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The nuts and bolts of setting up a social enterprise

Emma Wilkinson takes a look at what social enterprises can do for PBC

Emma Wilkinson takes a look at what social enterprises can do for PBC

What is a social enterprise?

Social enterprises are businesses, but unlike limited companies that make profits to line the pockets of shareholders, they are driven by environmental or social principles, and surplus funds are reinvested to further those goals. So the community benefits from any profits made.

The Social Enterprise Coalition (www.socialenterprise.org.uk) says there are some 62,000 social enterprises in the UK with a combined turnover of at least £27bn.

Mo Girach, social enterprise lead for the NHS Alliance, says: ‘There are three elements to social enterprises. They are designed to tackle social objectives, such as health inequalities. Any profits made are reinvested in the local community. And local people and staff have the ownership of their services.'

If you generate the bulk of your income from trading and use most of your profits to further social or environmental goals, your organisation might be classed as a social enterprise.

Models for a social enterprise include:

• A community interest company (CIC) – a legal form created specifically for a social objective, overseen by the CIC regulator to ensure it does not deviate from its mission and that its assets are protected (www.cicregulator.gov.uk).

• Industrial and provident society (IPS) – this is the usual form for co-operatives and community benefit societies, and is democratically controlled by members.

• Companies limited by guarantee or shares – these can have a social mission written into their memorandum and articles of association, but are not regulated.

• Group structures and charitable status – in these cases the tax breaks associated with charitable status can be an important factor.

How do they differ from a limited company?

The key difference is that a social enterprise is set up to fulfil a social goal rather than a financial goal. But social enterprises are businesses and need to make a profit to be competitive, remain afloat and to keep investing in their social vision. They are not an easy option for someone wanting to avoid the legal technicalities and governance arrangements of a limited company.

Dr Mike Dixon, chair of the NHS Alliance, says: ‘It's a way of setting out business principles but making sure the business is there for the patients and not for shareholders.

‘The steps to setting one up are similar to those for a limited company – you need a lot of advice, you need to decide your basic vision and what sort of partnership it's going to be, and who is going to be a part of it.'

Mr Girach adds: ‘A true social enterprise has in its constitution that profits are reinvested and there are no shareholders. That is a key point. There might be shareholders but that is in terms of ownership rather than profit so they are more social enterprise members.'

What are the advantages for PBC?

Setting up a commissioning group under a social enterprise model means GPs are less likely to be accused of lining their own pockets – a suggestion that has surfaced repeatedly in the past few years. It may also be an easier route for organisations wanting to work as both provider and commissioner.

Dr Dixon explains: ‘It shows that the profit motive is not an issue but at the same time gives a businesslike approach.

‘There's another element that's quite important if you are a commissioner.

I think it allows a certain blurring of boundaries when it comes to also having a provider role.

‘Social enterprises are becoming more common in PBC – not rapidly but PBC has been a slow process – and they are very logical.'

Richard Oliver is business manager at Nene Commissioning, a not-for-profit community interest company of 76 practices in Northamptonshire that started life as a limited company.

‘Trying to get 76 practices under one umbrella is a challenge and there was a huge amount of discussion about the structure that might be suitable. We started off as a limited company because it was a known legal entity but we decided that didn't reflect why the organisation got together. So we looked around to see how we could demonstrate it wasn't just a money-making exercise for doctors but that it was about patients.

‘The model that most clearly suited what we already had but that could move us into the social enterprise arena was a community interest company. We retained nominal shares and there is limited liability but at the same time the money is retained for use in the business.'

Any disadvantages?

Disadvantages to being a social enterprise may have more to do with misconceptions surrounding their function rather than a problem with the business model itself.

‘I think people don't understand the calibre of credibility and true benefits they bring and think they're small businesses,' says Mr Girache.

‘The other problem is commissioners don't embrace social enterprises and tend to go with what they know, for example the foundation trust, which are mutuals.

‘There is a lot of work to be done between commissioners and providers in raising awareness of social enterprises. This is something the Department of Health's social enterprise unit is working on.'

