Here at Impact Brixton, we’re proud to house a thriving community of social changemakers. Social enterprise Spiral Skills rent a fully serviced private office in our large Brixton coworking space, and tons of our members are working on incredible initiatives aimed at making the world a better place.
But we’ve found that one of the main barriers our community faces to formalising their charitable enterprises is choosing the correct business structure. We’re often asked what is the difference between a charity and a social enterprise, and which option is better.
Impact Brixton is a social enterprise, so we’ve got some experience in getting a not-for-profit off the ground! This bumper blog post will outline the differences between a charity and social enterprise, and give some pointers on how to choose between the two.
What are the key differences between a charity and a social enterprise?
The key difference between social enterprise and charity lies in funding. Typically charities fund their work through donations and fundraising, while social enterprises tend to sell goods or services to earn profits which they then reinvest in their work.
For example, at Impact Brixton we reinvest our profits into running free workshops, and keeping our virtual office and coworking memberships affordable. We don’t keep any of our profits – they go back into keeping the lights on and doing everything we can to empower entrepreneurs.
Charities and social enterprises are also subject to different laws and regulations. And generally speaking, setting up a social enterprise is much easier than setting up a charity.
When you set up a social enterprise in the UK, you follow more or less the same process as setting up a limited company. Under UK law, you can set up a social enterprise as a limited company, a co-operative, a CIC (community interest company), a sole trader, or a business partnership. You’ll usually need to hit certain requirements to demonstrate the reinvestment of your profits and indicate how you’re using this cash to do good, but in nowhere near as much detail as you do when you set up a charity in the UK.
When you set up your own charity in the UK, you’ve got to do a lot more in terms of compliance. All charities in the UK must follow Charity Law, which means that they have to be established for charitable purposes only, and will be subject to the control of the High Court’s charity law jurisdiction. Charities must also be wholly independent, and not operate for the benefit of trustees in any sense – it must exist and operate for public benefit.
You also might need to register your charity with the Charity Commission. This applies if your charity is a charitable incorporated organisation (CIO), or if the annual income of your charity exceeds £5000.
Whether you’re setting up a charity or social enterprise, it’s important to be aware of the requirements you need to hit! Read on to discover social enterprise and charity pros and cons.
Setting Up a Social Enterprise: Pros and Cons
There are a number of different advantages and disadvantages to setting up a social enterprise in the UK. Here are the key ones to consider.
Pro: Sustainable Revenue
The main advantage of setting up a social enterprise is that you’re not dependent on external funding – you can generate your own revenue though selling goods and services. This often leads to a much more stable cash flow, meaning that you can plan ahead, invest in growth, and better weather economic uncertainties. It also means that you don’t have to spend tons of time fundraising, allowing you to focus on building your business.
Pro: Increased Flexibility
One of the key strengths of social enterprises lies in their operational and financial flexibility. Unlike charities, which may face restrictions on how funds are used, social enterprises have more freedom in managing their resources. They can adapt quickly to changing market conditions, explore diverse revenue streams, and pivot their strategies as needed. This adaptability is crucial for staying competitive, responding to emerging trends, and effectively addressing the evolving needs of their target audience.
Pro: Space for Innovation
The dynamic nature of social enterprise set up is ideal for entrepreneurs. These organisations are driven by a dual purpose – achieving social or environmental goals while maintaining financial viability. And rising to both of these challenges encourages creative problem-solving, the development of innovative products or services, and the exploration of unconventional business models. Social enterprises push the boundaries of traditional approaches to address complex societal challenges, which is super exciting!
Con: A Constant Balancing Act
While the social enterprise set up of working towards two different goals (earning revenue and serving the greater good) can spark innovation, it can also be a tricky balancing act. You’ll need to make careful and conscious decisions to make sure that the pursuit of profit doesn’t compromise the organisation’s core values and mission.
Con: Increased Market Competition
Social enterprises function in essentially the same way as a limited company. And while this makes it quick and easy to set up a social enterprise on Companies House, it also means that social enterprises face all the same competitive pressures as any other business. This includes effectively communicating their mission to consumers in order to stand out from an increasingly crowded commercial market. This requires strategic marketing, innovation, and often, additional resources.
Con: Limited Grants
Unlike charities that often have broader access to grants and philanthropic donations, social enterprises may find it challenging to secure funding that aligns with their specific mission. Many funds are restricted to organisations with charitable status, potentially limiting the financial resources available for social enterprises to pursue impactful projects.
Setting Up a Charity: Pros and Cons
The advantages and disadvantages to setting up a charity in the UK are varied. Here are the key factors to consider.
