One in five UK SMEs aspire to make a positive social impact

Some businesses make money while also trying to solve a social or environmental problem. They might create jobs for people facing disadvantage, provide services that address a community need, tackle an environmental issue, or put their profits towards a particular good cause.

This is the basic idea behind social enterprise: businesses that trade commercially but also put a defined social or environmental purpose at the heart of what they do. There are currently around 100,000 social enterprises across the country, collectively employing 2.3 million people and generating £60 billion in turnover. 

But new research from Social Enterprise UK (SEUK) suggests the model could extend well beyond these businesses, with more than a million UK SMEs potentially able to make the transition.

For SMEs already trying to balance commercial success with a wider purpose, that raises some practical questions: what actually changes when that purpose becomes part of the formal business model, and is becoming a social enterprise a good fit for every business?

What makes a business a social enterprise?

The distinction isn't simply whether a business does something beneficial. Many conventional companies run charitable initiatives, reduce their carbon footprint, or support local projects without altering their corporate structure.

To formally qualify as a social enterprise under SEUK guidelines, a business must meet four structural criteria:

• Set out its social or environmental mission in its governing documents;

• Operate independently of government control;

• Earn more than half of its income through commercial trading;

• Reinvest or donate at least half of its profits towards its core mission.

Such organisations operate across almost every sector of the economy. Examples range from solar-powered bus operators and creative agencies training underrepresented talent to coffee shops employing individuals experiencing homelessness and community health providers delivering affordable healthcare.

The potential commercial factors

For an SME that already prioritises social or environmental goals, formalising that commitment could have implications beyond the purpose itself.

According to SEUK, social enterprises can benefit from enhanced reputations, customer loyalty and employee engagement. They may also be able to reach new markets and access funders and finance providers motivated by social impact.

Making the purpose part of the business's formal structure can also give customers, employees and other stakeholders greater clarity about what the organisation is trying to achieve and how its profits are intended to be used.

However, these are potential advantages rather than guaranteed outcomes. Whether they matter to a particular business will depend on its sector, customers, employees and wider commercial priorities.

Considerations

Those potential benefits also come with some trade-offs.

The requirement to reinvest or donate at least half of profits or surpluses towards the social or environmental mission means owners or shareholders would have less scope to take those profits out of the business. That may be particularly relevant to businesses whose growth plans depend on how profits are distributed or on attracting particular types of investment.

There can also be implications for how a business is owned and governed. SEUK identifies different structures, including co-operatives, employee ownership and trusts, each of which can give different groups a formal role in how the organisation is run.

For SMEs whose social or environmental purpose is already central to what they do, formalising that commitment could bring greater clarity for customers, employees and funders, and may open up new markets and sources of finance. For others, the trade-offs around how profits are used and how the business is owned and governed may outweigh those potential benefits.