1 COMPANY LAW ESSAY TOPIC: Should New Zealand create a new business form for social enterprises? Introduction: Social enterprises are the organizations having both social as well as business goals, thereby can contribute to the public betterment by amalgamating both the entrepreneurial ingenuity together with genuine concern for making the society a better place1. Though there is no definite definition, but these social enterprises combine the desire of acting for a purpose together with the intention and desire to earn profit. Much attention is allowed to the social enterprises at conferences, in media and even within a community. In this regard, questions often rise about the legal structures that will be suitable for enabling the development of the social enterprise. This assignment will concentrate on how the concept social enterprise will fit in the present legal structure in New Zealand and also discusses about the options that can be proposed to change and help the sector’s development. Discussion: Variousoverseasjurisdictionshadenactednewlawstructuresforservingand encouraging the development of the social enterprises particularly. Though the social enterprises of New Zealand fit into the existing form of legal structures like the charitable boards of trust, incorporated societies as well as limited liability companies, such forms are not customized to serve the needs of the social enterprises2. This essay focusses on how adequately the present 1Suzanne Grant, Social enterprise in New Zealand: an overview, (2017)Social Enterprise Journal13.4: 410-426. 2Douglas Heather, "Embracing hybridity: A review of social entrepreneurship and enterprise in Australia and New Zealand." (2015)Third Sector Review21.1: 5.
2 COMPANY LAW legal structure serves the purpose of social enterprises what have been sought to achieve by the overseas approach and whether New Zealand will benefit from the new legal form, if made. Social enterprisescan be enumerated as an organization which trades for supporting various social, environmental or cultural goals3. The Internal Affairs Department adopted a particular definition of social enterprise which must have three basic elements; it must possess a social, environmental or cultural mission to achieve benefit for community or public, a sufficient portion of the income must be obtained from trade about 50 % or more and majority or total of the profit must be reinvested to fulfill the mission of organization4. Another defining aspect is that these enterprises are basically the private entities which are self-governing, not being part of the State and also possess the independent power to cause the winding up of its operations. For several charitable boards of trust together with incorporated societies earning income by selling goods or providing services is not new. When the trading turns into the main source of income, such organization will be known as the social enterprises5. Other social enterprises usually assume the character of companies having socially good ideals. In order to be regarded as the social enterprise, the environmental or the social orientation requires going beyond the activity related to the small quantity of corporate social responsibility6. It requires being the central part of the mission of the organization. Such organizations, in some cases are denoted as the social businesses also. 3Douglas Heather. "Embracing hybridity: A review of social entrepreneurship and enterprise in Australia and New Zealand."(2015)Third Sector Review21.1 :5. 4Grant Suzanne. "Social enterprise in New Zealand: an overview."(2017)Social Enterprise Journal13.4 : 410-426. 5Fitzgerald, Tricia, and Deborah Shepherd. "Emerging structures for social enterprises within nonprofits: An institutional logics perspective."(2018)Nonprofit and Voluntary Sector Quarterly47.3 : 474-492. 6Palakshappa, Nitha, and Suzanne Grant. "Social enterprise and corporate social responsibility: Toward a deeper understanding of the links and overlaps."(2018)International Journal of Entrepreneurial Behavior & Research24.3 : 606-625.
3 COMPANY LAW The most common structure used by the social enterprises is setting a charitable trust that gradually causes the incorporation of a limited liability company as a branch for running its trading arm that makes profit7. There is very limited research on this. However, the Department of Internal Affairs in its 2012 paper on this subject revealed that 76% out of the 421 respondents identified as social enterprises were trading for about 10 years or even more. Out of those, 52 % were formed as charitable trusts. Limited liability companies occupy about 7 % and 37 % were made up by the Incorporated societies. Very small proportion of the limited liability companies depict that the survey has stronger venture into the network of registered charities when compared to business networks8. It may be also possible that the new sect of young generation social entrepreneurs who has adopted the company structure are not many in numbers. Three most common tools used to set up social enterprise are the incorporated societies, incorporated charitable trust and limited liability companies. A charitable trust must have a charitable purpose at its base and the profit incurred by it must not be shared among the private individuals. This charitable trust can get itself registered with the Charities Services and can even apply for the status of a done such that the donations received by it are not subjected to the tax imposition. This type of approach may limit the scope of the activity of the trust as it is limited to stay within these particular purposes only. The Incorporated Societies Act9provides that people can form a society with at least 15 members. The constitution or rules usually provides it objectives. Such option in some situations is opted by the social enterprises. In a company, the profit incurred is generally distributed among its shareholders. However, it is also possible to expressly enumerate some of the purposes 7Barraket, Jo, et al. "Classifying social enterprise models in Australia."(2017)Social Enterprise Journal13.4: 345- 361. 8Jelsma, Phillip L., and Pamela Everett Nollkamper.The limited liability company. (LexisNexis, 2017). 9Incorporated Societies Act 1908 (NZ).
