Creating and maintaining a social enterprise

Starting your social enterprise

The Business Development Bank of Canada, Futurpreneur Canada (targeting 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 how to make a business plan or how to market and sell your products and services.

These guidelines also apply to social entrepreneurs and can help with:

A social enterprise that reflects your goals

Social enterprises are businesses that sell goods or services in the marketplace with a social, cultural, or environmental purpose. They reinvest the majority of their profits or surplus to maximize their social mission. Social enterprises are not restricted to a corporate form. Therefore, like any business, you need to choose a corporate structure that best reflects your project, purpose and values.

You can either establish an unincorporated entity or an incorporated entity. Unincorporated businesses include sole proprietorships and partnerships, while incorporated businesses include business corporations, not-for-profit corporations, and co-operative corporations.

It is important to consult legal and tax professionals to make the best decision possible – the structure you choose will impact your access to funding supports and will likely have implications for taxes. 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 and impact. You can choose to incorporate as a business corporation, a not-for-profit corporation, or as a co-operative. While this guide is aimed at entrepreneurs, it is important to note that a not-for-profit organization cannot be "owned" as it does not have share capital.

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.

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.

Visit Corporations Canada for information on federal incorporation as well as on the benefits of incorporation. To learn more about provincial and territorial incorporation visit the registrar of your specific government.

Overview of corporate structures

Sole proprietorship

Structure

A sole proprietorship is the simplest business structure. An owner makes all the decisions, takes in all the profit but also shoulders all liabilities.

Operating as a social enterprise

An owner of a sole proprietorship can undertake a variety of commercial activities to fuel the goals of the social enterprise. In addition, the owner takes all the decisions regarding what to do with profits, and how to invest in its business' social mission.

Partnerships

Structure

A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business. Partnerships are easy to create and dissolve, they are also flexible to operate. The specific requirements for setting up a partnership vary by province or territory. There are three kinds of partnerships: general partnerships, limited partnerships, and limited liability partnerships (limited to professional associations like lawyers or accountants).

Operating as a social enterprise

A partnership can be used to operate a social enterprise just as easily as a sole-proprietorship.

In a general partnership, the general partners equally share the decision making, the profits, and the liability, unless otherwise provided in a formal partnership contract.

A limited partnership is a type of general partnership where a single general partner with unlimited liability is supported by "limited partners". Limited partners contribute capital but are not involved in the company's management. Limited partners are only liable to the extent of their capital contribution — like shareholders of a corporation. In exchange for shouldering all the risks, the general partner takes in a bigger share of the profits.

Business corporations

Structure

A business corporation or for-profit corporation is an incorporated entity; that is, a legal entity that exists separately and independently from its owners. A business corporation can enter into contracts with other persons or legal entities, can sue, be sued, and own property.

The owners of a corporation are shareholders, and the individuals who manage and run its affairs are officers and directors. Shareholders enjoy "limited liability", as they are only liable to the extent of their capital contribution to the company.

A business corporation is one of the most common types of organization to run a business. Corporations are incorporated at the Federal level under the Canada Business Corporations Act, or at the provincial/territorial level. Unless otherwise provided in the articles of incorporation or by resolution, there are generally no restrictions on how a corporation uses its revenue.

Operating as a social enterprise

Business corporations can commit to a social, cultural and/or environmental goal in various ways. This goal can be integrated into the corporate structure of the business corporation, in its business model or in both.

A business corporation can achieve a social, cultural and/or environmental goal by indicating this in its articles of incorporation — a binding legal document of corporate governance that serves as the constitution of the corporation — or by a resolution passed by the executive board or by its shareholders. Resolutions passed by shareholders (or by the board) and the articles of incorporation are equally binding on the corporation. However, resolutions are more easily replaced by a later resolution while a change in the corporation's articles needs special majority approval by the shareholders.

