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Thread: What legal structure is best for our social enterprise?

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    What legal structure is best for our social enterprise?

    Hello everybody,

    two friends of mine and me are about to start up a social enterprise in Cape Town, active in the field of socio-economic community development. Currently we try to figure out which legal structure would be best for this venture and I hope to find some advice in this forum. For clarification: A social enterprise is about social impact maximisation while being financially self-sustaining from its operations.

    The facts: The legal structure will be an international one. For several reasons there will be a german non-profit organisation acting as an umbrella organisation for the South African organisation. The german NPO shall amongst others make Euro donations available to our South African organisation, which therefore has to be a non-profit organisation. Yet, that is where the problem starts. Our business and social impact model requires us to interact with SMMEs, Mobile Network Operators and Mobile Payment Service Providers, which for reasons of credibility, confidence and trust requires us to run a normal For-Profit organisation. This means, we are looking for kind of a hybrid legal structure ensuring us the business credibility on the one side and the NPO status to ensure our social impact maximisation goal (which would qualify us for donations etc.). So far, we think about setting up a South African NPO which administers all profits from our For-Profit enterprise, but we do not have the expertise to figure this out all by ourselves. Therefore I would appreciate it very much if you could help me out with some advice on which legal structure would suit us best.

    Thanks a lot in advance!

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by Startup View Post
    ... requires us to interact with SMMEs, Mobile Network Operators and Mobile Payment Service Providers, which for reasons of credibility, confidence and trust requires us to run a normal For-Profit organisation.
    The fact that a business is operated for-profit doesn't help the credibility/trust factor one bit, I reckon. It's about evidence of sound management and control.

    The right legal entity will probably depend on your annual budget, but assuming in excess of 75% of the income will come from donations or member subscriptions, there's no need to be anything other than a non-profit organisation in one form or another.

    First prize would be a Section 21 company. It has to have an annual audit and has to comply with reams of other legislated requirements which is why they are reasonably credible when it comes to entering into contracts. But they come with a fairly stiff administrative overhead cost.

    A trust would also be viable. Still a juristic person but a lot more flexible in terms of rules. However, credibility might prove tricky as a result at times.

    Last would be an organisation defined by constitution. The main problem here is that lots of suppliers (including Telkom) will not enter into contract in the organisation's name alone - some individual will have to be bound as the representative (which effectively makes that individual bound as surety for all sorts of potential claims).

    I don't know if there are any other ideas on this... Anyone?
    The trouble with opportunity is it normally comes dressed up as work.

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    Hi Dave,

    thanks a lot for your swift reply.

    I guess you could be right about the trust issue with a for-profit and a NPO. Still, it is the image attached to a NPO which lets me think a small business owner rather prefers to deal with a "proper" business.

    "The right legal entity will probably depend on your annual budget, but assuming in excess of 75% of the income will come from donations or member subscriptions, there's no need to be anything other than a non-profit organisation in one form or another."

    We do not know our annually budget yet, but it is for sure that our venture is not going to earn 75% or more of its income from donations or member subscriptions. The venture will earn its necessary income from its service offerings to SMMEs, thereby we will not depend upon donations for maintaining our operations running. One reason we are looking for donations is to facilitate our incubation process. Apart from that, it is our focus on social impact maximisation instead of monetary profit maximisation which sets us clearly apart from normal For-profit organisations. The whole communication with our very different stakeholders becomes much more straight forward, when there are two faces of our venture. Business owners get a plain business offering while social investment parties/ social supporters get to see how we achieve the social change we are aiming at. The later is not so much of interest for business owners, we reckon.

    To sum it up: Its mainly for the sake of straight forward communication to our business side stakeholder on the one side and the social development stakeholders on the other side that we want a hybrid social/ business organisation. But how could we do it, that remains the question.

    I am grateful for any comments, hints etc.

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    Platinum Member Marq's Avatar
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    A section 21 sounds like the best way to go. From the outside it will appear as a solid company doing regular business operations and from the inside you get the trust NPO stuff.

    The overseas donor would probably like an audit and proper record keeping so this should be done in any case to ensure ongoing funding.
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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by Startup View Post
    We do not know our annually budget yet, but it is for sure that our venture is not going to earn 75% or more of its income from donations or member subscriptions. The venture will earn its necessary income from its service offerings to SMMEs, thereby we will not depend upon donations for maintaining our operations running.
    OK then - If there is no intention of paying a dividend to shareholders/members, you can still go the section 21 company route.

    However, it's going to be pretty tough to frame this as an NPO for tax purposes.
    The trouble with opportunity is it normally comes dressed up as work.

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    Quote Originally Posted by Marq View Post
    A section 21 sounds like the best way to go. From the outside it will appear as a solid company doing regular business operations and from the inside you get the trust NPO stuff.
    The thing is that we have two faces, two outsides: One for our SMME clients and one for people and organisations interested in our social impact. Once again, we will have a traditional value proposition for SMMEs and a blended value proposition for social minded organisations and individuals. The blended value proposition contains a monetary and a social return on investment.

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    Quote Originally Posted by Dave A View Post
    OK then - If there is no intention of paying a dividend to shareholders/members, you can still go the section 21 company route.

    However, it's going to be pretty tough to frame this as an NPO for tax purposes.
    That is another reason why we want to split the organisation in two parts. Isn't there any way to do so?

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    You would need to register two seperate entities to achieve what you're looking for. Have the section 21 company as the NPO and the trading company as a Pty Ltd. The section 21 company could probably be the sole shareholder.

    The only real downside is you're going to be in for 2 audit fees

    An option would be to have the trading company as a CC (or whatever the heck the new version of that is nowadays). I really need to get down to the bottom of this "discontinuation of CC's" business
    The trouble with opportunity is it normally comes dressed up as work.

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    Full Member totius54's Avatar
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    There will be no credibility if the NPO board members and that of the normal trading company is the same.

    The main aim normally in NPO's is to great a cash cow to draw salaries from for few individuals and the moneys eventually getting to the worthy cause is very little .

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    Thanks a lot for your support! That will most likely be the route we will take. The NPO will be concerned with all educational and awareness campaigns, while the For-Profit will earn the money.

    Great Forum!

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