grassroots advocacy work, research to strengthen their offering or even to cross-subsidise non-profit charitable work that aligns with their mission.

Social enterprises fill critical gaps in areas like employment, job creation, environmental stewardship, essential service delivery, education and healthcare where other institutions may fall short. They implement business principles to build sustainable solutions. They use innovative models to empower communities facing major problems to help reduce dependence on aid, build infrastructure and build human and environmental capital. They are enterprising, self-sustaining and motivated to drive social innovation efficiently across South Africa’s diverse landscape.

In short: social enterprises play a crucial role in creating social value across South African society.

Hilary Alexander

Strategist | Writer | Editor

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