Not-for-profit corporations

Structure

A not-for-profit corporation is an incorporated legal entity that does not distribute dividends to its members. Not-for-profits can be incorporated at the Federal level under the Canada Not-For-Profit Corporations Act, or at the provincial/territorial level.

The term not-for-profit can be misleading; there exists a wide spectrum of not-for-profit corporations. Some operate lucrative commercial businesses and are taxed like for-profit corporations, while others meeting the requirements of "registered charities" or "non-profit organizations " benefit from special tax exemptions.

The fundamental difference between a business corporation and a not-for-profit corporation is the ownership structure. Whereas shareholders own the business corporation and are entitled to dividends, members of a not-for-profit do not own the company and therefore do not receive dividends. But members have much of the same rights shareholders have with regards to electing directors, voting, accountability etc.

Operating as a social enterprise

The federal not-for-profit corporation allows entrepreneurs to operate a social enterprise like a for-profit business without distributing dividends. The federal not-for-profit model could help your social enterprise stay focused on its social, cultural and/or environmental goal, because your ownership base is not expecting dividends from its membership contribution.

Like a business corporation, you can integrate a social, cultural and/or environmental goal into a not-for-profit by integrating it into the corporation's articles of incorporation, or by passing resolutions.

Non-profit organizations

Structure

A non-profit organization is an organization that operates solely for social welfare, civic improvement, pleasure or recreation, or any other purposes, except profit. An organization must fulfill and maintain certain requirements to be exempt from paying income tax.

Operating as a social enterprise

A non-profit organization can run its own business and generate revenue if the business is connected to its social mission. Non-profits have commonly engaged in various sorts of commercial activities related to their social mission. A non-profit cannot use its income to personally benefit its members. And a non-profit organizations, contrary to registered charities, do not have spending requirements.

It is important to distinguish "not-for-profit corporations" from "non-profit organizations." A "not-for-profit corporation" 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. The Canada Revenue Agency's tax services offices are responsible for determining whether an organization qualifies for non-profit tax-exempt status as a non-profit organization.

For more information visit What is the difference between a registered charity and a non-profit organization?

Co-operatives

Structure

A co-operative is a type of incorporated entity democratically owned and operated by an association of members. Cooperatives respond to the needs of their members, be it social, economic or environmental, such as accessing products or services, the sale of their products or services, or employment. A member of a co-operative carries one vote regardless of the number of shares she or he possesses.

Some co-operatives operate as "for-profit" businesses and distribute dividends to members; others, are purely social endeavours that do not distribute any surpluses to their members — this is often the case for nursery schools and daycare co-operatives.

Co-operatives are incorporated under specific federal, provincial or territorial Acts. Generally, they adhere to internationally recognized cooperative principles. Use the Information Guide on Co-operatives and other online tools to start and grow your co-operative.

Co-operatives operate in almost every industry in Canada. For more information on their economic activity, visit Co-operatives in Canada.

Operating as a social enterprise

Like business corporations and not-for-profit corporations, a co-operative can integrate the social, cultural and/or environmental goal in its articles of incorporation, or by passing resolutions. While the primary beneficiaries of a co-operative may be its members, a co-operative can extend its activities to benefit a wider community.

Registered charities

Some registered charities may be allowed to operate a social enterprise if it's part of their charitable programs or structured as a related business. For more information, refer to CPS-019, "What is a related business?".

To help charities better understand and comply with their obligations, the CRA also provides detailed guidance for charities, including a plain-language Charities and giving glossary and practical checklists for 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.

Will you need outside financing?

Depending on the scope of your operations, you may or may not need access to outside capital.

Integral to establishing a strong foundation is an awareness of the supports that will be available to you throughout your businesses life cycle. Look into financing opportunities to start, build and grow your idea and turn your social enterprise into a sustainable and impactful business.

The Government of Canada's Business Benefits Finder can link your social enterprise to government funding tailored to your needs and situation. By answering a few questions about your business, you will receive a tailored list of programs that you may be eligible for. Criteria, including your business structure, will determine the programs available to you.

