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Dee Holmes

Solicitor

BSocSc, LLB, LLM (Hons), STEP Affiliate, MInstD

June 2019

The Impact Initiative and Structuring of Social Enterprises

This article provides a summary of the recent Impact Initiative Report, produced for the Social Enterprise Sector Development Programme.

This partnership between the Department of Internal Affairs (on behalf of the Government) and the Ākina Foundation is supported by the Community Enterprise Network Trust (CENT). The report provides practical examples for different Social Enterprise (SE) in New Zealand including those operating as a charity, through a mixed model of charity and business, or business only.

SE is about prioritising impact as well as profit, and New Zealand has legal structures that enable organisations to prioritise one over the other (charity or business). But an SE is not a natural fit, with the SE either utilising charities legislation (Charitable Trusts Act 1957 and Charities Act 2005) or Company Law (Companies Act 1993) or a combination of both. Without SE specific legislation, the overall impact that the organisation wishes to achieve can be limited due to the current legal structures. The SE organisations interviewed for the report often had to choose between being one or the other, or blending the two legal structures together. The report sought to understand how the current law reflects this segmentation within the ecosystem that SE exists. The research found that there were three core themes relating to legal structure: mission, funding and innovation.

There were a variety of broad and far-ranging missions that the organisations interviewed for the report were involved with. The notion of changing the world through the environment in which the SE exists and being purpose driven was highlighted in the report. This is different from that of a charity, which provides help and support on an issue. This difference is not a natural fit and could be described as trying to fit a square peg into a round hole. Trying to fit the mission with the charitable purposes required to be registered as a charity can be difficult, as can reflecting mission through a company structure. The difference between a charity and company is the balance between profit and not-for-profit. However, running a sustainable company and turning away from the traditional charitable model can also impact public perception about what the SE should and shouldn’t be, and/or the mission that it is trying to achieve.

The funding model of the SE also impacts on the relationship of legal structures, especially when equity and investment is required. For those planning on being a profit-with-purpose business, there is an automatic barrier to holding charitable status. These include the misconceptions between the lack of business acumen and efficiency for charities, and the idea that organisations that do good do not make a profit (or shouldn’t). Doing good is seen as being limited to charities, because for-profit businesses who do good are only being ‘superficial’ or ‘trendy’ to help with marketing. Starting up an SE under a company also means limited opportunities for philanthropic funding, with banks also unwilling to finance ‘do good’ businesses. For those who hold charitable status, funding from banks is also limited due to the perceived lack of business acumen. For those seeking to carve out a profit-for-impact business, they are limited by an ability to build equity in a business which lenders then use for security. Investors are also looking for a return on their contributions, which may not always be possible.

While the SE sector makes a contribution to New Zealand, the ability for innovation is being stunted by the challenging regulatory and funding environment. This is not caused exclusively by legal structures, but can be improved if more options and support were available. The importance of innovation is driving SE to trade and pursue their purpose despite the challenges detailed above. The solutions involve continuing, but also developing and expanding education and support, evolving the law into a fit-for-purpose SE model, and providing more incentives for impact companies.

If your organisation is wishing to set up a SE or change the current structure of your SE model we can help. At Grayson Clements we have experience structuring and designing SE to reflect the mission and innovation within your chosen funding model.

The Impact Initiative Structuring for Impact: Evolving Legal Structures for Business in New Zealand.   Written by Dr Jane Horan, Amber Hosking, Steven Moe, Jackson Rowland and Phillippa Wilkie.

For more information about the programme visit www.theimpactinitiative.org.nz

Dee Holmes

Solicitor

BSocSc, LLB, LLM (Hons), STEP Affiliate, MInstD