Pro: Tax Benefits
Charities often enjoy significant tax advantages. In the UK, charitable organisations can benefit from tax exemptions on income, capital gains, and inheritance tax, which can be incredibly beneficial for cash flow. This encourages donations and support from individuals and corporations who not only want to support a cause they believe in, may find the tax benefits appealing.
Pro: Public Trust
Being recognised as a charity can definitely enhance an organisation’s public trust and credibility. Charities are perceived as entities driven by a genuine commitment to a social or environmental cause rather than profit, and that can encourage people to donate. This credible reputation is especially beneficial during an economic downturn when people are more careful with their money, and more likely to place value on the transparency and altruistic nature of charitable endeavours.
Pro: Grant Funding
Charities have access to a wide range of grant funding opportunities – and often, these grants will ONLY be available to charities, so you’re competing with a far smaller pool of organisations to secure your funding.
Various governmental, non-governmental, and philanthropic organisations offer grants specifically designed to support charitable activities. These grants can provide crucial financial resources for executing projects, conducting research, and implementing programs that align with the charity’s mission.
Con: Funding Challenges
Although charities are able to access funding that’s specifically allocated to charities, they also face the challenge of depending on donations, which can lead to financial fluctuations. How much people are able or willing to donate may vary based on the economic climate, public sentiment, or the specific focus of the charity’s mission. This unpredictability can make financial planning tricky, and can introduce uncertainties in sustaining ongoing projects.
Con: Limited Revenue Streams
Unlike for-profit organisations, which are able to earn money from a wide range of sources, charities may face restrictions on where they can gather their income. While it’s true that charities benefit from tax exemptions and donations, they may be limited in terms of generating revenue through commercial activities. This is because charities are often bound by regulations to ensure that their primary focus remains on the charitable objectives rather than profit-making ventures.
Con: Bureaucratic Requirements
There are quite a lot of bureaucratic requirements and administrative tasks that charities have to complete to comply with regulations. This includes maintaining accurate financial records, keeping up to date with reporting requirements, and ensuring full transparency in all operations. While these requirements help to create transparency, allowing your funders to hold you accountable and inspiring trust in your charity, they can also divert time and resources away from the core mission.
Frequently Asked Questions (FAQs)
How does a social enterprise differ from a charity?
The main difference between social enterprises and charities is the way they are funded. Charities rely on donations, while social enterprises generate profits through sales, reinvesting those profits in their activities. What’s more, establishing a social enterprise in the UK is generally simpler, involving various legal structures with fewer detailed requirements. On the other hand, setting up a charity involves more compliance efforts, following Charity Law and potentially registering with the Charity Commission. So whether you choose to set up a social enterprise or a charity, understanding and meeting legal requirements are crucial in both cases.
Is a social enterprise better than a charity?
This really depends on what you’re trying to achieve. If you’re looking for financial independence and stability, along with flexibility and room to innovate when it comes to generating profits, it’s a good idea to set up a social enterprise. This is because you have the freedom to earn money through commercial activities and reinvest your profits into your business. However, if you want to maintain a clear philanthropic purpose, build public trust and support, and the specific legal requirements of setting up a charity work for you, you’re better off setting up a charity.
What is a charitable social enterprise?
A charitable social enterprise is an organisation that combines aspects of both a social enterprise and a charity. This hybrid model aims to achieve social or environmental goals while also generating income through business activities, allowing it to reach for a philanthropic goal while creating a sustainable business model centred on profit. Essentially, it seeks to blend the best of both worlds by maintaining a strong social mission while employing sustainable and innovative business practices.
Are charities social enterprises?
No. While charities and social enterprises may both share a commitment to creating positive social impact, the key distinction lies in their funding and legal structures. Charities rely heavily on donations and grants, often with a non-commercial focus, whereas social enterprises operate more like businesses, generating income through their activities that they then reinvest in their mission. Some organisations choose to adopt a hybrid model, becoming a social enterprise with a charitable purpose. This means that they take the business model of a social enterprise, while pursuing a philanthropic purpose.
Conclusion
There are advantages and disadvantages to both charities and social enterprises – it’s all about working out which structure best suits your purpose. But whether you opt for a social enterprise start up or a classic charity structure, it’s really important that you comply with all legal regulations and accounting requirements. There are 166,000 charities and 131,000 social enterprises in the UK. So no matter which structure you choose, you can be sure that you’re in good company! If you’re looking to set up a charity with a step by step guide, check out our blog post which tells you everything you need to know about charity set up.
