Social enterprises are either of two types: the ones that are not built to make a profit and the ones that are in the business to make a profit in addition to fulfilling their social objectives. Social enterprises that are not for profit are limited in the ways they raise funds by their very nature. This has made it very difficult for them to effectively pursue some of their core objectives. Many people who would have supported social enterprises are constrained by the fact that their expectation of profit may never materialize, especially if the enterprise is strict of the non-profit category. In addition to the limitation of their capacity to attract funds, a number of other challenges confront social entrepreneurs in practically all economies.
The legal environment for social enterprise is usually very challenging. It has always been a challenge to categorically fit these entities into the legal forms available. There is the for-profit type and the not-for-profit type, which are guided by laws that sometimes appear conflicting. The not-for-profit type is prohibited from distributing profits. This is the central challenge that limits their access to capital. Equity investment is probably the cheapest form of investment an enterprise can have because it does not make any demand for dividends on the enterprise if the business is bad. Unlike debt and other forms of capital, the investor waits for profit but shares in it only when it is made.
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The legal restriction on income distribution is such that earned income that is not related to the core objective of the enterprise is taxed in many climes. This is income sometimes a huge proportion of the enterprise’s income. In that case, the organization may be badly affected when it makes what ought to have been a good harvest and faces heavy taxation. Most of them therefore depend on donations. By their very nature, donations are counterproductive to the objective of sustainability. Self-sufficiency objectives cannot be developed in an environment of dependency on gifts and donations. All donor-dependent enterprises run the risk of not fulfilling their objective.
In more advanced economies, Crowdfunding and Impact investing are being seriously promoted and they are becoming the more potent ways of funding social enterprises. These forms of investment seem to conform more to the objectives of social enterprises. However, the absence of technological support and financial technology instruments to support, for instance, crowdfunding, is limited in our environment. This limitation has however been reported to be a world-wide phenomenon, not limited to any specific area. The not-for-profit social enterprises in the United States have been reported to have performed well below their for-profit counterparts over time.
There is no difficulty for any organization to claim to be focused on a social objective, but this is hard to deliver upon if the enterprise is profit-oriented. Profit orientation presupposes accountability to the fund providers.
However, they enjoy other advantages, which their for-profit counterparts do not enjoy. Exemption from corporate taxation and the ability to offer tax breaks to those who support them with donations are attractions to donors. They also have the advantage of goodwill. Most people recognize their dedication to good work and this helps them to gain social support. This means that they have the great advantage of enjoying the reputation for doing good and helping to make the world a better place. Some research has indicated that some non-profit social enterprises that participated in a 2009 survey in the United States, did not see competition with the for-profit social enterprises as an important source of threat.
On the other hand, for-profit social enterprises have their own challenges. These challenges include making a social or environmental purpose their primary objective. There is no difficulty for any organization to claim to be focused on a social objective, but this is hard to deliver upon if the enterprise is profit-oriented. Profit orientation presupposes accountability to the fund providers. They put their money in the enterprise so as to multiply it. The directors are therefore under unwritten law to prioritize profits. Most shareholders would vote for the removal of a board of directors and management of an entity that fails to deliver good profit figures.
