Business organizations in the private sector differ from one another in terms of ownership structure and control, the purpose of existence, how they raise finance, how they are managed and who manages them, their size and how the profits are distributed or losses covered.
Businesses in the private sector are divided into three main types depending on profit orientation:
1. For-profit commercial organizations
a. Unincorporated businesses: Sole trader, Partnership
b. Incorporated businesses: Private limited company, Public limited company, Holding company
2. For-profit social organizations
a. Cooperative
b. Microfinance provider
3. Non-profit social organizations
a. Non-governmental organization (NGO)
b. Charity
2. For-profit social organizations:
Social enterprise organizations can be found in many countries throughout the world.
A for-profit social business organization is a revenue-generating, profit-making business but mainly concerned with social objectives at the core of its operations, rather than maximizing earnings for the owners. It has social aims and uses ethical ways of achieving those aims. The social objective means that the company makes its money in socially responsible way and uses that money to benefit the society instead of making owners rich. To benefit the society, a social business organization conducts activities related to the needs of the community and environment.
While commercial for-profit businesses return a profit for their owners, social enterprises strive to return a surplus for social gain. They need to make a profit (called surplus) to survive as they do not rely on donations like charities. For-profit social organizations are not charities. While profit (surplus) is made, this profit is not redistributed to shareholders in the form of a dividend, but reinvested in the business to make more good things for the society. Making surplus allows social enterprises to expand their activities
Social enterprises produce goods or provide services the same as for-profit commercial organizations, and choose a legal structure for their business activities. They operate as a limited company (very large ones operating nationally) or as a cooperative (small local ones). They use business principles to achieve social objectives and compete with other businesses in the same market or industry.
Social enterprises usually have three main aims commonly referred to as ‘the triple bottom line’. The triple bottom line includes:
1. Economic aim – to make a profit and reinvest back into the business.
2. Social aim– to provide jobs for the local community and support disadvantaged members of the community.
3. Environmental aim – to protect the environment and manage the business in an environmentally sustainable and responsible way.
To sum up, for-profit social enterprises aim to achieve social objectives and earn revenue in excess of costs in order to keep operating. No business can deliver the social good, if they do not manage the financial health of their business. Without a profit (surplus), there is no business, and nobody benefits.
There are two main types of for-profit social enterprises. They include: cooperatives and microfinance providers.
Cooperative
Cooperatives are business organizations that provide benefits for a group of people with the common goal.
They are owned, run and controlled by their members (employees or customers) in order to undertake an economic activity for mutual benefit – creating value for their members by operating in a socially responsible way. Any profits made by a co-operative are usually equally shared and returned to members as dividends.
All members can contribute to the running of the business by sharing workload, responsibilities and decision-making. However, professional managers are hired in larger cooperatives. Anyone can also become a member and each member of the cooperative has an equal share in the ownership and control of the organization (one member has one vote at important meetings), thus contribute to decision-making.
Cooperatives operate in various industries, especially in agriculture and farming, retailing, financial services, child-care service and housing associations. There are three main types of cooperatives, all of which are democratically owned and controlled: producer cooperatives (that make goods), consumer cooperatives (that purchase materials in bulk to benefit from economies of scale) and worker cooperatives (that sell goods and services).
Producer cooperatives. This cooperative buys the produce of the members and then sells it collectively in order to obtain a better price. Farmers unite and pool funds together to buy equipment, fertilizers and seeds collectively, thus benefiting from purchasing economies of scale. They also join and support each other to process and sell their products. Farmer cooperatives are the most common example of producer cooperatives.
Consumer cooperatives. Members of this cooperative buy the products for personal use such as food, financial services, child care, housing, and health-care to get access to goods and services at lower prices than those charged by traditional commercial businesses. It is owned and controlled by customers who pay a membership fee which is used to set up the retail outlet and purchase goods from a wholesaler to sell. Any profits made are usually used to decrease prices in the retail outlet.
Worker cooperatives. This cooperative is set up, owned and organized by employee members such as cooperatives involved in production and manufacturing, cafes, printers, tourism and communications. Members are provided with work as they pool their money to buy equipment, share equally decision-making and any profits. Member-workers are motivated to work harder as they are the owners of the business who receive all the profits that the cooperative makes in the form of dividends. But, they might find it difficult to raise money as members have a limited amount of money making expansion difficult. Worker co-operatives may also be badly run because the workers who make decisions may have very little business experience unlike the professional managers.
Microfinance provider
Microfinance is a type of financial service aimed at entrepreneurs of small businesses enabling the disadvantaged members of the society to gain access to essential financial services to set up small businesses.
Specialist finance businesses in developing countries like China, India, Bangladesh or Vietnam provide small loans to new entrepreneurs, women, poor people living in very deprived circumstances, those on low income, etc.
As a for-profit social enterprise, microfinance providers help to eradicate poverty and raise agricultural productivity by giving easier access to banking and insurance services that may be otherwise very limited for small businesses to access. The World Bank announced that over 500 million individuals have directly benefited from access to microfinance.
Examples of microfinance providers
Example 1: SECLO in India provides sustainable energy solutions (e.g. solar-powered lightning) to low-income households and small businesses.
Example 2: Alibaba in China, the world's largest E-commerce company, provides loans of average size RMB20,000-30,000 (USD$3,500 to USD$5,000) to farmer vendors who sell their agricultural products through the E-commerce platform.
Example 3: KASHF Foundation in Pakistan provides very small loans and social-support services to women entrepreneurs enabling them set up their own businesses in food production, cloth making and other industries.
Example 4: Grameen Bank founded in Bangladesh makes small-scale loans to groups of women setting up businesses and employing local people who otherwise would have had no access to credit.
Example 5: Headquartered in San Francisco, Kiva operates in the US and in more than 80 countries around the world allowing individuals to lend directly to borrowers such as small businesses, education and health services who lack access to traditional financing sources.