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4 COMPANY LAW of the social enterprise during company’s constitution. Companies having charitable purposes may also register itself as a charity. Other structures that may be used are the Cooperative companies, limited partnerships, trusts of the Maori land, provident and industrial societies. However, these are not generally seen as they occur very rare. While considering the economic challenges economically, the requirement for innovative steps to create flexible local economies appears to be very imperative10. These social enterprises can also provide huge contribution to the economy as well as provide opportunities for employment like jobs for people who are otherwise marginalized. Instead of depending solely on thegovernmentaids,donationsandphilanthropicgrantsliketraditionalnonprofitable organizations, the social enterprises earn income from trading and also scale up by securing loan and investments. Thischaracteristic of obtaining income by selling goods or services is significant at time when the government resources are getting constrained. Social enterprises face many hurdles that can vary when they start moving from the initial start-up phase to maturity level via expansion. The social enterprises that started as or emerged from the non- profit background usually face challenges while moving from the known ambit of getting donations or grants to the business model and achieving required commercial awareness. Charitable boards of trust together with the incorporated societies are usually prevented by their legal framework from allowing pecuniary benefits to their members. Thus many non- profit organizations in spite of being interested in growth are restricted in their capability to raise money or capital as they are unable to pay back the investors. 10Bull, Michael, et al. "Challenging tensions and contradictions: Critical, theoretical and empirical perspectives on social enterprise."(2018)International Journal of Entrepreneurial Behavior & Research24.3 : 582-586.
5 COMPANY LAW The most common issue for any new type of business is securing the required capital. When a charitable structure is adopted, it automatically results into approaching groups or even individuals for getting philanthropic donations or grants if it possesses the status of tax exemption. But it is seriously very difficult to attract investors who work privately as this business model cannot return profits back to the investors or share holders. This is because they have to remain charitable as per the provisions of Charitable Act11. On the other side of the dilemma, the limited liability company faces difficulties to attract private funding as there lies an assumption that it is for incurring profit due to the type of entity being used though it is possible that it may have many other aims apart for returning back the profit. The social enterprises that started with a dominating commercial orientation usually face high risk levels in the initial stages like many other businesses12. They may have to struggle a lot for raising capital. The members of the social enterprises sometimes may need to place their mortgages of their homes or seeking help from friends or family to implement their ideas. These enterprises often do not possess proper revenue streams that place difficulty for managing the base costs like salaries, attracting investment and loan guarantees. Even the development of social finance market is affected by different factors that include uncertainty of potential investors about risk profiles of social enterprise and wish for faster growth that may result into higher costs for diligent processes. In addition, the owners or the members of the social enterprises often lack proper experience required for developing any business case and also for managing and controlling the financial parts of the business. The main stream entrepreneurs are much more qualified and experienced. As a result of which, they can 11Charitable Act 2005 (NZ) . 12Fitzgerald, Tricia, and Deborah Shepherd. "Emerging structures for social enterprises within nonprofits: An institutional logics perspective."(2018)Nonprofit and Voluntary Sector Quarterly47.3: 474-492.
6 COMPANY LAW efficiently handle different business incubator as well as mentoring programs and can even approach many investors and seek capital from various sources. There are present very few similar sources of support for social enterprises13. Initiatives are taken for setting of social enterprises within universities, communities and also in the local and central government to some extent. All these are happening without any intervention from the government on one hand. Again, on the other hand, the market is not enough strong and yet to reach its potential. Government must play a role for creation of an enabling government as well as addressing the barriers of regulation that curtails the capability of the social enterprises to achieve their potential target. Governments overseas usually vary in the extent of the interventions. United Kingdom is active particularly to galvanize the interested players to a strategic direction by establishing a particular legal framework specifically for the socialenterprises,undertakingresearchaswellasfundingsocialenterprisesthrough intermediary body network14. The legal structures refer to the different forms available in the statute of a country for organization having desire to incorporate as legal entities. A legal framework provides an entity tooperateinanindependentmannerapartfromitsownersbylimitingtheirpersonal responsibility and also provides an ongoing life to the body even if the founders do not exist. There are several barriers faced by the social enterprises that have to be overcome, then only they can flourish. 13deBruin,Anne,EleanorShaw,andKateV.Lewis."Thecollaborativedynamicinsocial entrepreneurship."(2017)Entrepreneurship & Regional Development29.7-8 : 575-585. 14Defourny, Jacques, and Marthe Nyssens. "Mapping social enterprise models: some evidence from the “ICSEM” project."(2017)Social Enterprise Journal13.4: 318-328.
