1.1 Equity for social enterprises
All enterprises need risk capital to start, to grow, and to be sustainable. This capital is usually provided by the shareholding owners of the enterprise, plus funding from lenders and, of course, from the business itself, reinvesting its profits. Risk capital allows the enterprise to ride the ups and downs of development, which are to be expected when pursuing ambitious, challenging or innovative business goals.
One of the main reasons why social enterprises can find it difficult to compete with private enterprises is their lack of risk capital. A root cause of this under-capitalisation is the belief that social enterprises cannot, or should not, have shareholders. Equity investment is considered anathema, because shares give legal title, meaning that the enterprise is owned, controlled and run in the interest of investors.
Social investment institutions have developed alternatives: quasi-equity, patient capital, and social impact bonds. But most of these products are, ultimately, a form of debt. And indebtedness is a poor form of risk capital, especially for social enterprises, where the high levels of profitability that are needed to repay debt might be incompatible with their social aims. All debts, however patient, eventually have to be repaid.
Social enterprises are defined as businesses that have “primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners”.
The purpose, objectives and behaviour of a social enterprise are enshrined in its legal form and governing document. There are many different forms of social enterprise, including charities, charitable incorporated organisations, not-for-profit companies limited by guarantee, community interest companies, co-operative societies, and community benefit societies. Each of these forms has a distinct approach to social objectives, ownership, control and capital finance.
The term “community shares” refers to non-transferable, withdrawable share capital; a form of equity unique to co-operative and community benefit society legislation. This body of corporate law provides many of the same features as company legislation, such as corporate body and limited liability status, but it also has some unique features, especially in its provisions for members and share capital.
Community shares are an ideal way for communities to invest in enterprises serving a community purpose. The remainder of this section explains how community shares work and why co-operative and community benefit society legislation is the preferred legal form for community shares, the business model underpinning community shares, and the many starting points for community share initiatives.
If you have any questions or suggestions for new information you would like to find in the Handbook, contact the team by email at [email protected]