By Leslie Milton, CPA, CA, LPA, Associate Partner
Social enterprise is a current and popular topic in the non-profit sector. As organizations continue to face funding challenges, there is an obvious appeal to creating a new source of financial support to further the organization’s charitable and social objectives.
Social Enterprise: A social enterprise is an organization that applies commercial strategies to maximize improvements in human and environmental well-being; this may include maximizing social impact alongside profits.
A quick Google search offers many definitions for the phrase social enterprise. The common thread is that they impact a community as they are aligned to social values. But let’s be clear – a social enterprise is a business. So, if you’re a Director at a Non-Profit Organization (NPO) and considering engaging in social enterprise, you need to think like a business person.
Let’s start by thinking about how you would like to execute your social enterprise activity. As an NPO, you can engage in social enterprise activities via the following channels:
- by applying to be a registered charity, if you are not already one;
- through a for-profit corporation owned by your registered charity; or
- as a separate incorporated non-profit entity.
Each approach has its own implications and you’ll want to understand the benefits and drawbacks of every one before making a decision.
Next, you’ll want to arm yourself with a detailed business plan and budget. Many NPO directors find it foreign to consider or discuss business risks, but if you are starting up a social enterprise that’s exactly what you should do. Here are some points to ponder:
- The existing income tax rules as they apply to charities and non-profit organizations. Is the social enterprise consistent with your charitable objects or the charter of your non-profit organization? Depending upon your structure there are tax implications if you earn a profit in a non-profit environment – even if you use the profit from your social enterprise for your stated purpose in your articles of incorporation. Therefore, you need to consult your tax advisors as part of your due diligence with respect to establishing a social enterprise.
- How to fund the start-up costs (again, there are different implications for this based on the structure and the stakeholders in your organization).
- How much are you willing to invest in this start-up organization or division of your existing organization? How much can you afford to invest?
- Who is your competition with respect to your proposed product or service?
- How will you price your product or service?
- Who will staff it?
- Can you get financing for this endeavour?
Reporting to your stakeholders is another consideration. These people could include donors, lenders, volunteers, and of course the public who is interested in supporting your social enterprise. Although you will start with optimism and plans for success, it is important to consider the implications of failure. How would you close down the social enterprise branch/division/company and what would be the related costs?
If you are considering establishing a social enterprise in support of your organization’s charitable objects or purposes, CPA Canada’s 20 Questions Directors of Not-for-profit Organizations Should Ask About Social Enterprise is worth a read. Of course your professional advisors will be able to provide you with more information and offer guidance as you decide whether or not social enterprise is the right move for your organization.
