What is a Social Business?
Definition and relationship with social enterprises
If you landed to this page, it probably means you are among the countless numbers of people willing to get their hands dirty in order to address complex social problems such as poverty, discrimination or climate change. That’s actually great, as there has never been a better time to become a changemaker! Yet, you might have heard the term “social business” and got a bit confused. “Is it the same as social enterprise? Is it something else? How does it relate to traditional businesses?”.. surely, these were the main questions that popped up in your head. So, in this article we decided to dig into the concept of “social business”: definition and key principles analyzed for you!
Social Business: Definition and characteristics
We can trace the notion of “social business” back to the late 1980s. Around that time, Nobel Peace Prize laureate Professor Muhammad Yunus founded Grameen Bank, a microfinance institution intended to alleviate poverty across Bangladesh. His goal? To provide the poor with financial services, empowering them to break out of the vicious cycle of poverty.
Grameen Bank tremendous success encouraged Professor Yunus to further develop the concept of “social business” and spread it across the globe. According to M. Yunus, social businesses are indeed companies trying to tackle and solve a societal issue. Unlike traditional not-for-profit organizations, they carry out their social missions through business-oriented methods. In other words, they sell products and/or services to stay financially viable.
There can be only two types of social businesses.
“Type I” Social Businesses
To begin with, a “Type I” social business is a non-loss, non-dividend company, purely oriented towards social value creation. Here, investors get back only the amounts they first poured into the firm: no profits nor dividends are paid afterwards. Why so? Because profit-driven attitudes often tend to cannibalize social goals. To avoid this conflict, dividends are taken out of the picture. So, each time such organizations generate a surplus, they must re-invest it in their operations and business activities.
“Type II” Social Businesses
A different logic applies to the second type of social businesses, “Type II“. Here, the poor own the company, either directly or through a trust fund. In this case, profits can be distributed, as the payment of dividends perfectly aligns with the ultimate social objective (alleviating poverty).
Apart from their differences, it’s important to note that Type I and Type II social businesses both share couple more common rules. For instance, they always have to be environmentally friendly. Also, they must provide the workforce with market wages as well as better-than-standards working conditions. [Click here for a full overview over the seven principles of social business ].
Social Business vs Social Enterprise
Quite too often, people use the terms “social business” and “social enterprise” as synonyms. Yet, we shouldn’t confuse them.
As a matter of fact, social enterprises are a much broader concept than the one discussed so far. Sure, social enterprises are organizations tackling societal problems, just like any social business does. Nevertheless, such enterprises might choose to accomplish their missions either through non-business initiatives or through business-oriented ones. Because of that, the so-called “social enterprise spectrum” happens to include very diverse types of entities.
For instance, charities with income-generating activities are usually considered “social enterprises”. The same goes for profit-making, responsible businesses. And the list goes on. But if – and only if – a self-sustainable social enterprise pays no dividends (or shares profits when the poor are the actual owners), such enterprise becomes the same as a social business.
In this article, we explored the concept of “social business“.
According to Professor Muhammad Yunus, social businesses are socially-oriented enterprises carrying out their missions through business logics and means. They can either be non-loss, no-dividend firms (“Type I”) or profit-making entities owned by the poor (“Type II”). Furthermore, remember that social business is just a small subset of the more generic notion of “social enterprise”, since the two show common traits but also major differences.
And finally, let’s go back to your initial questions. Does your company qualify as social business? If so, is it a Type I or Type II? If not, what kind of social enterprise is it? Feel free to share your answer in the comment section below!
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