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7 COMPANY LAW Such barriers need to be removed. There are two options available to it. First option is not to do anything and allowing the present scenario to continue as it is. This could obviously lead to slower and gradual progress of the social enterprises or may not result into any progress at all. Another option available is to adopt a new legal structure like other countries. In UK15, these are known as community interested companies. Again, in United States, they are called as the ‘benefitcorporations’whereasinCanadatheyaredenotedas‘communitycontribution companies’. Prior to it, legal structures already available to the social enterprises in New Zealand must be referred. In order to establish a social enterprise, various considerations are involved that provide the option of legal structure including whether it includes transformation of an already existing organization, buying an existing type of business or initiating an absolutely new venture, whether the services or goods provided will be sufficient to achieve environmental or social betterment or whether the income gained will be used in the environmental or social betterment, whether extra income is to be secured from funders or investors and whether tax is exempted, whether many or only a few people are involved, whether such people are paid or give voluntary service, whether the decision will be taken by the members, staffs, trustees or directors16. All these need to be considered in the light of the existing legislations in New Zealand. As per theIncorporated Societies Act17,incorporated societies can act for the nonfinancial benefits and for objectives set out in their set of rules or constitution. These incorporated societies can act as social enterprises. Again, companies can also act as social enterprises by following the provision enumerated in the 15 16Newth,Jamie."Socialenterpriseinnovationincontext:Stakeholderinfluencethrough contestation."(2016)Entrepreneurship Research Journal6.4 : 369-399. 17Incorporated Societies Act 1908 (NZ).
8 COMPANY LAW Companies Act18. Similar application is also available to Limited Partnerships where they can also act as social enterprises as per the Limited Partnerships Act 200819. Conclusion: Thus in the light of the discussion made above, it is the duty of the present government of New Zealand to decide whether it wanted to continue with the existing scenario or to legislate a new structure. If creating legal structure seems to be a lengthy procedure, it can also opt for a new legal status which can be granted by the Government to those enterprises that fulfill certain conditionstogetherwithsatisfyingtheconditionsofreinvestment,reportingaswellas entrenched social objectives. 18Companies Act 1993 (NZ). 19Limited Partnerships Act 2008 (NZ).
9 COMPANY LAW BIBLIOGRAPHY: BOOKS: Jelsma, Phillip L., and Pamela Everett Nollkamper.The limited liability company. (LexisNexis, 2017). JOURNALS: Barraket, Jo, et al. "Classifying social enterprise models in Australia."(2017)Social Enterprise Journal13.4 : 345-361. Bull, Michael, et al. "Challenging tensions and contradictions: Critical, theoretical and empirical perspectives on social enterprise."(2018)International Journal of Entrepreneurial Behavior & Research24.3 : 582-586. de Bruin, Anne, Eleanor Shaw, and Kate V. Lewis. "The collaborative dynamic in social entrepreneurship."(2017)Entrepreneurship & Regional Development29.7-8 : 575-585. Defourny, Jacques, and Marthe Nyssens. "Mapping social enterprise models: some evidence from the “ICSEM” project."(2017)Social Enterprise Journal13.4: 318-328. Douglas Heather, "Embracing hybridity: A review of social entrepreneurship and enterprise in Australia and New Zealand." (2015)Third Sector Review21.1: 5. Grant Suzanne. "Social enterprise in New Zealand: an overview."(2017)Social Enterprise Journal13.4 : 410-426.
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10 COMPANY LAW Newth,Jamie."Socialenterpriseinnovationincontext:Stakeholderinfluencethrough contestation."(2016)Entrepreneurship Research Journal6.4: 369-399. Palakshappa, Nitha, and Suzanne Grant. "Social enterprise and corporate social responsibility: Toward a deeper understanding of the links and overlaps."(2018)International Journal of Entrepreneurial Behavior & Research24.3 : 606-625. Suzanne Grant, Social enterprise in New Zealand: an overview, (2017)Social Enterprise Journal13.4: 410-426. LEGISLATIONS: Charitable Act 2005 (NZ). Companies Act 1993 (NZ). Incorporated Societies Act 1908 (NZ). Limited Partnerships Act 2008 (NZ).