What Is The Difference Between A Charity And A Social Enterprise?

Whether you’re setting up a charity, a Not-For-Profit or a profit-making social enterprise, the structure you choose is crucial to how you conduct your business activities. 

As there is no set rule or structure in the UK specific to these organisations, the choice you make is very dependent on what you envision for the organisation. Therefore, it is important to know whether you want to be a social enterprise or a charity as this will impact your decisions. 

In this article, we’ll go through the differences between a charity and a social enterprise. This should help you decide on how your operation can be best supported.

What Is A Charity?

Charities operate under, and are regulated by, the Charity Commission and are subject to and defined in the Charities Act 2011.

Note that the rules are different if you want to set up a charity in Scotland or Northern Ireland.

Under this legislation, an entity is a charity in England and Wales if it meets the following criteria:

1. It is established for a charitable purpose
2. It is subject to the High Court’s control over charity law jurisdiction

To satisfy this criteria, a charity must also comply with the following requirements:

1. Charitable Purpose

According to the Charities Act, a charitable purpose needs to fit one of the descriptions set out in the Act itself. There are 13 purposes:

• The prevention or relief of poverty
• The advancement of education
• The advancement of religion
• The advancement of health or the saving of lives
• The advancement of citizenship or community development
• The advancement of the arts, culture, heritage or science
• The advancement of amateur sport
• The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
• The advancement of environmental protection or improvement
• The relief of those in need, by reason of youth, age, ill-health, disability, financial hardship or other disadvantage

2.    Public Benefit Requirement

The entity can have other purposes, but these must be ancillary to and supportive of the charitable purpose. This charitable purpose must be for public benefit.

To better understand this, the concept is split into two:

• The ‘benefit aspect’ – the benefit must not be outweighed by the potential harm caused
• The ‘public aspect’ – the purpose must benefit the public in general, or a ‘sufficient section of the public’.

A charity will have a charitable purpose where it satisfies both of these aspects.

For example, the provision of goods, services, education and spiritual guidance all meet this definition.

Whether your charity fits this definition depends on your activities as well as your organisation’s governing documents, such as your constitution. So, it’s a good idea to make sure these are drafted properly and with the right help. 

3. High Court’s Charity Law Jurisdiction

As noted earlier, an organisation is only considered a charity where it is also subject to the High Court’s charity law jurisdiction. In other words, they will have the authority to make decisions about your charity, such as your purpose and the way things are run.

Unfortunately, it isn’t enough to informally agree to be bound by their jurisdiction. You’d need to make this crystal clear in your governing document (such as a Charity Charter).

For example, if your organisation is based in Scotland and most of your property is found there, you would not satisfy this requirement. Your organisation needs to show, even by way of your business dealings and locations, that it is subject to the High Court’s power in England and Wales.

What Is A Social Enterprise?

A social enterprise is an organisation that conducts business activities for some social purpose. You might think this is quite similar to a charity, but they’re quite different (we’ll cover these key differences shortly).

Social enterprises are unique as they can seek to make a profit while creating social impact. They could essentially make a profit to provide for social benefit causes or incorporate social benefit within their operations, or some amalgamation of the two. 

An example of the former is donating a portion of profits to environmental clean up, while an example of the latter could be providing greater employment opportunities to those with disabilities. 

What Is The Difference Between A Charity And A Social Enterprise?

Now that we’ve gone through the definitions and nature of a charity and social enterprise, what exactly are the key differences? 

Mission

For charities, the mission needs to be aligned with the criteria above. In other words, it needs to satisfy the charitable purpose mentioned in the legislation, the public benefit requirement and it must be subject to the High Court’s jurisdiction.

However, social enterprises are not restricted in this way. Since there is no legal definition of a social enterprise, they don’t need to satisfy a criteria to qualify as one. So, they can choose any social cause they wish to pursue.

Registration

Charities can be registered with the Charity Commission (this is the organisation that manages and regulates charities in the UK). While registration is voluntary, it is a requirement if:

• Your income is expected to be at least £5,000 a year
• You are a charitable incorporated organisation

However, there is no registration mechanism specifically for social enterprises. Both charities and social enterprises can register with Companies House.

How Do Each Get Funding?

Charities raise funds through donations, fundraising activities, trading, investing and government grants. However, they cannot get funding through investors. 

Social enterprises that operate for profit gather funding from investors who may seek to make a profit. Not-for-profit social enterprises get funding from government grants or through their own profits which are re-distributed into the functions of the organisation.

Types Of Charities

Charities can take a number of forms. When choosing a legal structure, you need to keep in mind that this will affect the way your organisation runs and its membership requirements. For example, if you choose a CIO structure, you’ll be able to include voting members beyond your trustees.

There are four primary charity structures:

• Charitable incorporated organisation (CIO)
• Charitable company (limited by guarantee)
• Unincorporated association
• Trust

Types of Social Enterprises

There are no set or defined types of social enterprises, but some of the following are examples:

• Businesses that help train or employ disadvantaged individuals
• Businesses that distribute profits to social causes like cleaning the environment
• Businesses that provide services that are generally not available to disadvantaged communities
• Businesses similar to a charity 

Tax Concessions

Charities registered with HMRC can get tax relief on things like:

• Donations
• Profits from trading
• Rental/investment income
• Profits from asset disposal
• Buying property

It’s important to note that this tax relief is only available to charities that are recognised by HMRC.

For social enterprises, however, they will likely still need to pay tax similarly to any other limited company.

Is A Charity A Social Enterprise?

The short answer is that some charities are also social enterprises. For example, if a social enterprise operates Not-for-profit and satisfies the charity criteria above (including the charity purpose), it can be a charity and register under the Charity Commission. 

The funding comes from the operations of the organisation, including fundraising activities and redistribution of profits into the functions of the organisation. 

However, the social enterprises that seek to create a profit or have a social purpose that is not aligned with any of the charitable purposes are not charities. For example, a water bottle manufacturer that distributes some of the profits to a social cause and the rest to shareholders cannot be a charity.

Which Classification Is Right For My Business?

This really depends on your individual circumstances. As you can see, there are clear legal definitions for charities which also brings about restrictions around legal structure and social causes. 

There are also some ongoing obligations you need to be aware of if you choose to be a charity. 

However, a social enterprise may not get all the tax concessions that may be available to charities. 

Need Help?

Working out the key differences between a charity and a social enterprise can get a bit tricky, especially if you’re both! It’s important to understand the nature of each, so you can conduct your business activities in a way that is compliant with the relevant laws. 

If you need help, reach out to our team for a free, no-obligations chat at [email protected] or +44(0)2034321860. 

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