The Legal Challenges to Social Enterprise

Flickr/CC/Sara Spaedy


By Pia Chatterjee

Europe has witnessed the growing popularity of social enterprise with the recent reduction in public spending and services. Still, the proportion of social enterprises within the business sector in the continent is minimal – less than 1 per cent. Social enterprises are relatively new entities and thus face countless legal challenges. One of the main challenges to its proper functioning are the problems caused by the legal definitions of social enterprise that differ from country to country.

Social enterprise is particular in that it falls somewhere between for-profit companies and charities or public benefit organizations on the legal spectrum.

As a result, when choosing their corporate forms, social enterprises have tended to have the following options:


  1.    Choosing an existing legal form and having the concept of social enterprise be adapted to it. This type would include structures such as associations, foundations, cooperatives and share companies.
  2.     Choosing new types of legal forms created specifically to suit social entrepreneurship by tweaking certain characteristics of pre-existing legal forms. This option is exemplified by the social cooperatives in Italy, the Société Coopérative d’Intérêt Collectifs (SCICs) in France and Community Interest Companies in the UK.
  3.     Obtaining a legal status from selected or all existing legal forms that comply with a defined set of criteria, as is common in the case of social enterprise legal status in Italy, or the Social Purpose Company in Belgium.
  4.    Adopting the structure of non-profit organizations that are exceptionally permitted to perform economic activity, as is the case of Non-Profit Institutes in Slovenia.

The fact that the law surrounding social entrepreneurship is so malleable and still evolving makes it a lot more likely for entrepreneurs to work outside of the law and not be aware of it themselves. Questions of whether profit-making, capital investment, social missions, corporation certification and tax relief are permitted are extremely relevant to the illegality of the company, and can be inadvertently overlooked simply because the intricacies of each corporate form are not made clear enough. This makes choosing one of the options leaning towards older, more conventional legal forms tricky.

On the other hand, newer forms more adapted to social enterprise have their flaws as well. Since their position in the business world is still a little ambiguous, investment into social enterprise is sometimes deterred for fear of the companies with this structure being unstable, and therefore risky. Moreover, while it is extremely advisable to keep a lawyer or some such expert on the board of your company, few lawyers are familiar enough with the newer corporate forms and thus not exploitable to their full potential.

For businesses to function properly, knowledge of how to hire employees, protect intellectual property, protect unpaid volunteers, obtain funding from the right sources and correctly follow protocol needs to be readily accessible. Unfortunately, given the hybrid nature of the social enterprise, the lack of clarity in the legislative framework surrounding this type is making it difficult for these businesses to fully carry out their activities. There needs to be an elaboration of the best business practices available, clarification of the different corporate forms that could come to exist and could be refined, and the models that have succeeded in the past and are likely to succeed in the future for this type of economic activity.