The Pros and Cons of Starting a Social Enterprise

According to the World Giving Index, the United States has been the world's most generous country over the last decade. In 2019 alone, individual Americans gave nearly $450 billion, while corporations donated another $21 billion to charity.

This desire to give back has dramatically impacted how business is done in the U.S. From nonprofits to socially driven for-profit corporations, there is a broad spectrum of socially conscious organizations looking to encourage giving and drive real social change. Recently, a new model has emerged that blends both nonprofit and for-profit goals. It's called social enterprise.

What Is a Social Enterprise?

A social enterprise is a hybrid of a profit-driven corporation and a socially-driven nonprofit. It's organized to make a profit, but instead of focusing on paying dividends to shareholders, a social enterprise's primary focus is to benefit society or the environment. This creates a dual purpose for social enterprises to maximize both profits and social impact.

History of Social Enterprises

According to a University of Pennsylvania study, this market-driven approach to doing good first appeared in the U.S. in the 1970s. Initially, social enterprises were considered a way to help circumvent the need for government funding. These businesses are structured to rely on commercial revenue to fund their philanthropic mission more sustainably and without the need for donations or grants.

Over the years, many social enterprises have positively impacted everything from climate change to affordable housing. Many well-known companies attribute their growth and success to their socially-minded efforts, including shoe retailer TOMS and eyeglasses retailer Warby Parker. Both of these companies follow a "buy a pair, give a pair" business model in which they donate a pair of their products to those in need for every pair bought.

Pros & Cons of Social Enterprises

While many companies have found success and done much good with the social enterprise model, this type of business is not for everyone. Below are some pros and cons of operating a social enterprise.

Social Enterprise Pros

When done correctly, a social enterprise is a way of sustainably funding efforts that positively impact individuals, communities, and the environment. Owners, customers, and employees generally prefer social enterprises over traditional business structuring for some of the following reasons.

Helps Drive Change

Many entrepreneurs can get burned out or lose their sense of purpose after starting a business. Social enterprises keep owners grounded with a mission. It can keep those involved motivated as they see real change happening because of their efforts.

Built-in Marketing & Brand Identity

When people connect with a brand, it can help create loyal fans for life. Having a strong brand identity associated with a cause will go a long way to garner new customers' attention. Likewise, charitable efforts can help bring free publicity and name recognition to a business as they first start out.

Added Connection With Customers & Employees

Communicating a brand's mission to do good can help increase brand loyalty for customers and employees. This is especially important if your business is marketing to millennials. According to one study, 81% of millennials want to spend their money with socially responsible brands that have displayed good corporate citizenship.

Social Enterprise Cons

While social enterprises do a lot of good, they are not without some disadvantages. Below are some of the reasons you might want to choose a different business structure.

Competing With Corporations for a Share of the Marketplace

Social enterprises still must compete in the marketplace and are under the same rules and obligations as more profit-driven companies. While a desire to help with a social cause is positive, it may take time and money away from competing in a cutthroat industry.

No Nonprofit Tax Breaks

Being organized as a social enterprise compared with a more traditional nonprofit may mean that the company could miss out on tax breaks and other incentives not available to a for-profit business.

Examples of Social Enterprises

Swyft Filings works with many social enterprises that find unique ways to give back. Below are just a few examples that we've recently highlighted for their inspiring missions.

SIMPLi

SIMPLi works directly with farmers in communities around the world to bring food to U.S. businesses and consumers. They handle the entire food supply chain, cutting out the middlemen to provide competitive prices to consumers without putting unfair financial pressure on farmers.

Fresh Greens Farm

Fresh Greens Farm is an urban farm providing fresh, healthy, tasty microgreens to residents of Memphis, Tennessee. They donate microgreens weekly to local community centers that feed the hungry and poor.

1For1 Water

1For1 Water sells natural spring water in eco-friendly, biodegradable bottles. For every bottle bought, they donate one liter of clean, sustainable drinking water to people in desperate need — one for one. The company also devotes time, money, and resources to digging wells in developing rural communities.

Lord Jameson

Lord Jameson is a small, family-owned business on a mission to elevate the bond between dogs and humans. They do this by making high-quality, organic dog treats and donating the proceeds to animal welfare organizations.

Key Takeaways

If you are looking for ways to distinguish a social enterprise from another structure, here are a few key takeaways to remember:

• Their mission is to do good through social or environmental efforts

• Maximizing profits is not their primary purpose

• Unlike a nonprofit, they work to generate revenue, but those profits are used to help fund their mission

For more on this unique business structure, read our article, Business With a Conscience: the Rise of Social Enterprise.

Start Making Your Own Impact

If you have an idea to start a business that also helps give back, then a social enterprise may be the right fit. To start, you will need to form a business entity. The simplest and most popular way of doing this in the U.S. is by forming an LLC. This business structure helps provide liability protection and tax advantages for their owners. When you create an LLC with Swift Filings, we'll do the heavy lifting for you, with many people forming their very own LLC online in just 10 minutes.