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- What is a social enterprise?
- Do you have what it takes?
- A social enterprise that reflects your project
What is a social enterprise?
A social enterprise is a revenue-generating organization whose objective is to have a social impact. Definitions of "social enterprise" vary, but there is no unified definition in Canada. For our purposes, social enterprises fall into a wide spectrum of business models.
A social enterprise does not have a specific corporate form. Social enterprises include "non-profit organizations" or "registered charities" who operate revenue generating related businesses, and include organizations that operate as "for-profit" businesses with a social goal.
You can operate a social enterprise in the corporate form that suits you best, whether it is more socially or commercially focused. In the graph below, social enterprises fall anywhere between a "charity operating a related business" and a "business corporation with social purpose."
Do you have what it takes?
A social enterprise is a business. Before choosing what corporate form suits you best, there are a number of personal, business and financial factors to consider — having a good idea is not enough.
The Business Development Bank of Canada, the Futurpreneur platform (targeting socially minded business owners aged 18 to 39), and the Government of Canada offer guidelines to help entrepreneurs accomplish their goals of starting a business. For instance, it is important to know your client base, and if there is a need for the product or service you would be offering.
These guidelines apply equally to social entrepreneurs and can help with:
- Determining their entrepreneurial spirit;
- Business Planning;
- Financial Planning; and,
- Market Research.
A social enterprise that reflects your project Footnote 1
Social enterprises are not restricted to a corporate form. Therefore, like any business, you need to choose a corporate form that best reflects your project.
You can either establish an unincorporated entity or an incorporated entity. Unincorporated businesses are sole proprietorships and partnerships. Incorporated businesses are business corporations, not-for-profit corporations, and co-operative corporations.
Once you have chosen a corporate form, you could consider operating as a non-profit organization or applying to become a registered charity as defined under the Income Tax Act.
It is important to consult legal and tax professionals to make the best decision possible. For more information on the taxation of the various corporate structures discussed, please see Staying on top of your tax obligation.
Is incorporating right for you?
Your decision to incorporate or not will influence your social enterprise's ownership structure and governance structure, but also your ability to attract investments and scale your business. You can incorporate as a business corporation, a not-for-profit corporation, or as a co-operative. Please refer to Annex 1 for a comparison chart of federally incorporated entities.
At a basic level, incorporating creates a legal entity distinct from its owners/members which protects its owners/members from personal liability, and allows directors elected by shareholders/members to run the business.
In contrast, unincorporated entities like sole proprietorships and partnerships are not distinct from their owners, which means that the owners of sole proprietorships and partnerships are directly liable for the debts and obligations of their business.
While unincorporated entities are administratively less burdensome to operate, incorporated entities have many advantages. For instance, corporations are often better suited to attract investments, receive government funding, and scale their business.
Note that incorporating at the federal or provincial/territorial level has different implications. For instance, federally incorporated companies can use their business names across Canada and can do business in all provinces/territories — although you may need to register your business name in certain provinces.
What ownership structure best reflects your project?
As an unincorporated entity, you alone, or with your partners, own your social enterprise. This provides you with the ability to shape your social enterprise without many formalities.
As an incorporated entity, ownership is either shared between shareholders or collectively shared amongst members:
- A business corporation issues shares (that may increase in value) to raise capital, the shareholders own the entity and receive dividends. Shareholders have votes proportional to the type and number of shares they have purchased.
- A co-operative issues memberships, the members collectively own the entity and may or may not receive dividends. Each member has one vote regardless of his/her membership stake. Co-operatives can also issue non-voting "investment shares" to raise capital.
- A not-for-profit issues memberships, the members, who form the "membership" of the company, do not own the corporation and do not receive dividends. Typically, members have one vote.
Members and shareholders are the backbones of your social enterprise. Members and shareholders are your sources of financing, can be the community you are trying to help (especially in the case of cooperatives), and hold the organization accountable by electing and removing directors, requesting corporate records and passing resolutions.
