Social Enterprise vs Non-Profit Organisation

Planning to make a positive difference in the people around you? Solving the many societal problems that the world is facing currently, from disconnected marginalised populations, facing discrimination and exclusions, social initiatives can assist in resolving the issues faced.

Setting your business in the right entity will definitely aid in your cause, and provide the best legal structure to reach your goals.

The 2 main types of entities you can consider setting up are either a Non-Profit Organisation or a Social Enterprise, and understanding which one is right for you is crucial to bring your social initiatives to light with the best business practices.

Often than not, people get confused between a Non-profit Organisation, Social Enterprise and Charities. Even though they may seem similar on the surface, there are various distinctions and business setups.

 

1. What is a Non-Profit Organisation (NPO) or Charity?

Charities function on a non-profit basis and can only solely operate for charitable purposes. All activities by the NPO or charity serve to benefit the public only and they cannot generate profits for their shareholders through the sale of products and services.

Classified as non-profit organisations in Singapore, charities are legally constituted organisations whose sole purpose is to support or engage in activities of public or private interest without any commercial or monetary profit. When NPOs earn a “profit”, or more accurately called a surplus, it is to be retained by the organisation for future activities and more importantly, does not distribute any earnings amongst its members.

NPOs can be registered as

• a public company limited by guarantee under ACRA,
• society under the Registry of Societies, or
• charitable trust.

Charities and Institutions of a Public Character (IPCs), which are exempt or registered charities able to issue tax-deductible receipts for qualifying donations to donors, have to abide by the Charities Act in Singapore.

For an NPO to be considered a charity, it must apply for charity status. Being a charity is a matter of status, not of organisational structure. Charity status brings certain benefits such as

1. All registered charities in Singapore enjoy automatic tax exemption.
2. It gives a standing and credibility to the organisation.
3. Charitable status is beneficial for fundraising. Many grant-giving trusts and foundations can only give funding to recognised charities. “Charity” is a very emotive word and can be very persuasive in encouraging the general public to donate.

Characteristics of an NPO

• Registered and institutionalized
• Created solely for charitable purposes
• Mainly dependent on the government and donations from the public for the funding of the organisation
• Does not engage in any for-profit activities

Pros of running an NPO

• As an NPO is created solely for the good of society, it is able to gain trust and fundraise from the public by being registered and institutionalized.
• NPO with charitable status cannot use assets for any purpose other than the pursuit of philanthropic objectives. A charity’s founders and members can never use its assets for personal benefit. This separates the division between ownership and operations clearly.

 

Charities benefit from a variety of tax reliefs, including:

1. – exemption from corporate tax on surpluses from operations undertaken in the course of charitable provision
2. – Certain sources of grant funding are open only to organisations with charitable status

 

Cons of running an NPO

• There are several restrictions on the work that can be carried out or funded for the NPO. NPO that has achieved charitable status, must comply strictly with the regulatory requirements, which include the proper preparations of annual accounts and returns.
• Trustees on the board of the NPO, must not be paid unless approved by the Charities Commissioner, thus having a charitable status for the organization may be detrimental to the founders who want to receive a salary and retain control of the organization. However, founders that is either chief executive or directly involved in the operations, can be considered an employee of the charity, and receive compensation that can be dismissed by the board
• The founder who sits on the charity board shares control and responsibility equally with all the trustees on the board.
• The primary source of the initial capital must come from either donation or raise by the board of trustees during the setup of the NPO.

 

2. What is a Social Enterprise

While NPO operates in a strictly non-profit capacity, Social Enterprise is a cross between conventional for-profit enterprises and non-profit organizations where it may engage in profit-generating activities.

The main difference between a Social Enterprise and a conventional business entity is that you want to run a business that contributes to society meaningfully without the constraints of running an NPO.

While an NPO is often reliant on donations to fund the organisation’s operation, social enterprises aim to be self-contributing while serving their cause.

Characteristics of Social Entreprises

• Directly manufacture goods or provide services
• Have defined social objectives and use responsible ways to accomplish them
• Profits and earnings from the business are required to stay on top of the business as social enterprises often do not depend on donations
• Profits are not the business’s sole objectives. Social enterprises often have 3 main aims;- Economic, Environmental and Social which are used to evaluate the business performance

Pros of Social Enterprise

• With a social cause as a business core, Social Entreprises make an impact on society while generating profit as a business
• A unique or powerful social cause allows the business to attract people’s attention
• While it can be difficult to sustain a social enterprise, having a sound business plan with a strong social cause as well as a proper marketing strategy, can help with the building of the business
• There are options to achieve funding through grants by the government as other charitable organization

Cons of Social Enterprise

• Running a social enterprise is the same as any other business. For it to succeed, it must be profit-generating. And like any business, there is a need to compete with other companies in the market and is subjected to the same challenges and risks faced by other businesses.
• While expected to run as a conventional business, there is the pressure to keep up with the social enterprise’s social cause

 

Taxes faced by NPO and Social Entreprises

While only charities that is incorporated as charitable trusts qualify for automatic tax exemption, Social enterprises are subjected to the same corporate tax as limited liability companies.

Singapore served as a good country to set up a social enterprises with her relatively low corporate tax of a flat 17% rate on chargeable income and does go lower if the entity is qualified for any other tax reduction

 

Table of comparison between NPO and Social Entreprises

	NPO	Social Enterprise
Characteristic	·         Solely engaged in charitable causes ·         Dependant on donations ·         Operate on a non-profit basis	·         Social Objectives as core business aims ·         Profit-generating to remain operationally viable ·         Manufacture, and sell goods and services directly
Pros	·         Public Recognition and trust ·         Direct positive social impact ·         Corporate Tax Relief	·         Profits generation is allowed ·         Can generate positive social impact ·         Autonomy of corporate governance as compared to NPO ·         Access to grants from the government and other organisations
Cons	·         Restrictions and requirements that must be strictly observed ·         No fixed salary for the board of trustees as well as monetary benefits such as equity investment	·         Is considered a conventional business  that is subjected to market movement ·         There are more regulations that need to be followed compared to a conventional business entity
Incorporation	May registered as Public company limited by guarantee, society, or charitable trust	Must register as a conventional business entity
Operations	·         Solely function as a non-profit generating organization ·         No monetary or commercial profits to be generated by activities that are of public or private interest	·         Business revenue is generated through the sales of goods and services ·         Social aims are incorporated into the business objectives of the social enterprise

 

 

Final Thoughts

If you are looking to set up a business that has a strong social cause in mind, setting up a Social Enterprise can be a way to go, while striving to achieve social impact as well as building a profitable business.

Let Mi2U Business Support handle the administrative and accounting aspect of your business while you focus on creating a better society.