Social enterprises are often misunderstood in many areas; their mission, the function, how they operate and whether they are just a charity.
If you have been working within a social enterprise, you may have been asked to explain the difference between a social enterprise and a charity, and you are certainly not alone. Social enterprises and charities are often spoken about interchangeably, and in some respects they overlap but they are foundationally very different.
It’s true that both are driven by a desire to do good and to measure success beyond the balance sheet, considering a range of social and environmental factors too. However, beneath the missions that drive them, there are two quite distinct models, with their own logic, legal structure and relationship with money.
Understanding the difference between the two is important for many of us across the sector, whether you are deciding which path to take as a founder, or looking to partner with purpose-led businesses, working in a financial institution, or simply just trying to make sense of the landscape.
So we are going to give you a quick overview of the two, what they both are and their functions.
Where does the money come from?
This is one of the core distinctions between a social enterprise and a charity lies in how each organisation generates and uses income.
Charities: Funded to Give
A charity is an institution that is established exclusively for charitable purposes, operating for the public benefit. Charities are primarily funded through donations, grants and fundraising – meaning that their income depends largely on the goodwill of others, whether that is individual donors, grant-making trusts or statutory funding bodies.
In the UK, charities must be registered with the Charity Commission, and they must demonstrate that they exist for exclusively charitable purposes, such as the relief of poverty, the advancement of education or the promotion of health.
Crucially, any surplus a charity generates must be reinvested in its charitable mission. Profits cannot be distributed to members or shareholders.
Social Enterprises: Trading to Change the World
A social enterprise is a business that trades for a social or environmental purpose, operating within the open market to sell goods or services. However, instead of aiming to maximise profits for shareholders, they reinvest the majority of its surplus revenue back into the mission or purpose they are set out to achieve.
This trading model gives social enterprises a degree of financial independence that many charities do not have. Whilst some social enterprises do benefit from grants and funding, they also have the flexibility to earn in competitive markets. They just do so whilst often being focused on achieving their core mission.
What do they do with profit?
For charities, they are not-for-profit organisations where the money they generate goes into their specific cause and surpluses are used to cover running costs and furthering the cause they are focused on. The surpluses in revenue can be used to reach more people, building reserves and future investments.
However, for social enterprise, they can make a profit. Though, the majority of this is reinvested back into the business or its social mission. They can do this in several ways, such as funding their core cause directly, business expansion to increase their impact, community-led projects and some limited shareholder dividends.
The legal structure of charities and social enterprises
Neither the term ‘social enterprise’ nor ‘charity’ refers to a single legal structure, each has a range of forms.
Charities in England and Wales are typically structured as charitable incorporated organisations (CIOs), charitable companies (limited by guarantee), charitable trusts or unincorporated associations. The structure defines how the charity should operate, influencing things such as property, employment of staff and legal liability. Charities must register with the Charity Commission if their annual income exceeds a certain threshold and they are bound by charity law.
Equally, social enterprises can also take many legal forms. Social enterprises do not have a single, mandatory legal structure and they can adapt different traditional business and charity structures. For example, they can be: a community interest company (CIC), Company Limited by Guarantee (CLG), Company Limited by Shares (CLS), Charitable Incorporated Organisation (CIO) and Co-operative and Community Benefit Societies. If it is a more informal organisation, they can be an unincorporated association, a trust or even a sole trader. Even a standard limited company with a strong social mission embedded in its governing documents can be a social enterprise.
Can you be a charity and social enterprise?
In short – yes you can be both simultaneously. Some social enterprises are also registered charities, which is where the lines can blur considerably.
If you are a registered charity, then you can operate as a social enterprise if the primary purpose is social, but most of your income is generated through trading goods or services.
Some organisations trade commercially while holding charitable status, for example if a museum that sells tickets and runs a gift shop is technically trading, but if it is a registered charity, the surplus goes back into preserving collections and education programmes.
However – this isn’t the case for all legal forms of social enterprises. Some social enterprises – such as CICs or private companies – aren’t allowed to become charities.
How does it work with accountability and governance?
Charities are accountable to the Charity Commission and must demonstrate ongoing compliance with charitable purposes. They also have trustees, who serve voluntarily and cannot typically be paid for their trustee role.
Social enterprises are accountable to Companies House (or the relevant registrar for their legal form) and must comply with standard company law, additionally CICs also report to the CIC Regulator. Their governance varies: some are member-led, some have investor directors and others operate with founder-led boards.
The perception difference
There is also a cultural dimension worth acknowledging; charities are often perceived as the more traditional model for doing good. Many view the good work that charities’ aim to do as one of the only ways to do good.
On the other hand, social enterprises are increasingly associated with innovation, whereby commercial thinking is applied to social problems and solutions are created out of a desire for change.
However whilst each perception holds truth, they are not entirely accurate. Some charities are also entrepreneurial and commercially savvy organisations. Equally, some social enterprises are as dependent on grant income to survive, similar to any charity.
The perception can shape how funders, partners and the public engage with each model.
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So there you have a quick whistle stop tour of the differences between registered charities and social enterprises!
About Impact Hub London:
Impact Hub London is a workspace, community and business support provider with a hub in Euston, London. We are part of a global network of 100+ hubs, connecting purpose-driven entrepreneurs with the resources, expertise, funding and community they need to grow. We are quite literally a hub for impact!
