Structuring your Social Enterprise

By Nishant Kaul, Espark-Viridian, India

Execution of a social venture often creates a vision to actively contribute to the social and economic development of the communities in which the entrepreneur operates. The aim is to build a better, more sustainable way of life for the society and a value proposition for the venture. Chanakya, a mentor, philosopher and economist believed that it’s important to have a sound philosophy in order to become a successful social entrepreneur. For such a venture profits are just by-products and not its final goal.

In Cannibals with Forks, author John Elkington convincingly argues that future market success for Social Ventures will often depend upon the venture’s ability to satisfy the three-pronged fork of profitability, environmental quality, and social justice, thus aiming at social development and sustainable growth through beneficial practices toward community and creating an economic value for itself.

A leading manufacturer of home appliances aimed to reinvigorate growth through crossing several social barriers, attracting more than 80% of households that lacked basic appliances such as refrigerators. Thereafter they developed a super economical and portable refrigerator that stayed cool for hours without power and consumes half the energy, thus creating a product, which benefits the society. With this kind of model and product, implementation of a social venture goes beyond revenue generation and engages in deeds that inspire social good. Such entrepreneurs aim to embrace responsibility for corporate actions and to encourage a positive impact on the environment and stakeholders.

Organisational Forms

Since India is an emerging market with wide scope and opportunities for both Indian and foreign investors, the Government of India offers entrepreneurial friendly policies which make invasion and growth of entrepreneurs in India easier.

Therefore before setting up a venture it is very important for the entrepreneur to prepare a blueprint. This blueprint is referred to as a capital structure which serves as a tool for planning and execution. In India the following forms of organisational structure are most suitable for an entrepreneur to execute a social venture:

Not for Profit Organisation

A Not for Profit organisation can be registered in India as a Society, under the Registrar of Societies or as a Trust, by making a Trust deed, or as a Section 8 Company, under the Companies Act, 2013. The benefits of Not for Profit organisation are:

  • Tax Benefit as the Income Tax Act, 1961 gives all categories equal treatment, in terms of exempting their income and granting 80G certificates, whereby donors to non-profit organisation may claim a rebate against donations made.
  • Governing Body i.e. all categories are governed under respective laws and instruments in forms of Charter, Trust Deed and Memorandum and Articles of Association are executed for smooth functioning of the venture.
  • Simple Structure as its incorporation is less complicated, but it still requires clarity about mission, operating rules, and procedures for decision making.
  • Donations, which help such organisation for philanthropic funding.

Private Limited Company

Incorporated under the Companies Act, 2013, a Private Company has the following features:

  • Limited Liability i.e. the entrepreneur is legally responsible to limited amount of company’s debt which does not involve the entrepreneur’s personal assets.
  • Must have a minimum paid up capital of INR.1 Lakh, therefore making it easier to start the venture with minimum investment.
  • Borrowing Capacity i.e. in this form an entrepreneur can enjoy better avenues for borrowing of funds. Banks and Financial Institutions prefer to render financial assistance to a company over other forms of organisational structure.

Limited Liability Partnership

Governed under Limited Liability Partnership Act, 2008, a Limited Liability Partnership popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organisation. Such form of organisation is a type of strategic alliance where an investor invests with a view of combining financial and social returns on their investments.

An LLP has the following features:

  • Low cost of formation
  • Is easy to establish and even easier to manage & run.
  • No requirement of any minimum capital contribution and hence a venture can get a boost with the least amount of capital in hand.
  • Less compliance level and least government intervention.

Organisational Models

A social entrepreneur sets up and seeds an innovation that addresses a market or government lack of success. In doing so initially, the entrepreneur engages the society to drive the innovation forward through outside philanthropic funding.

The entrepreneur may further aim at including some cost-recovery through the sale of social or ecological goods and services to target population groups. While profits are ideally generated, the main aim is not to maximise financial returns but to persevere and reach more people in need.

Finally to be able to sustain and grow successfully the entrepreneur should mobilise other sources of funding in the form of equity issuance or taking Loans. The entrepreneur of an social venture should therefore seek an investor who is interested in combining financial and social returns on their investments.

Philanthropic Funding                             Good and Services                              Issuing Equity
Philanthropic Funding        Sale of Social Goods and Services   Issuing Equity & Taking Loans

 

Conclusion
To sum up, a game changing social venture’s model needs to be implemented in such a way that the benefit derived to the society isn’t merely a charity phenomenon but an action that an organisation shows in its strategy and actions. Furthermore before incorporating a venture it is really crucial that an entrepreneur prepares a blueprint of his idea and its organisation’s capital structure. This blueprint serves as a tool for making the social venture sustain, grow and maximising financial returns.

  • Share On