“Legalizing” Social Enterprise

“I want to make a social impact.” — That’s almost a trend right now in the minds of millennials, young professionals and students in general. It’s cool to care, and I love that this is becoming a thing. I am proud (or guilty — however you want to view it) of falling under this spell. But, one thing that bothers me about this hypnosis is the absence of an official, legal recognition of the golden child that is social enterprise.

Yes, “social impact” is and should remain vague enough as anything that does good for humanity and / or the environment. “Non-profits” have a whole IRS section associated with them and are wonderfully defined — I do have issues with calling them non-profits vs something more optimistic like “for-purpose” or “for-impact,” but that’s just semantics — am content with their legal formalization. Woohoo. But, why can’t we do the same for social enterprises?

Social enterprise to me is the future. The idea of having a financially-sustainable social impact business is mesmerizing because it is arguably immune to a sometimes-crippling dependence on donations and grants. What is even more enticing is that a social enterprise is still open to donations and grants, but those donations and grants can be used on growth strategies instead of sustenance — investment in scale, prototyping a new idea, or buying a Super bowl commercial (why not?)

The issue amidst this gold dust is that there is no legal definition of a “social enterprise” in particular. I think it is time we have one. Just like we have a section for non-profits in the IRS, it is time to make room for social enterprises as well, and not just in the U.S., but around the globe. Throw in some significant tax-breaks too if possible. Incentivizing social enterprise can play a key role in increasing the rate at which we make the world a better place.

And a lot of the hard work is already done. B-corps, ironically a non-profit organization, is already doing a stupendous job of certifying organizations that put social impact over profit. Benefit Corporation, almost an offshoot of B-corps, goes a step further to provide legal protection to social organizations from shareholder law-suits.

There is also a somewhat universal acknowledgement of what a social enterprise is, or at least everyone is beating around the same bush. For instance, Stanford Social Innovation Review — arguably the leaders in inspiring leaders of social change — took a whack at the definition, and hit on the right nodes — financial sustainability and primacy of social impact. But they also roped in this complex notion of “shifting the equilibrium” (like Apple did with the iPhone, but in the social impact space). In theory, this equilibrium-shifting ambition is hunky-dory, but puts excessive pressure on a social enterprise and severely filters out a lot of social businesses. Plus, it is excessively subjective in an already subjective space, and does not help if we want a legal corporate framework for social enterprises. Mohammed Yunus also threw in his definition of social business (yes, some people say business, some enterprise, semantics again, but let’s get our nomenclature consistent already FFS). He is also in the same ballpark and stresses on the importance of putting social impact first, and over (not side by side) profit.

My personal view is very aligned with this. Putting social impact over profit also separates social enterprises from enterprises that have a social impact. That’s not just a play on words, that’s real. Google can have a tremendous social impact, but it is not a social enterprise because its primary purpose is not to drive social change. It wouldn’t deserve the shiny gold dust.

The other breakthrough in this space is the focus on a stakeholder-centric model over a shareholder-centric model. Jaqueline Novogratz, the founder of +Acumen, embodied this in her year-end note to donors:

“As it becomes clear that business must move away from shareholder primacy, we are doubling down our investments in companies that unapologetically consider all stakeholders — starting with the poor — at the heart of their purpose.”

So, there we have it — a concept that has significant differentiation, a definition that is somewhat consistent across the board, an organization that is doing a stellar job at certifying social impact organizations and a level of legal protection for “Benefit Corporations” in many states in the U.S. The only thing left is to STOP beating around the bush, take motivation from the precedence set by non-profits / for-purpose organizations and write out a section 501(c)(15) (or whatever) that legally sanctifies social enterprises. Like non-profits, they should receive some sort of a tax-break, maybe not a full tax-exemption, but a significantly lower tax rate on their net income. They should be allowed to have an IPO, but with enough controls in place to ensure their social impact vision and their key stakeholders are not compromised. This is crucial to encourage and incentivize social enterprises.

We need to use all our ever-increasing human IQ and EQ to come up with financially sustainable solutions that put real social impact first. We need to differentiate true social enterprises from wannabe-social enterprises. Or else, we’ll have Joe’s Carwash call itself a social enterprise because they use natural tap water.

Personally, I hope that fifty years from now every single enterprise is a social enterprise, especially in the developed world. And no, not the Joe’s Carwash kind.

P.S. Impact Investing — you’re next.