LEGAL ISSUES OF A SOCIAL ENTERPRISE

The most common inquiry that I am getting of late is from social entrepreneurs that is, people who have a business idea that will assist society. Most of them have an idea but do not know how to develop this idea or concept into a business. I have also seen that most of the people who inquire about social enterprise are professionals who would like to turn their professional skills into a business model that will help society. Some of the innovators I have spoken to are coming up with systems and apps that will benefit society in some way.  A social entrepreneur therefore identifies a need in society and aims to meet that need. It is a very risky form of enterprise and is not for the fainthearted. In fact from my own observation I have seen that most of the social entrepreneurs have a passion for the area of business they want to venture into due to personal experience. When I talk to most of them, I discover that for them it is not even about making money, but fulfilling a need in society. I therefore concluded that to be a social entrepreneur you have to have the passion for it. There are many stories of people who quit their corporate jobs to go into social enterprise and for them the go factor is that it is a more rewarding venture in terms of job satisfaction.

 

A social enterprise may be profit making or be a non-profit making venture.  In Kenya there are a number of multibillion organizations that would qualify to be social enterprises.

 

Whether a social enterprise is formed with the aim of making money or not, it faces the same issues that all other businesses face the main one being finances. Some of the social entrepreneurs are able to finance their enterprise from their own savings but financing remains the biggest challenge for a social enterprise in Kenya. Financing is very difficult as not many lenders will lend to a social enterprise especially if it is formed with a charitable purpose. Not many equity investors will also venture into social enterprise as for an equity investor, return is what drives him to invest.  The financing options for a social enterprise are therefore very limited. I have however considered the legal issues faced by a social enterprise in as much as there are many other issues such as finances.

 

Legal Issues

The main legal issue for a social enterprise is what form of business association to use in the venture. The main forms are a sole proprietorship, partnership, company, NGO and trust. I usually recommend formation of either a company limited by guarantee or a trust. The reason for this is the corporate identity that the social enterprise gets. Furthermore, most donors would be unwilling to work with a sole proprietor due to governance issues. Donors are very keen on corporate governance. The understanding social enterprises should have is that one of the main sources of financing from them is donor funds. Therefore to meet the need of the donors on funding they can use the two forms of association. A company for example, would allow the donors to participate in board affairs and sometimes even co-own the enterprise.

 

A social enterprise faces another issue on regulatory approval. There are some ventures you cannot get in without government approval, for example you cannot deal with child matters without informing the Government. You cannot deal with conservation without getting approval from the regulator. Before beginning a social enterprise ensure that you have consulted a lawyer who will take you through whatever approvals are required for your venture.

 

In my view social enterprise is the next big thing as many organizations are increasingly looking to partner with social entrepreneurs.

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