Methodical Manual For Social Enterprises
Clarification of the basic definitions of social enterprises, domestic situation
When we look at studies and publications about social enterprises, we can soon feel lost in the overwhelming conceptual chaos. We come upon phrases in the texts like social economy, social enterprise, community economy and sharing economics. Although over the last two decades several studies have been conducted in Hungarian aiming to clarify the various concepts and definitions, the disputes and misunderstandings about them are still frequent. Thus below we first deal with the explanation of the concepts related to this field.
In Hungary, the most common and widely-known definition was introduced by NESsT that has been working for the spread and development of social enterprises in our country (too) for nearly two decades. They define social enterprise as a consciously planned entrepreneurial activity that is created to come up with innovative solutions for social problems. It has two objectives: to improve the financial sustainability of the organization and to exert a significant social impact. It achieves this through the continuous, responsible and high-quality provision of products and services. In their view, social enterprises can be non-profit organizations that use business models to accomplish their basic mission, and can be business enterprises that strive to achieve significant social impact besides their business goals. Their principle is the dual optimization, which means the coordination and balance of economic and social goals. The creation of real value is a fundamental characteristic of social enterprises, as, for sustainability, it is important for them to serve real market needs in addition to social goals (e.g. employment of disabled people) and to offer quality, competitive products or services. This can only be achieved on the basis of a well-founded business plan and a well thought-out and tested market concept.
Legal regulation of the operation of social enterprises
Under current domestic law, the followings are considered social enterprises:
- NGO (association and foundation),
- a non-profit business association,
- social cooperative.
It would be a mistake to think that they are not interested in earning income during their operation, even though social enterprises, with the exception of social cooperatives, are non-profit organizations. However, no organization can operate without income.
In the case of a for-profit business, however, it is clear that its activity is aimed at making the highest possible profit, so that the members of the company receive a share of the profit to satisfy their personal needs on the highest level and in the most comprehensive way possible. However, the question arises, what the purpose of an organization can be from which its members and owners can not obtain any property, can not take dividends home because the earnings of their operation can not be divided. One of the basic common features of non-profit organizations is the prohibition of profit sharing. The exception is the social cooperative, which can be regarded as a "mule" organisation, since it is a social enterprise despite the fact that the prohibition of profit sharing does not apply to it.
What can we consider as a basic common feature of social enterprises? The fact that their activity and operation is primarily aimed at addressing a social need, mostly of a smaller or larger community, and their business goals are only related to the realization of these primary goals.Their purpose is self-preservation, and one of its tools is the secondary economic-entrepreneurial activity. In every case, the purpose of a business organisation is the acquisition of assets and not the operation in the interest of a community or a community goal. By contrast, although social enterprises do or may engage in economic activity, their earnings can only and exclusively be used for the achievement and realisation of the goals defined in their deed of foundation. The social purpose and the business goal constitute a close unit, but the business objective can only be subordinated to the social purpose, serving it.
The term "social enterprise" already reflects this duality. "Social" because the purpose of the operation, which is always a non-profit goal, is formed along the lines of community interests, and "enterprise" because they can conduct economic activity in order to achieve social, community goals.
Social enterprises form part of the social economy, but their operation can not be limited to achieving only social goals. An association created by fans of Irish stepdance can be, in legal terms, a social enterprise just like a non-profit limited liability company operating a pickling plant or a foundation operating a restaurant that employs disabled people. The feature they share is that they all work for the achievement of the social goals set by the founders, and their primary motivation is not the economic interest of making higher profits.
A social enterprise, - with the exception of the social cooperatives - does not start with the formulation of a business objective but rather with the identification of social problems and needs that affect smaller or larger communities, natural or legal persons, for whose support certain forms of organization (social enterprises) provide a suitable framework. After formulating the operational goals, the question arises as to what financial coverage helps them achieve the goals they set, what income can ensure the organization the intended operation and self-sustainability.
Depending on the nature of the organizational form, these incomes can be membership fees (at associations), contributions made by the founders (in the case of foundations and nonprofit businesses), subsidies, tenders resources, and in each of the listed organizational forms they may come from some kind of economic, entrepreneurial activity. Establishing which organizational form is best suited to achieving a social goal requires the careful consideration of many financial and legal factors.
The purpose of organizations operating social enterprises
Under domestic law, social enterprises can operate in a variety of organizational forms. We can see that there are significant differences in the basic goals of the various organizational forms. For example, the aim of the social cooperative is to create working conditions for its disadvantaged members and to improve their social situation. This can be achieved by employing members in a specific member employment status or by providing benefits from a community fund of post-tax profit. Non-profit social enterprises can not be established to pursue collective economic activity for gaining income. The profits of these organizations can not be shared among their members, they must be used for their business activity. Associations are set up for the continuous realization of the common long-term goals set by the members in the articles of association. The association is a registered legal entity that can not be founded for economic purposes. However, it is entitled to carry out an economic activity directly related to the realization of its objectives. The founder determines the assets and the structure of the foundation in the articles of association.
Conditions of economic activity
Before choosing the organizational form, it is also necessary to examine the conditions under which the social enterprise can carry out an economic-entrepreneurial activity, that is to say, an economic activity aimed at gaining income or wealth.
The current legislation does not restrict economic activity in the case of social cooperatives and non-profit companies. Moreover, a social cooperative can only achieve its goals by pursuing economic activity. However, in the case of non-profit companies, the law prohibits the company from dividing its profits and taxed income among its members. Thus, non-profit companies can use their earnings exclusively in the interest of their activity.
Stricter regulations apply to non-governmental organizations. Foundations and associations can not be founded primarily for the pursuit of an economic-entrepreneurial activity, but can, in order to achieve their goals, engage in such activities, however, only in a way that does not jeopardise the accomplishment of their basic task and the income they generate can not reach sixty per cent of their total income. The members do not have the right to dispose of the income gained through their economic activity, it adds to the assets of the organization.