Guidance note: Legal and Regulatory Framework

A country’s legal and regulatory framework can have a significant impact on the visibility, recognition and credibility of social enterprises and can act as a key enabler of social enterprise development. It also serves as reference for suitable and targeted public support schemes, notably regarding access to public procurement, and financial and non-financial assistance and benefits¹. However, the way in which “social enterprise” is interpreted in legal and regulatory terms varies between countries.

In some countries, the concept of social enterprise is interpreted very narrowly (if legally recognised at all), with only certain legal forms acknowledged as social enterprises, like for example co-operatives or associations. There may also be a limited range of recognised social missions that social enterprises may pursue, such as work integration. Countries with more mature social enterprise traditions typically recognise that social enterprises can take on a variety of legal forms, such as associations, foundations, co-operatives and share companies, and that they can pursue a wide range of social missions, from protecting the environment to promoting financial inclusion.

In countries where neither the law (nor for example a label) recognise social enterprises at all, it is typically very difficult to tell which enterprises are social enterprises and which are not. In such cases, it might therefore be difficult to provide policy incentives or targeted support towards social enterprise development, since they remain largely invisible within the overall businesses community and economy. Businesses that operate as social enterprises in practice are sometimes described as “de facto” social enterprises, but these are not easy (if even possible) to distinguish legally from other enterprises. As a result, there is often a lack of official statistics about social enterprises: how many exist; their rate of incorporation and growth; sectors of activity; insolvency, etc.

Since all social enterprises must operate through one or more legal forms, these are the basic building blocks of a social enterprise. If the legal forms available are not suitable for social enterprise activity, it will be much more difficult for a vibrant and broad-based social enterprise sector to develop to its full potential. For instance, in some countries there are restrictions placed on non-profit organisations (e.g. foundations or associations) from trading, or from establishing subsidiaries for the purpose of trading. In other countries, there are no established legal ways for share companies to prioritise a social mission.

In countries recognising and supporting social enterprises, the law sometimes adapts existing legal forms to create specific, tailor-made legal forms for use by social enterprises. Examples of this include the “social purpose company” in Belgium or the “community interest company” in the United Kingdom. These tailor-made legal forms are sometimes verified by an external regulator that ensures that the social mission is kept primary and that any other conditions set out in the law are duly followed, so as to avoid that the legal form is abused in practice.

In other instances model constitutions are available that social enterprises can use to take on an existing legal form while prioritising their social mission.

In some countries, the law creates a legal status that recognises social enterprises operating under a variety of different legal forms. This is the case of the French framework law on social and solidarity economy which recognises that in addition to the legal forms traditionally used in the field of social economy – co-operatives, associations, foundations and mutual organisations – also commercial enterprises can be considered as social and solidarity enterprises if they meet the criteria set by the law. This kind of legal status may require registration with the government on a centralised register of social enterprises and may bring with it tax exemptions or other privileges.

Arguably, the “ideal” legal and regulatory system is one which combines:

1. Traditional legal forms used by social economy entities and/or legal forms that have been adapted to make them suitable for use by social enterprises, allowing them to prioritise social mission above profit (as well as other possible criteria set out in the legislation); and

2. a social enterprise legal status available to social enterprises operating through one of a variety of different legal forms, which brings with it appropriate tax and other reliefs or other privileges reflecting the fact that social enterprises prioritise social mission above returns to investors.²

It is also important that complementary and consistent provisions are sought in related legislation governing business start-ups, small and medium enterprises, taxation, social security contributions, donations and volunteer work, public procurement and state aid, etc.

Policy levers for creating an enabling legal and regulatory framework:

• Consider whether it is possible to adapt legal forms within the framework of existing legislation to make them suitable for social enterprises to use to prioritise their social mission (and potential additional criteria such as inclusive governance or asset lock).

• Think about whether there are particular legal forms which are not currently being used by social enterprises in the jurisdiction and whether any specific barriers need to be removed to make the relevant legal forms usable, including potentially by removing or changing restrictions or barriers set out in law or regulation.

• Recognise that law and regulation is complex, and that a long-term, holistic policy approach is needed for social enterprises to become mainstream.

Pitfalls to avoid

• Do not draft legislation before mapping and understanding relevant national legislation and regulations, as well as the state of development of the ecosystem for social enterprise.

• Do not think that a single “social enterprise law” is the silver bullet that will solve all problems.

• Do not design legal forms or statuses that are unduly restrictive and unattractive to entrepreneurs

_{¹ See, for example, Social Enterprises and the Social Economy Going Forward, published in October 2016 by the European Commission’s Expert Group on Social Entrepreneurship.}

_{² See, for example, For definitions of legal form and legal status, see the glossary in the assessment section of the online tool: .}

Guidance per assessment statement

Why is it important?

All social enterprises must adopt one or more legal forms in order to operate and enter into contractual relationships. As such, they operate within a broader legal and regulatory context.

For legislators, it is possible to adapt existing legal forms to make them tailor-made for social enterprises, helping them to prioritise their social mission above other interests. Alternatively (or in addition), it is possible to develop social enterprise legal statuses or registration systems to identify, and in turn support, social enterprises using different legal forms.

To facilitate the use of a wide variety of existing legal forms by social enterprises it is important to consider removing unnecessary barriers and restrictions set out in laws and regulations. In many countries, existing legal forms are subject to for instance blanket restrictions preventing certain legal forms from engaging in trading, establishing trading subsidiaries or paying their directors. Such restrictions make the choice of legal form difficult for social entrepreneurs. In other countries, a wide variety of legal forms are available and used by social enterprises who find them suitable for their needs.

In order to score high, in your context:

• The legislation effectively recognises, differentiates, and supports social enterprises.

• There is (are) specific legal form(s) dedicated to social enterprises.

• Social enterprises can operate through a wide variety of legal forms.

Why is it important?

Along with the contents of the legislation developed or adapted to suit social enterprises, the process for developing or revising it is important. To this end, governments can invite relevant stakeholders to participate in a consultation process to ensure that the proposed legislation (or revision) reflects the views of different stakeholders in an appropriately sensible, measured and proportionate way. Ultimately, an inclusive consultation process serves to inform and enhance the design and implementation of the law and/or regulation in the real world.

It is further important that the legislation provides a definition for “social enterprise” and the activities they can pursue. Without such a definition, it can be difficult for policy-makers and investors to distinguish social enterprises from other businesses and hence to develop suitable instruments and support.

In order to score high, in your context:

• The legislation provides a definition and presents the key features of social enterprises.

• The legislation sets out the activities that social enterprises can pursue.

• The content of the legislation was developed through an inclusive consultation process.

Why is it important?

Since every social enterprise (like any other business or formal organisation) must choose one or more legal forms through which to operate, they need information about which legal forms are available, and how different legal forms can be used to prioritise their social mission.

In addition, information regarding the procedures and paperwork required for establishing a social enterprise needs to be clearly signposted and easy to understand by prospective social entrepreneurs. Different countries have different ways for presenting and communicating such information. One way to help social enterprises to “get things right” from the beginning is to provide model documents that already take into account prioritising a social mission (e.g. a model company constitution), which social enterprises can use when starting up.

In order to score high, in your context:

• Information for establishing a social enterprise is easy to access.

• Information on administrative procedures is easy to understand.