In addition, the BDC's entrepreneur's toolkit, Futurpreneur Canada (targeting socially minded business owners aged 18 to 39), and the Government of Canada provide various tools and tips on how to increase your knowledge and skills as a social entrepreneur to help grow your business and impact.

If your social enterprise has a clearly articulated social and/or environmental purpose, you may be interested in, and eligible for, programming under the Government of Canada's Social Innovation and Social Finance Strategy to help you scale, innovate, and enhance your social and/or environmental impact.

How to manage your social enterprise?

Day to day operations

Managing your social enterprise includes a wide range of activities, such as managing employees, marketing, and strategic planning. The Government of Canada's Business and Industry platform provides useful links to help you manage the affairs. of your business. The Business Development Bank of Canada also offers an Entrepreneur's Toolkit to help you grow and manage your business. Also, Futurpreneur Canada provides a 10-step framework for How to Start a Social Purpose Business.

Staying on top of your tax obligations

Your social enterprise will be taxed differently depending on its given corporate structure. Below are a list of resources and websites that explain in further details the tax implications and tax obligations of sole proprietorships, partnerships, for-profit corporations, not-for-profit corporation and co-operatives.

General Information

Taxation of Unincorporated Entities

  • Taxation of proprietorships: This resource provides specific tax information for sole proprietorships, how they are taxed, and whether or not sole proprietorships need to register for GST/HST. This resource also offers a number of useful related links.
  • Taxation of partnerships: This resource provides specific tax information for partnerships, how they are taxed, and whether or not partnerships need to register for GST/HST. This resource also offers a number of useful related links.

Taxation of Incorporated Entities

  • Taxation of business corporations: This resource provides specific tax information on business corporations' tax obligations, how to file a corporation income tax return, how to file a GST/HST return, and the extent of a shareholder's liability for the corporation's debt. This resource also offers a number of useful related links.
  • Taxation of not-for-profit corporations: Depending on the activities carried out by your not-for-profit, you may have to pay regular corporation income tax (and file a corporation income tax return) or pay the applicable tax obligations of non-profit organizations or registered charities.
  • Taxation of co-operatives corporations: Depending on the activities carried out by your co-operative, you may have to pay regular corporation income tax (and file a corporation income tax return) or pay the applicable tax obligations of non-profit organizations or 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, advocacy organization or another professional advisor to ensure that the specific needs of your corporation are met.

Marketing, promotion and certification

Marketing your social enterprise is essential to expand your targeted audience, attract investors, hire local talents, generate partnerships, and overall amplify your goals. There are a number of resources available to help you. The Business Development Bank of Canada, in its efforts to support for-profit enterprises, offers a marketing plan template to help organize a marketing strategy. As well, Futurpreneur Canada offers Business Planning and Strategy Tools as part of their support to entrepreneurs aged 18–39.

You may also consider certification to promote your social and/or environmental objective. Certification is a recognition by a third-party that your social enterprise has a special competence. Certification can provide your social enterprise's service or product with extra visibility and credibility.

Becoming a B-Corp

B Corps are for-profit companies that meet rigorous standards of social and environmental performance, public transparency and legal accountability. If you are interested in this approach, there are steps you can take to become one. The short assessment will provide you with a better idea of how B-Corp could benefit your business. B Corps certification does not certify you as a social enterprise, but is a recognized designation that your business is meeting high standards of verified performance.

Buy Social

Buy Social Canada is a Community Contribution Company that offers a third party certification program that can recognize your organization as a verified social enterprise, and enhances your marketing potential as a business that actively prioritizes community benefits and social impact over private profit and shareholder returns, reflected in a reinvestment structure that is built into the business design.

Being Fair Trade

Fair trade is a social movement whose stated goal is to help producers in developing countries achieve better trading conditions and to promote sustainable farming.

What about other sustainability certifications?

The Business Development Bank of Canada offers further details regarding certifications that may help your business demonstrate greater environmental sustainability.

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