What is the Difference Between a Charity and a Social Enterprise?

Difference between social enterprise and charity

Social entrepreneurship is an excellent way to effect positive change in the world around us. Social initiatives can help to empower marginalised groups and resolve inequality in society, issues that define economically and socially successful societies.

Read Also: Enabling Mark: Singapore’s Framework For Hiring Employees With Disabilities

There are two main types of entities – a charity or a social enterprise – you can set up that will benefit your cause; and help you identify the best legal structure to achieve your goals. 

Choosing To Incorporate The Right Entity

Charities function on a non-profit basis and operate only for charitable purposes. This means that all their activities serve to benefit the public only and they cannot generate profits for their shareholders from selling products and services.

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

NPOs can be registered as 

1) a public company limited by guarantee under ACRA, 

2) society under the Registry of Societies, or 

3) 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.

While charities operate in a strictly non-profit capacity, social enterprises may engage in profit-generating activities.

Social enterprises a cross between conventional for-profit enterprises and non-profit organisations. You can run a social enterprise if you have strong social values and want to run a business that contributes meaningfully to society without the constraints of a charity.

One can say that charities are reliant on donations to fund their operations, while social enterprises aim to be self-sufficient while serving a cause.

Here’s a comparison between charities and social enterprises:

 CharitiesSocial Enterprises
Characteristics– Engage only in charitable causes

– Dependent on charitable donations
 
– Operate on a non-profit basis
– Have social objectives 

– Must generate profit to remain operationally viable 

– Directly sell goods and services
Benefits– Public recognition
 
– Generates positive social impact

– Corporate tax relief

– Enhanced accountability (lock on assets)
– Allowed to make profits

– Generates positive social impact

– Autonomy of corporate governance (compared to charities)

– Access to grants from governmental organisations
Disadvantages– Many restrictions and requirements to fulfil

– Unpaid board- No equity investment
– Have to compete in the marketplace like a regular business

– More regulations to follow than a private company
IncorporationMay register as a public company limited by guarantee, society, or charitable trustMust register as a regular company
OperationsPrimarily functions as a not-for-profit organisation. Supports or engages in activities of public or private interest without any commercial or monetary profit– Revenue comes from providing goods and services 

– Intent to incorporate social goals into the core objectives of the enterprise

As can be seen from the table, both charities and social enterprises can have similar goals; both demonstrate clear intent to serve the public good and generate positive social impact. However, social enterprises have the additional flexibility (and potential liabilities) of being a for-profit business. 

Being a social entrepreneur requires you to not only contribute to your social goals, but also stay ahead of the competition, pivot when necessary and hire staff to manage operations when you grow in size. 

Characteristics Of Social Enterprises

Most social enterprises have these common characteristics:

– They directly manufacture goods or provide services.

– They have social objectives and use responsible ways of accomplishing them.

– They need to make a surplus or earnings to keep up as they cannot wholly depend on donations as charities do.

The Triple Bottom Line Of A Social Enterprise And Why People Run Social Enterprises

Social Enterprises often have three main aims. They are economic, environmental, and social, which are collectively known as the triple bottom line.

Social enterprises adopt the triple bottom line framework to evaluate their performances in a broader perspective, which also means that profit is not the business’s sole objective.

Advantages Of A Social Enterprise

Social enterprises tend to operate with a social cause in mind (e.g., help out the less fortunate), making an impact on society while generating profit and remaining self-sufficient. Marketing and publicity may also be more manageable as it can be easier to pull in people’s attention for a unique/powerful social cause.

It can be more difficult to ensure the sustainability of social enterprises, but the ones that can find a good business model and market their cause effectively usually find success. One such local example is The Animal Project, which is a social enterprise that aggregates and sells artwork and handicraft from artists with autism. Selling lifestyle products centred around the theme of animals, its items feature the unique designs of resident artists, whose illustrated animal motifs are printed onto fashion pieces, art, gift items, homeware and stationery. Not only do the artists earn royalties from the sales, at least 50% of profits are also donated to partner charities.

When you start a social enterprise, you might also have the option to get money from the government or other private investors. Organisations such as raiSE help social entrepreneurs raise funds for their businesses. 

The organisation tends to attract employees who are naturally orientated to the organisation’s social goals. 

Disadvantages Of A Social Enterprise

Social enterprises still have the same business goals like other regular businesses. They must compete against other companies in the market and face the same challenges and risks common to all companies.

While competing, they are also subject to unique controls and restrictions as defined by their constitutions. They are expected to operate commercially, contributing a proportion of income to social causes.

Characteristics Of A Charity

Charitable organisations have the following characteristics:

– They are registered and institutionalised.

– They are created only for charitable purposes.

– They are mostly independent of the government.

– They do not engage in profit-making activities.

Benefits Of A Charity 

Charities exist only for social good, so they can assist with fundraising. Most charities are recognisably altruistic and for this reason, gains the public’s trust. Any organisation or personnel associated with the charity may also be perceived as such.

Organisations 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:

– exemption from corporate tax on surpluses from operations undertaken in the course of charitable provision 

– Certain sources of grant funding are open only to organisations with charitable status

Disadvantages Of A Charity

Charities may face restrictions on work that are carried out or funded. Organisations with charitable status must comply with regulatory requirements, including those relating to the preparation of annual accounts and returns. 

Individuals on the board of a charity, known as trustees, must not be paid unless approved by the Charities Commissioner. This means charitable status may not appeal to founders of organisations who want to receive a salary and retain control. A founder who is a chief executive or involved in its operations will receive compensation as an employee of the charity and can be dismissed by its board. A founder who sits on a charity’s board shares control and responsibility equally with all trustees.

The primary source of initial capital must come from either donations or be raised by the board of trustees during the setting up of the charity. Those who donate do not then have ownership stake in the charity.

Taxes

Only charities incorporated as charitable trusts qualify for an automatic tax exemption. Societies or limited liability companies may be required to pay some form of tax.

Social enterprises are subject to corporate taxes. However, in some cases, they may request tax deductions on foreign revenue. 

The good news is that Singapore’s tax policy is one of the world’s best for social enterprises. It seeks to encourage entrepreneurship by imposing a flat 17% rate on chargeable income. The rate goes lower if a business qualifies for any tax reduction schemes.

Read Also: Complete Guide To Singapore Corporate Taxes: Tax Rates, Tax Rebates, And Tax Exemptions

According to IRAS, from Year of Assessment (YA) 2008, registered charities enjoy automatic income tax exemption under section 13 of the Income Tax Act. They do not need to file income tax returns.

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