Dr Dixon agrees: ‘A lot of people see social enterprises as rather woolly and something done by people in socks and sandals rather than business suits, but that's not true and there are lots of examples of successful social enterprises. Look at John Lewis.

‘The other thing is that there are people in social enterprises who are not as they seem. It is easy to be a wolf in sheep's clothing. If it does take off we will have to look very closely at social enterprises and check people are who they say they are – not one thing masquerading as another.'

Why has the government been so keen on social enterprises?

It is not just the current government that is keen on PBC groups setting up social enterprises, with the announcement of a £100m pot for health and social enterprises in 2007. The Conservatives have also hinted they may be the way forward, with talk about social responsibilities as well as a focus on the ownership agenda.

‘I think there are a number of reasons the Government is keen on social enterprises,' says Mr Girache. ‘The ownership factor is a big reason. Being able to say to people "over to you – deal with it". There is an incentive for people to get a little bit back and also a feeling that in some policy areas, such as health inequalities, things haven't moved. PCTs have been working on these for 20 years and sufficient progress just hasn't been made. Social enterprises are an alternative.'

So what are the first steps in setting one up?

Nene commissioning's Richard Oliver says the first thing to do if you are interested in setting up a social enterprise is to make sure the PCT is on board with the proposed change. Then you need to decide what kind of organisation you want to be.

‘Do a lot of preliminary work before you see a solicitor as there is a lot of information out there, for example on the Social Enterprise Coalition website, to inform your decision. Then you need to get legal advice, and I would recommend choosing a solicitor with national experience.'

Dr Mike Dixon adds: ‘You need to form the right relationship first before you do anything else. There is no point hoping to gel with practices that don't talk to each other.'

Are there any pitfalls?

With the appropriate business and legal advice and a clear plan of what the company wants to achieve, the process should be fairly straightforward, but there are potential problems to consider before taking that leap.

‘People often think social enterprises are not businesses but a form of charity that doesn't have to make a profit – this is nonsense,' says Mr Girache.

‘You need to think who your competitors are and what you have over them. Social enterprises focus on quality rather than feeding shareholders' pockets.

‘The other thing is to do proper market research. You will have to deal with some aggressive providers and if you don't understand the market and what your niche is, you will fail.'

Dr Dixon advises: ‘Don't expect organisational form to be the solution to everything and don't be too optimistic about what you can achieve; be realistic.'

Mr Oliver adds: ‘When it comes to legal advice, make sure you only fund what you need to as you can incur a lot of costs.'

What about funding?

To get off the ground, in addition to PCT resources, there are various sources of funds for social enterprises, including patient capital, grants and favourable loans, details of which can be found in the Good Deals 2009 Social Investment Almanack.

In June 2009, Social Investment Business took over the management of the DH's social enterprise investment fund, and along with Partnerships UK is responsible for the £100m fund (£70m is now left) for start-up and existing social enterprises in the health sector over the next three years.

But the NHS Alliance would like to see more incentives to catalyse the social enterprise model.

Dr Dixon explains: ‘There are sources of funding available, for example from the social enterprise unit at the DH, but we produced a report three or four months ago pointing out there should be preferential treatment for people funding social enterprises in the form of tax advantages, the ability to get capital and VAT relief, in order to make social enterprises build a bit faster. It needs to be pushed further.'

Richard Oliver says: ‘Our funding comes through the PCT like any other PBC cluster and is based on population size – which for us is 650,000.

‘The advantage of being so big is that our money is pooled so we can fund a team working on our behalf rather than having to do it ourselves in house.

‘We looked at it and realised there was no way we were going to be able to do that and the day job of looking after patients, but by pooling the resources we can have a much bigger team – there are 10 people here – running the PBC side of things.'

Emma Wilkinson is a freelance journalist

More information

The Third Sector has published The Social Investment Almanack to showcase the different types of social investment.

It includes a comprehensive directory of social investors, finance providers and support organisations as well as many examples of different models.

Good Deals 2009: The Social Investment Almanack

http://www.socialenterpriselive.com/supplements/good-deals-2009-the-social-investment-almanackGood Deals 2009: The Social Investment Almanack

al-investment-almanack

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