What Is The Difference Between A Charity And A Social Enterprise?

If you’re thinking of starting an organisation with a social cause in New Zealand, then you might be considered a charity or a social enterprise. This depends on the way your organisation functions. 

There are a number of questions that need to be answered regarding the structure, funding, mission, and taxation for your organisation. Once you decide whether your organisation is a charity or a social enterprise, it’ll be a lot easier to hit the ground running. 

What Is A Charity?

Charities in New Zealand are defined under the Charities Act 2005. A charity is an organisation that works for a social cause and does not earn a profit. Namely, a charity must meet the following requirements:

• The purpose of a charity must be charitable as defined by law and provide a ‘public benefit’.
• They must not be for profit. A charity cannot earn an income by selling a service or product for the personal gain of any individual.
• Charities must not have a disqualifying purpose. This means that a charitable organisation cannot engage in illegal activities or support political parties.

The Charities Services, part of the Department of Internal Affairs, regulates charities in New Zealand, so it’s a good idea to read through their website if you want to set up a charity.

What Is A Social Enterprise?

Social enterprises are businesses with a philanthropic cause. Organisations that identify as a social enterprise engage in trade and have an income. Their business model will have one or more elements to it that will put their mission values into practice.

Example Let’s say a small grocery store has opened to help decrease unemployment in their community. To do this, they only hire workers from vulnerable backgrounds. This way, they are considered a social enterprise. This is because they are still making a profit, while achieving social good.  A business that sells jewellery donating a portion of their profits every month to an environmental movement can also be categorised as a social enterprise.

What Is The Difference Between A Charity And A Social Enterprise?

There are stark differences between charities and social enterprises. Both types of organisations are committed to engaging in social change. However, the way they commit to their mission is different. 

Charities work with no profitable goals. Social enterprises utilise their business structure for a compassionate purpose, but still make a profit. 

Mission

The guidelines for a mission differ for a social enterprise and a charity. As mentioned above, a charity must follow the guidelines set in the Charities Act 2005. Their organisation must be solely dedicated to their mission.  

A social enterprise, however, is not limited by guidelines. An organisation functioning under the label of a social enterprise is not responsible for ensuring its mission meets the requirements of being considered a ‘public good’. As a result, the mission for a social enterprise can be any social, political, economic or cultural cause.

Registration

A charity in New Zealand can be registered with Charities Services. It’s important to ensure that your organisation meets the legal definition of a charity to be eligible for registration.

A social enterprise is essentially a business and will need to be registered as one. If you’re in this position, it’s important to consider the nature of your business activities as this will help you choose the best structure. 

How Do They Get Funding?

Generally, charities get funding through donations and social enterprises earn profits. Grants are also available for both organisations, depending on each business. For the most part though, donations for charities and profits for social enterprises are what keeps these organisations functioning financially.

Organisational Structure

The organisational structure for both will differ. If a charity registers with Charities Services, they will need to meet certain requirements, such as having officers and providing annual returns. A social enterprise will generally appear as a regular business engaging in the selling of products or services, and their mission may be targeted through the structure of their business.

Types Of Charities

New Zealand Red Cross is an example of a charitable organisation. They are fully committed to humanitarian activities, their organisation is for public benefit and they rely on public donations to do the work they do.

Another example is the Cancer Society of New Zealand. They are committed to minimising the impact of cancer through research, support, and education, which comes from public donations.

Types Of Social Enterprises

There are a number of ways in which a social enterprise can use their business to promote a philanthropic cause.

For example, Eat My Lunch is a business that provides a lunch to a child in need for every lunch purchased. In this case, their business is selling lunches, however, their overarching purpose is to tackle child poverty in New Zealand. Liminal Apparel sells clothing and accessories that support fair trade and sustainable practices, empowering workers and communities involved in their production.

Tax Concessions

Tax concessions allow businesses or organisations to pay no or less tax. Charities in New Zealand can apply for charitable status to be exempt from income tax and possibly other taxes. Social enterprises can also have tax concessions if their particular business qualifies.

Is A Charity A Social Enterprise?

No, a charity cannot be considered a social enterprise. By definition, social enterprises engage in trade in order to gain profits. For an organisation to qualify as a charitable entity in New Zealand, they cannot earn an income from any goods or services they might provide.

Which Classification Is Right For My Organisation?

Knowing the source of income, organisation structure and purpose is key in deciding which classification is right for your organisation. If you’re a social enterprise, thinking about how the business will inform the mission is essential. A social enterprise may or may not engage multiple ideas into their company structure.

A charity must adhere to the guidelines provided by the legislation. As a result, different questions such as the funding, donations, grants, community support are all valid questions when deciding how to classify your organisation. 

Can These Organisations Be Considered Ethical Businesses?

A social enterprise or a charity is not to be confused with an ethical business. The former two use their respective organisation to promote their mission, an ethical business engages in business practices that aim to reduce their harm on the world. 

For example, a clothing brand that only makes products from recycled materials.

Next Steps

There are multiple factors to consider when deciding whether to categorise your organisation as a charity or a social enterprise. The income, registration, grants and structure of the organisation are wholly dependent on what you decide to call it. Each one has their own relevant process. 

If you would like a consultation on your options going forward, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.

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