Photo by Štefan Štefančík on Unsplash
Beginners’ guide to social benefit companies
I love this post from Chuffed which explains beautifully what they call a “social benefit company”. It’s a way of adapting a traditional private (Pty Ltd) company so that the business can and must pursue a particular mission (however you like to define it) as well as make money. It’s not going to make the business a Not-for-profit (which is just as well if you want to attract share capital), but it is going to help the founders sleep at night knowing that the social purpose is locked in.
What’s the difference between a social enterprise and a social benefit company?
Social enterprise
Social Traders’ definition of social enterprise is an organisation that:
- is driven by a public or community cause, be it social, environmental, cultural or economic;
- derives most of their income from trade, not donations or grants; and
- uses the majority (at least 50%) of their profits to work towards their social mission.
This is not a technical legal definition, but it’s one which is widely accepted. Your organisation could be a for-profit, or a Not-for-Profit, and meet this definition.
There are various legal structures that you might use for a social enterprise. Some great resources on that are available at Justice Connect’s Not-for-profit Law Information Hub.
Social benefit company
A social benefit company, at least one using the model described by Chuffed, may or may not fit the above definition of a social enterprise. It’s a Pty Ltd company with 3 additional features:
- a statement of purpose that locks in the social/environmental purpose
- an explanation that directors are permitted and required to do more than just maximise shareholder profits*
- a requirement that any proposed changes to the above must have the unanimous support of shareholders (“mission lock”)
Should I become a social benefit company?
Some people (like me) reckon that you don’t have to be a “social enterprise” or even a “social benefit company” in order to pursue a social mission with your business. There’s no law against it. Really.
But if it makes you feel better, go for it! Just make sure you’re careful when you’re defining what the directors’ duties are. You don’t want to frighten off potential directors who might be uncomfortable with a novel definition of their legal obligations. On the upside, formalising the mission as part of the company’s purpose in its constitution may be helpful when you’re trying to find the right investors – if they’re put off by the purpose being locked in, they’re not the right fit!
What about “social businesses”?
“Social business” is a term used by Professor Muhammed Yunus and is explained in his book Building Social Business – The new kind of capitalism that serves humanity’s most pressing needs. His view is that once you allow individuals to make profit out of a business, this will necessarily compromise the social mission. So he’s an advocate of sticking with a NFP structure for your For-purpose business.
*What’s the law about social benefit? There is a widely held perception that directors of for-profit companies are always going to be legally obliged to pursue maximum returns for shareholders. This is arguably wrong in the US as the Harvard Business Review explains in its May/June 2017 edition. In Australia, where the law is different to that in the US, it’s just plain wrong. More on that later…
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