Guidelines for social entrepreneurs in Latvia

After an analysis of various resources available on the internet (including research papers), it can be concluded that social enterprises are best characterized by a certain set of features or criteria.  Therefore, company can get special status only if it meets all of the set criteria or characteristics. In cases when enterprise’s activities fulfill one of criteria or meets one of the features, it cannot be regarded as a social enterprise.

Social enterprise is characterized by the following criteria:

The company's goal is to address socially important problems, creating measurable and useful benefits to the public.

In any regulatory enactment or political document formed in Europe with an aim to define social entrepreneurship, it is emphasized that the purpose of establishing a social enterprise is to SOLVE social problems. This fundamental feature is also highlighted by the European Commission, indicating that the main goals for social enterprises are with a social objective. To paraphrase above mentioned - after the social problem is identified, company can be created to solve this problem.

Moreover, it does not matter whether problem-solving is the direct method of operation for particular company (for example, the company is established to provide work places, provide livelihood, place in society etc. for persons with disabilities or for persons who just have been released from prisons) or if instead the enterprise focuses on directly solving the problem in (e.g., a web portal that aims to promote citizen participation in local municipalities work).

Activities of social enterprise are organized according to commercial practice - creating goods and providing services in the market.

It is very important for social enterprise to be a a participant of the market economy and to produce goods and services which comply with the demand in the market. Enterprise has to use commercial methods and tools in order to achieve their aims and in addition to this, operation of social entrepreneurship must be finically and economically sustainable. In some countries, social enterprises can be subsidized by the state, or they may receive donations. However, there is certain amount of income that must be covered from their own economic activities. In Italy these are at least 70%, in Lithuania - 20% from company’s income.

Social enterprise profits are channeled to achieve social goals, business development or to build reserve fund.

Given that the main objective of social enterprise establishment is to solve social problems, it is run by people who are not inclined to make any special benefits from the company. Therefore prohibition of profit sharing has to be clearly stated in company’s documentation – it must be included in the statutes. If the company does not hold any profit, because its operations are not efficient enough. it cannot be seen as social entrepreneurship.

According to some countries’ legislation, part of dividends can be paid to enterprise’s shareholders. For example, in Italy members are allowed to distribute only a part of profits which do not exceed 20%, in Belgium the limit is 6%. Profit of social entrepreneurship is mainly directed to enterprise’s goal achievement or operation expansion. At the same time, social entrepreneurs in Belgium are obliged to establish accrual fund, depositing at least 6 % of company’s profits each year.

 Employees must  receive adequate and appropriate salary for their work.

One of the most important aspects that characterize social entrepreneurship is fair treatment of employees. Social enterprise cannot generate new, socially disadvantaged or low-income groups as this would be contrary to the very concept of social entrepreneurship. If employees do not receive salary which is appropriate to labour market or if they receive the so-called “envelope pay”, therefore avoiding payment of taxes - the company is a fraud and thus their special status must be subtracted. Often social enterprises employ people with limited work capacity or with no appropriate job skills. Consequently, labour productivity of such people is relatively low. In order to compensate the difference between the low labour productivity and salary which is appropriate to the labour market, state should provide specific support mechanisms, such as partially subsidized salary or favorable tax payments for employer.

Management methods and ownership of social entrepreneurship relies on democratic and participatory principles - corporate governance may consist of employees and stakeholders.

This is one of the oldest principles used to describe social entrepreneurship. 30 years ago, when social entrepreneurship started to develop, they were primarily formed as cooperatives. Hence, a group of people joined cooperative to address a specific problem. Members of a cooperative are not only the direct beneficiaries, but they are involved in company’s management, they develop business strategies and jointly decide on profit distribution. Currently, “target group” or people affected by different social problems and their involvement in management can stipulate more efficient business operations and promote the sustainability of the company.

Recognizing that not all social enterprises in Latvia will be established as cooperatives or members’ organizations, it is important to ensure that at least at the level of cooperate governance (not on the owners’ level), employees and stakeholders are still able to be involved. Perhaps it could be a board or special consultative institution of the company, bearing distinct amount of rights and obligations. Main purpose would then be to advance company’s operations and not result in additional bureaucratic obstacles.

A COMPANY CAN ONLY GET SPECIAL SOCIAL ENTREPRENEURSHIP STATUS, IF IT MEETS ALL OF THE CHARACTERISTICS AND FEATURES IN THIS LIST. 

The concept of social entrepreneurship in Latvia is still under development, therefore we have a unique opportunity to build it exactly the way we need it.

International experience is a useful source of ideas, which helps to evaluate the success and analyze the failures. However, we must establish a legal framework that will be specifically tailored for us, our needs and opportunities.

A legal framework for social entrepreneurship in Latvia has to be created so as to not only support establishment of new social enterprises, but also to help successfully expand the already existing ones. Hopefully, the ideas mentioned in this article, will promote insightful discussions and will contribute to creation of a balanced regulatory framework.