A for-profit social enterprise uses commercial business practices in order to achieve social goals, such as improving the environment, building better communities and developing social wellbeing. Such organizations do not focus on generating profits for their shareholders but strive to build and improve communities.

There are three main types of for-profit social enterprises covered in the IB Business Management syllabus:

• cooperatives
• microfinance providers, and
• public-private partnerships (PPP).

Cooperatives are for-profit social enterprises that are owned and managed by their members. Examples are employee cooperatives, producer cooperatives, managerial cooperatives and customer cooperatives. Cooperatives exist throughout the world, but are predominant in the agricultural and retail sectors of the economy in many parts of Europe.

Features of cooperatives

• Cooperatives aim to provide a service for the members, providing and creating value, instead of seeking to earn a desired level of profit margin for their member-owners. However, any profits of the cooperative are shared with its members.

• Most cooperatives are registered as limited liability organizations. Like limited liability companies, cooperatives have a separate legal entity from their shareholder owners. Hence, shareholders, directors, managers and workers are not held personally liable for any debts incurred by the cooperative.

• All member shareholders are expected to help run the cooperative.

• All members of a cooperative have equal voting rights, irrespective of their role in the business or their level of investment in the cooperative.

• Cooperatives tend to have a democratic culture, with empowerment of its members to make decisions. The organizational structure is rather flat as there is decentralised decision making (see Chapter 2.2).

Watch this short video clip the Singapore National Co-operative Federation. The video shows how the idea of cooperatives came about, following the industrial revolution. It also covers the functions of cooperatives. There is no need to watch the final minute of the video unless you are based in Singapore:

Advantages of cooperatives

The advantages of establishing cooperatives as a form of for-profit social enterprise include:

• Cooperatives are not difficult or expensive to set up.

• Cooperatives are tax exempt because the focus of the business is on serving the collective interests of its member-owners and the community (such as home care associations for the elderly).

• As all member shareholders are expected to help run the cooperative, it is more likely to succeed.

• Similarly, as the owners have equal voting rights, the cooperative is more democratic so the members feel equally important to the success of the business. This is likely to lead to a harmonious working environment.

• There is an absence of pressure from external investors and shareholders, so the member-owners of the cooperative can run the business that best suits their own interests.

• As cooperatives strive to benefit their members and society, they often qualify for government financial support.

Disadvantages of cooperatives

However, there are potential drawbacks of establishing a business as a cooperative. These include the following points:

• As cooperatives are not profit-driven, it can be difficult to attract investors, financiers and member-shareholders.

• Similarly, employees and managers of cooperatives may lack the financial motivation to excel, due to the absence of a profit motive.

• Most cooperatives have very limited sources of finance as their capital depends on the amount contributed by their members.

• Most cooperatives are unable to hire a range of specialist managers to run the business, due to the lack of financial rewards and sources of finance to remunerate their senior staff. This can limit the success of the cooperative.

• A democratic culture is not always effective. Despite some members having more to contribute to the organization and greater responsibilities, they only get one vote as do all other members. This can be somewhat inefficient and perceived as unfair for some members.

Microfinance providers are for-profit social enterprises that offer a financial service to those without a job or on very low incomes. These members of society would not ordinarily be able to secure bank loans. The concept of microfinance was developed by Nobel Prize winner Muhammad Yunus (http://www.muhammadyunus.org/) in 2006, in association with the Grameen Bank.

The aim of providing microfinance is to help entrepreneurs, especially women, struggling to finance their business start-ups to gain access to loans of a small amount. Microfinance can give these people the opportunity to become self-sufficient and empower them to run their businesses. As with the majority of loans, interest is charged on the amount borrowed, although these are typically lower than what commercial banks would charge.

