How To Establish a Social Enterprise Venture?

A few days back, our Founder Minal Madan spoke at the Conference 1.0 about ‘The Emerging Role of Social Entrepreneurship, in the Era of Pandemic’, organised by SK Associates and Group. To view the entire panel discussion, click here.

For those of you who could not attend the conference and in general for anyone involved with Social Entrepreneurship, here are the basic legal parameters for kick starting or growing a social enterprise in the Startup industry in India.

A social enterprise, simply speaking is an enterprise undertaking business for a cause that will benefit the society or its people at large.

Social entrepreneurship is a combination of different and unique business ideas which are connected closely with the society and its people with an aim to provide cultural and social solutions.

Generally, in a social enterprise success is measured in terms of solutions provided to the society at large, in addition to profit and revenue generation.

No, there is no law in India that makes it mandatory for a social enterprise to not make a profit or to register as a not-for profit entity.

A social enterprise can register as any entity, for profit or not for profit. What differentiates and enterprise from a social enterprise, is that in a social enterprise the profit (if any), is re-used by the enterprise as funds for the social cause the enterprise is engaged in.

Further, for any business to survive the said business needs to generate revenue to sustain, grow and to continue to provide social solutions for the foreseeable future.

Trust: registered under The Indian Trusts Act, 1882, a trust can be either be a private trust (commonly known as a ‘foundation’) or a public charitable trust.

In a trust format, there is usually a ‘donor’ that donates to the trust and the ‘trustees’ that use the funds for the cause as per the ‘trust deed’.

Society: registered under The Societies Registration Act, 1860, can be formed by seven or more persons associated for inter alia any literary, scientific, or charitable purpose. Please note that a society is not limited to charitable purposes but may extend to multiple other fields.

Section 8 Company: registered as a not-for profit company with the Ministry of Corporate Affairs under the Companies Act, 2013, for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object and whereby they apply any profits into furthering the objective.

Normal company/LLP: registered as an ordinary company with the Ministry of Corporate Affairs under the Companies Act, 2013 or The Limited Liability Partnership Act, 2008 (as the case may be). The charter documents of the company/LLP can provide for clauses like (a) re-infusion of profits in the company for further expansion; or (b) using the profits to donate to a trust etc, if the said company/LLP is engaged in social causes.

Yes, social enterprises can raise funds, including foreign funding.

As we have seen from the Trust model above, there needs to be a ‘donor’ who will provide funds for said trust to function. The reason I am referring to the trust model here is because, trusts are one of the oldest forms of social enterprise and they still understood long back, as they understand today – the importance of funds being available, especially for social causes.

‘Crowdfunding’ and ‘Impact Investors’ are two of the most popular models in today’s time for any social enterprise to raise funds for a cause, biggest example being Ketto.

The ‘earned income’ model has been very popular in the start-up circles. Under this model the company makes revenue by selling a product or a service, that will contribute a part of the profit for social causes.

TOMS – a shoe company and for-profit social enterprise, has been the biggest example of this model in the market, wherein for every pair of shoes sold, they would donate another pair of shoes, under there ‘buy one and give one model’. The basic idea being very simple i.e., to create revenue through customer purchase.

“Social Impact Bonds” are also gaining popularity as a hybrid model between the government and the private sector to improve standards of living for people in a country.

The base question for any enterprise (for profit or not-for-profit) and an investor remains constant, through time i.e., can the said social enterprise generate enough revenue and attract enough investment to cover their costs and grow their activities and, for the investors to get back their investment amount along with some profit.