Social Enterprise: Definition, Importance, Examples, Purpose, How it Works

What’s it: A social enterprise is a business with a social orientation through its commercial operations. Their main goal is the common good and social impact.

Three keywords you need to pay attention to: profit, planet, and people. Social enterprises operate commercially by selling goods and services responsibly. I mean, they don’t just produce environmentally friendly products; they also operate in an environmentally sound manner.

From selling the product, social enterprises make a profit. However, they reinvest most of their profits for social purposes rather than maximizing profits for owners. So, for example, owners may take dividends not exceeding their initial investment. Once recovered, the profits go back to the business to be invested in social programs.

A social enterprise is a for-profit social organization. Examples are cooperatives and microfinance providers. Businesses use profits to provide more services, not just to maximize shareholder wealth.

What are some examples of social enterprises?

You may find many examples of social enterprises around you. As I have mentioned, the keywords are economic, environmental, and social. They do not only aim to maximize profit as a profit-oriented (economically motivated) company. But, on the other hand, they also don’t just pursue environmental and social goals and ignore profit as non-profit organizations like charities do. So, they need profit to provide more benefits to the environment and society.

Here are some examples of social enterprises:

• Solar Sisters. Business empowers women in rural Africa to bring clean energy technology to their communities.
• Fairy Collection. The company employs artisans and disadvantaged people in developing countries to make jewelry – which is then sold on the international market – offering fair wages.
• Better World Books. The company reuses every book sold online to fund literacy initiatives around the world.
• Kiva. Through crowdfunding, the company provides funds to provide capital and expand financial access to underserved communities with more flexible terms and affordable costs.
• SELCO. The company provides sustainable energy solutions for low-income households and small businesses in India.

Why is social enterprise important?

Social enterprises use profits for their social, environmental, and humanitarian agendas. For this reason, they generate higher returns on social investment than profit-oriented companies. They generate direct and measurable public benefits.

Four reasons explain why social enterprises are important.

First, social enterprises empower communities and contribute to social justice and public safety. They create more jobs, incomes, and fair wages for the economically disadvantaged. They also improve access to education and finance, as Better World Books and Kiva do.

Second, social entrepreneurs pay attention to and are responsible for the environment in operating a business. They also produce environmentally friendly products. Ultimately, it promotes sustainability in building the economy.

Third, social entrepreneurship also reduces the government’s fiscal burden. Their positive socio-economic impact can reduce spending on several social programs such as unemployment benefits and benefits to poor families. In addition, they also improve the quality of human capital by providing more access to education.

Fourth, social enterprises have a positive impact on the economy. They encourage increased community economic activity. Programs such as providing microfinance allow communities to access cheap capital, encouraging them to become entrepreneurs.

What are the purposes of a social enterprise?

Companies compromise on three aspects: profit, people, and the planet. The three we call the triple bottom line. You will usually find this concept when you learn about corporate social responsibility.

In conventional business, maximizing profit is the goal of the company. In contrast, the goals of social enterprises are oriented towards three aspects:

• Economic
• Social
• Environment

Economic. The business operates commercially to generate profit or surplus. But, it’s not to maximize the owner’s wealth. Rather, it is to provide sufficient returns to the owners and invest some of the profits into the business to have a greater impact on society.

Social. Businesses support social efforts, for example, by providing low-cost capital funding support, increasing financial literacy, or providing jobs and income to the less fortunate.

Environmental. Businesses support environmental sustainability by managing their business responsibly and offering environmentally friendly products.

How do social enterprises work?

To explain this, let us distinguish social enterprises from profit-oriented organizations and social-oriented organizations. The first point you need to pay attention to is the difference in their purpose.

• Profit-oriented organizations are motivated by profit and seek to maximize profits, and ultimately, returns to shareholders. A company may have a social impact, for example, through a corporate social responsibility program, but that is no more important than a profit goal.
• Non-profit organizations do not make a profit. Examples are charities and non-governmental organizations. They rely on funding from sources such as donations and grants. Any money they receive does not go to the owners or organizers.

Social enterprises compromise the goals of the two organizations above. They are a for-profit social organization. They operate commercially to make a big social impact. In other words, they make a profit, but it is more used to sustain the organization’s social goals.

Then, the following three characteristics of social enterprises describe how they operate:

• They make money in a socially and environmentally responsible way. They also adopt ethical principles in operating the business. For example, they offer environmentally friendly products such as renewable energy. Another example is to provide fair wages.
• They need to make a profit to survive. Without profit, business does not continue. It is their main source of capital to run the business. They cannot rely on donations like charities.
• They use most of the profit or surplus to benefit society. In other words, they use business principles to achieve social goals. They may compete with profit-oriented firms in the same market or industry.

What are the disadvantages of social enterprises?

Social enterprises have several drawbacks. I will discuss two of them. First, to operate successfully, they require hard work and maintaining accountability and trust, especially from the public. When they lose public trust, the continuity of their business is called into question. For example, failure in one program can lead to public distrust.

Second, the scale of their business operations is more limited than for profit-oriented companies. Profits may not be enough to sustain expansion, which makes it difficult for them to grow the size of the business. On the other hand, they can also find it more difficult to raise large funds through the capital market as for-profit companies.