Legal framework for business with a social mission

Policy Instruments

Description

Governments can support and facilitate social enterprises by acknowledging their special character and contribution. By officially defining “business with a social mission” as a form, the government creates a basis from which it can provide direct support for these enterprises. Defining specific legal forms is uncommon; however, doing so means the government can implement tax exemptions or reductions; provide low-cost loans; devise favorable public procurement mechanisms; expand on fiduciary duties to reflect stakeholders other than shareholders; or provide technical assistance.

Points to consider

The most challenging aspect of creating a new legal form for business with a social mission is defining what is and what is not socially valuable. In principle, all business activity contributes to social objectives by meeting people's needs, generating economic growth, and fostering overall well-being. In order to set business with a social mission apart, governments have to recognize specific business goals and objectives as particularly valuable from a social perspective such as tackling critical challenges in education or health care. No matter where the line is drawn, criticism can be expected from those actors beyond that line. To mitigate against this, governments should work to build a consensus around social business with key stakeholders including civil society organizations (CSOs) and private-sector associations.

Case Example

United Kingdom:  Establishing a new class of business

In the early 2000s, the United Kingdom (U.K.) government convened a Social Investment Task Force and created a Social Enterprise Unit within the Department for Trade and Treasury. After a few years of socializing these concepts, the government introduced a new type of company – a community interest company (CIC) – for social enterprises that used their profits and assets for the public good.

The CIC form was established under the Companies (Audit, Investigations and Community Enterprise) Act of 2004. CICs could be established as companies limited by guarantee or by shares but that have additional features to safeguard their social mission. To be considered a CIC, a company must satisfy a community interest test. This test requires a community interest report be placed on the public register of the company on an annual basis. Unlike registered charities, CICs can pay their directors. However, CICs cannot return profits and surpluses to members unless they are asset-locked bodies and do not receive tax exemptions.

Today, CICs exist in 14 different sectors but are primarily active in the following sectors:  Social and Personal Services; Education, Health and Social Work; and Real Estate and Renting. CICs are one of the fastest growing community-oriented enterprise movements in the country. Roughly one in every 200 new companies in 2013 was a CIC, and in August 2014 there were almost 10,000 CICs on the regulator’s register. While the introduction of the CIC in the U.K. has been evaluated as a great success, development of a new legal form is a long process and requires dedicated institutions.

Sources:

Policy Case Study

Further Examples

Additional Resources

  • Heckl, E., Pecher, I. (2007). Study on Practices and Policies in the Social Enterprise Sector in Europe. Vienna, Austria:  Austrian Institute for SME Research and Turku School of Economics in Finland.
  • Henrÿ, H. (2012). Guidelines for Cooperative Legislation. 3rd ed. rev. Geneva:  International Labour Organization.
  • ICF Consulting Services (2014). A map of social enterprises and their ecosystem in Europe. Brussels, Belgium:  European Union Commission.
  • Nokes, N. (2012). Benefit Corporations vs. “Regular” Corporations:  A Harmful Dichotomy. Harvard Law School Forum on Corporate Governance and Financial Regulation. Cambridge, MA:  Harvard University.