Advantages of microfinance providers

The advantages of establishing a business as a microfinance provider as a form of for-profit social enterprise include:

• Microfinance can help many people to get out of poverty by making them become financially independent.
• Around half of the world’s people live on less than $2 a day, (with the vast majority of these living in low-income countries or highly indebted poor countries) so microfinance can help to provide poverty relief.
• They help to empower entrepreneurs of small businesses, especially women and the underprivileged working and living in low-income countries.
• Microfinance can create benefits for the wider community, such as improved healthcare, education and employment opportunities.
• Microfinance providers act in a socially responsible way by helping the poorest and most vulnerable adults in society.
• Microfinance can help to build and foster a culture of entrepreneurialship and economic independence.

Disadvantages of microfinance providers

However, there are potential drawbacks of establishing a business as a microfinance provider. These limitations include the following points:

• Some people regard the practice of microfinance providers as being unethical as they earn profits from low-income individuals and households.

• Microfinance only provides finance on a small scale, so is unlikely to be sufficient to make a real difference to society as a whole.

• Microfinance loans incur interest charges, so can be rather expensive for small business owners who find it difficult to earn enough revenue to keep up with their loan repayments.

• Microfinance increases the debts of entrepreneurs who may subsequently struggle in their business venture.

• Due to relatively low profitability, microfinance providers may struggle to attract and/or retain employees and managers, given that their remuneration packages are unlikely to be matched by larger for-profit financial companies such as commercial banks and insurance companies.

Public-private partnerships (PPP) are jointly established by a government and one or more private sector businesses. According to the World Bank, a PPP is defined as a long-term contract between a private company and a government agency for providing a public asset or service, in which the private party bears significant risk and management responsibility (not necessarily the majority stake though). The exact arrangements will differ from case to case and from country to country.

Examples of PPP projects include bridge construction projects in Australia and railroad services in Japan. In China, the Shanghai Disney Resort is owned 47% by the Walt Disney Company with the Chinese government owning the remaining 53% majority stake. In Hong Kong, the HK Disneyland Resort is a PPP between the Walt Disney Company (with 49% share) and the Hong Kong SAR government (with 51% share).

PPPs are a suitable type of organization when the finance for public projects (such as prisons or parks) lacks sufficient funding. The financial burden of a PPP is often borne by the government while the expertise is provided by the private sector partner (such as the Walt Disney Company).

Watch this short video about how PPPs can help countries to provide the funding needed for public infrastructure:

Advantages of public-private partnerships (PPPs)

The advantages of establishing public-private partnerships as a form of for-profit social enterprise include:

• PPPs can provide a viable solution for the government to finance projects that it simply does not have enough money for.

• As there is a formal partnership between the public sector and private sector provider(s), both contribute resources for the project, thereby limiting the risks involved.

• Similarly, PPPs help to reduce the debt burden of the economy and its taxpayers, because some of the finance can be raised by private sector firms.

• The venture gains from the financial backing of the public sector, and the expertise of the private sector. Hence, PPPs tend to be run more efficiently compared with typical bureaucratic organizations in the public sector.

• PPPs can create job opportunities and have a positive impact the country’s economic growth.

Disadvantages of public-private partnerships (PPPs)

However, there are potential drawbacks of establishing a business as a public-private partnership. These limitations include the following points:

• By funding a particular PPP, the government gives up the option of financing other items of government expenditure, e.g. education and healthcare.

• In addition, most PPPs are very expensive projects (involving high set-up costs and running costs). This means PPPs can be high-risk projects with unknown rates of return on the investments. For example, Hong Kong Disneyland opened in 2005 but took seven years to declare a profit (the annual profit in 2012 was only US$13.97 million).

• Hence, it can be difficult to persuade a private sector partner to join a PPP. Investors could be unsure and unwilling to form a PPP due to the uncertainty in generating any profit in the long-term.

• There are high legal costs involved in establishing a PPP. The contracts are very complex, so take up a lot of time to draft and finalise.

• As with any partnership in the business world, there is always the potential for disagreements and clashes between the stakeholders of a PPP. For example, the private sector partner will want to generate a large profit for its shareholders, but the public sector entity may have other priorities.