Company Law Assignment: Social Enterprises in New Zealand - Analysis

This essay delves into the question of whether New Zealand should establish a new business form specifically for social enterprises. It examines the existing legal structures, including charitable trusts, incorporated societies, and limited liability companies, and assesses their suitability for social enterprises. The essay explores the definition and characteristics of social enterprises, highlighting their dual focus on social and business goals. It analyzes the challenges social enterprises face, such as securing capital and navigating legal frameworks, and compares the New Zealand context with overseas jurisdictions that have implemented specialized legal structures. The discussion considers the potential benefits of a new business form, addressing the economic and social contributions of social enterprises and the need for an enabling government role. The essay concludes by weighing the options of maintaining the status quo versus adopting a new legal structure, ultimately aiming to inform the government's decision-making process regarding the future of social enterprises in New Zealand.

Running head: COMPANY LAW
COMPANY LAW
Name of the Student:
Name of the University:
Author Note:

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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:
Various overseas jurisdictions had enacted new law structures for serving and
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
1 Suzanne Grant, Social enterprise in New Zealand: an overview, (2017) Social Enterprise Journal 13.4: 410-426.
2 Douglas Heather, "Embracing hybridity: A review of social entrepreneurship and enterprise in Australia and New
Zealand." (2015) Third Sector Review 21.1: 5.

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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 enterprises can 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.
3 Douglas Heather. "Embracing hybridity: A review of social entrepreneurship and enterprise in Australia and New
Zealand." (2015) Third Sector Review 21.1 :5.
4 Grant Suzanne. "Social enterprise in New Zealand: an overview." (2017) Social Enterprise Journal 13.4 : 410-426.
5 Fitzgerald, Tricia, and Deborah Shepherd. "Emerging structures for social enterprises within nonprofits: An
institutional logics perspective." (2018) Nonprofit and Voluntary Sector Quarterly 47.3 : 474-492.
6 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 & Research 24.3
: 606-625.

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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 Act9 provides 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
7 Barraket, Jo, et al. "Classifying social enterprise models in Australia." (2017) Social Enterprise Journal 13.4: 345-
361.
8 Jelsma, Phillip L., and Pamela Everett Nollkamper. The limited liability company. (LexisNexis, 2017).
9 Incorporated Societies Act 1908 (NZ).

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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
the government aids, donations and philanthropic grants like traditional non profitable
organizations, the social enterprises earn income from trading and also scale up by securing loan
and investments. This characteristic 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.
10 Bull, Michael, et al. "Challenging tensions and contradictions: Critical, theoretical and empirical perspectives on
social enterprise." (2018) International Journal of Entrepreneurial Behavior & Research 24.3 : 582-586.

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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
11 Charitable Act 2005 (NZ) .
12 Fitzgerald, Tricia, and Deborah Shepherd. "Emerging structures for social enterprises within nonprofits: An
institutional logics perspective." (2018) Nonprofit and Voluntary Sector Quarterly 47.3: 474-492.

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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
social enterprises, undertaking research as well as funding social enterprises through
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
to operate in an independent manner apart from its owners by limiting their personal
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.
13 de Bruin, Anne, Eleanor Shaw, and Kate V. Lewis. "The collaborative dynamic in social
entrepreneurship." (2017) Entrepreneurship & Regional Development 29.7-8 : 575-585.
14 Defourny, Jacques, and Marthe Nyssens. "Mapping social enterprise models: some evidence from the “ICSEM”
project." (2017) Social Enterprise Journal 13.4: 318-328.

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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
‘benefit corporations’ whereas in Canada they are denoted as ‘community contribution
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 the Incorporated
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. "Social enterprise innovation in context: Stakeholder influence through
contestation."(2016) Entrepreneurship Research Journal 6.4 : 369-399.
17 Incorporated Societies Act 1908 (NZ).

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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
conditions together with satisfying the conditions of reinvestment, reporting as well as
entrenched social objectives.
18 Companies Act 1993 (NZ).
19 Limited Partnerships Act 2008 (NZ).

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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
Journal 13.4 : 345-361.
Bull, Michael, et al. "Challenging tensions and contradictions: Critical, theoretical and empirical
perspectives on social enterprise." (2018) International Journal of Entrepreneurial Behavior &
Research 24.3 : 582-586.
de Bruin, Anne, Eleanor Shaw, and Kate V. Lewis. "The collaborative dynamic in social
entrepreneurship." (2017) Entrepreneurship & Regional Development 29.7-8 : 575-585.
Defourny, Jacques, and Marthe Nyssens. "Mapping social enterprise models: some evidence
from the “ICSEM” project." (2017) Social Enterprise Journal 13.4: 318-328.
Douglas Heather, "Embracing hybridity: A review of social entrepreneurship and enterprise in
Australia and New Zealand." (2015) Third Sector Review 21.1: 5.
Grant Suzanne. "Social enterprise in New Zealand: an overview." (2017) Social Enterprise
Journal 13.4 : 410-426.

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Newth, Jamie. "Social enterprise innovation in context: Stakeholder influence through
contestation." (2016) Entrepreneurship Research Journal 6.4: 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 & Research 24.3 : 606-625.
Suzanne Grant, Social enterprise in New Zealand: an overview, (2017) Social Enterprise
Journal 13.4: 410-426.
LEGISLATIONS:
Charitable Act 2005 (NZ).
Companies Act 1993 (NZ).
Incorporated Societies Act 1908 (NZ).
Limited Partnerships Act 2008 (NZ).