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Why Social Enterprises need ‘new clothes’

Social enterprises often operate as limited liability companies, but new legal structures to govern them have been introduced in a number of countries. Lawyer Steven Moe argues we need these options in New Zealand.

In the classic children’s story by Hans Christian Andersen, an emperor is given new clothes which are invisible to those who are unfit to see them. So no-one dares tell him he isn’t wearing anything at all. That’s a bit like the current legal structures available for someone who has an idea to start a new venture which incorporates purpose beyond making profit – they are faced with a difficult choice. Do they become a company, which carries assumptions that it is for profit, with less focus on social good? Or a charity, which carries assumptions that it is not-for-profit, focusing on helping others. 

Neither really fit a “social enterprise” the term used to describe businesses that act for both profit and purpose. Social enterprises combine entrepreneurial spirit with a strong dose of ‘heart’ as they work to make a real difference in our world. And it is not just part of a temporary trend. The 1,600 people who assembled last month in Christchurch at the Social Enterprise World Forum demonstrate that.

But how should social enterprises set themselves up? Would a legal structure created for these ventures help?

Let’s walk for a minute down each of the usual roads taken to map out that answer. Choosing a company structure has advantages because it is well known, and provides a return of profit to the founder through dividends or selling shares. Investors are easier to attract, although they probably won’t understand a business that exists for more than profit. And, in fact, directors may feel a legal obligation to maximise shareholder returns. While the purpose-driven company may solve a critical social or environmental problem, otherwise addressed by expensive government programmes, it will be hard to access any funding from that source as they will not be a charity, which is usually required.

Down the other fork in the road, a charity may offer the ability to access grant funding, although the danger is that it may come or go. People assume a charity is doing good, and an advantage that flows from such an assumption (if it meets strict charitable purposes) is that donations are tax deductible. However, despite years of a founder’s blood, sweat and tears – which every new venture requires – the founder will not be able to have private gain, apart from a market rate salary.  

Neither option truly suits our social entrepreneur, a conclusion explored in detail in the recent Ākina Foundation paper about the inadequacy of current legal structures (check it out here). What would help is a “Social Enterprise Company”, a new legal structure which takes the best of both roads described above, as well as a dash of learning from Scotland, Canada and the USA where these structures already exist. Increased legitimacy would result as the purpose is baked into the DNA through clear statements in the constitution, reporting on how it is travelling (to prevent abuse), and the ability to return capped dividends to shareholders so profits go back into the purpose.  

What’s the pitch to government on the case for change? We will end up with tax paying companies, that are also uniquely positioned to give back to their communities in ways that improve the environment, or care for disadvantaged social groups as they combine both making profit and acting with purpose. This new legal structure would ensure that when that light bulb moment happens, social entrepreneurs don’t need to reach for the number 8 wire in order to adapt, and then make do with the ill-fitting legal forms that currently exist. Social enterprises need ‘new clothes’ that fit better than the current legal structures we have.  

All of us want to lead lives of purpose and meaning, and more businesses are seeking to position themselves in that direction as the old paradigms are tossed off the throne that profit and private wealth creation is king. New Zealand has the chance to be a true world leader through a new social enterprise legal structure that other countries would look to as an example, and which the next generations that follow us demand.

Steven Moe has a free e-book available, Social Enterprises in New Zealand. For a copy email stevenmoe@parryfield.com


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