Therefore, it is important to think about the type of ownership structure you want, whether it is shareholders who may be seeking returns on their investments or members who have no economic stake in your project.
Who will run your social enterprise?
As the owner of an unincorporated social enterprise, you alone, or with your partners, call the shots.
If your social enterprise is an incorporated entity, directors are the elected representative of your corporation. Federal not-for-profits and business corporations are required to have at least one director, and federal co-operatives are required to have at least three directors.
If you are a federal co-operative or for-profit corporation, at least 25% of the directors are required to be "resident Canadian"; there are no such restrictions for federal not-for-profit corporations.
If you are a federal not-for-profit or business corporation, directors are not required to be members or shareholders. In contrast, at least two-thirds of the directors of a federal co-operative, or a higher proportion set in the articles, must be members or shareholders.
What is the primary goal of your social enterprise?
All social enterprises have a social goal, but some are more social ventures and others are more commercial ventures.
Socially focused social enterprise
For social enterprises with a more focused social objective, incorporating as a co-operative or a not-for-profit are good options.
As a not-for-profit, members do not have a financial stake in the corporation and do not receive dividends. After incorporating, some not-for-profits seek "non-profit" status or apply to be "registered charities" under the Income Tax Act to benefit from income tax and/or property tax exemptions.
As a co-operative, there are legislative limits to the amount of dividends members can receive, and you can put additional conditions on the distribution of dividends in your by-laws.
Commercially focused social enterprise
For social enterprises with a more commercial objective, incorporating as a business corporation, a co-operative, or using a provincial social enterprise model are good options. As a commercial enterprise, you need to have flexibility in exploring various commercial and financing opportunities.
Business corporations and co-operatives are typically the ideal vehicles. Not-for-profit and unincorporated social enterprises are also "for-profit" structures, however, they cannot seek equity financing and may experience other barriers once the venture grows.
It is important to remember that regardless of its corporate form, your social enterprise needs to be profitable or its survival will be short. Revenues are essential to cover operational costs, pay employees and commit to a social cause.
Will you need outside financing?
Depending on the scope of your operations, you may or may not need access to outside capital.
If your social enterprise's goal is limited in scope, not too costly to operate, and you have the means, you could rely on your own capital or small institutional loans to finance your social enterprise. In this case, you may choose to use an unincorporated entity or you may incorporate as a federal not-for-profit to operate your social enterprise. Your need for financing may evolve as your social enterprise grows.
If your social enterprise's goal is more ambitious in scope and access to private and institutional investors is crucial for your social enterprise to achieve sustainability and growth, incorporating as a business corporation or as a cooperative may be more beneficial. In addition to the traditional financing means available, a business corporation can raise capital by issuing shares, and a co-operative can rely on members' shared capital and even issue non-voting investment shares to grow their business.
Do you want to operate as a tax-exempt entity?
If you plan on operating solely for social reasons, and revenues are a means for a greater goal, you may consider seeking a "non-profit organization" status or may apply to become a "registered charity" under the Income Tax Act.
Seeking these special statuses may alleviate some financial strain as you could be exempt from income tax and/or property tax. For more information on the criteria to be considered a "non-profit organization" or the process to become a registered charity, please see Registered charities and Non-profit organizations.
It is important to distinguish "not-for-profit corporations" from "non-profit organizations." A "not-for-profit corporation" or "society" is a corporate form that your business acquires upon incorporation — see Not-for-profit. In contrast, a "non-profit" is a legal status that any organization can acquire by fulfilling certain requirements under the Income Tax Act — see Non-profit organizations.
Because not-for-profit corporations and societies are entities without share capital, many of them operate as non-profit organizations or as registered charities.
The information provided is to assist you in understanding more about social enterprises. It is not intended to replace legal advice. Consider consulting a lawyer or another professional advisor to ensure that the specific needs of your corporation are met.