There is no set definition of a social entrepreneur, but there are some characteristics. Norwegian social entrepreneurs are typically motivated by creating social impact and deliver results based on what is known as the “double bottom line”: achieving outcomes that benefit both society and the economy.
Think tank Agenda finds three categories of social entrepreneurs in Norway today: trackers, challengers and includers. The trackers (Sporhunder) find “gaps” in the welfare society and invent completely new solutions to close these gaps. The challengers (Utfordrere) find existing measures to not hit well enough and become a competitor to the existing measures. The includers (Innslusere) aim at getting people back or into the work force through their organizations.
Legal Landscape for Social Entrepreneurs in Norway
There is no specific legal framework exclusively for social entrepreneurs in Norway. However, there are two regulations that may have implications. The Corporate Sustainability Reporting Directive (CSRD) requires large companies with more than 500 employees/ 320 MNOK in turnover or balance over 160 MNOK to report on social sustainability, starting this year (2024). This might affect funding or grants to social entrepreneurs as companies might change strategies for reporting purposes. The Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to disclose the concrete social characteristics of investment products promoted with such characteristics. This means that social entrepreneurs who want to attract social impact investment funds should have documentation for its social characteristics in order.
In short, the social entrepreneurs must follow the same rules and regulations as everybody else.
Challenges for social entrepreneurs
We see that social entrepreneurs face the same challenges as other startups, but there are also specific challenges for this group. The first mistake made is often wrong choice of legal entity. Typically, the intention is to be able to (also) make a profit for the owners, but the legal entity form does not allow this. Other issues can be mistakes in fundings, where capital increases aren’t registered and there is no control of share transfers.
Starting an organization – choice of legal entity
Choice of legal entity depends on the activity or business that is to be carried out. Key questions are whether you want a profit or non- profit organization, risk tolerance and desired ownership structure.
For social entrepreneurs, popular choices of legal entities are aksjeselskap (limited liability company), samvirkelag (cooperative), forening (Association) and stiftelse (foundation).
Aksjeselskap (limited liability company) can be either for profit or non-profit. The risk is limited to the owners’ capital contribution. Voting rights within the company depend on the extent of ownership held by each shareholder. A commercial aksjeselskap can distribute the surplus to its owners as dividend. A non-profit aksjeselskap cannot distribute dividend to the shareholders.
Samvirkelag (cooperative) is an association which aims to promote the members' economic interests through their participation in the business as consumers, suppliers or similar. The owners are members, and each member has one vote at the general assembly. The members do not have personal liability for the association’s obligations. Returns are based on the member’s turnover with the samvirkelag. For instance, where two foresters supply wood to the cooperative: the forester who delivers the most wood will receive a larger share of the surplus compared to the forester who contributes less wood. Uloba, an independent living organistation for people with disabilities, is an example of an entity organized as a samvirkelag.
Forening (association) has members who each has one vote at the general assembly. The members are not responsible for the organisation’s obligations and can normally not receive dividends. Røde kors (Red Cross) is an example of an entity organised as a forening.
Stiftelse (foundation) is a self-owned legal entity with a basis in a disposition. The disposition can be a gift or similar which is intended for a defined purpose. The foundation is governed by a board and controlled by Lotteri- og stiftelsestilsynet (The Norwegian Gambling and Foundation Authority). Foundations may perform both for profit and non-profit. Surplus can only be distributed according to the purpose of the foundation.
It is also possible for a foundation or association to hold an aksjeselskap which runs activities for profit.
Tax and VAT
Tax exemption for non-profit entities
Non-profit entities can apply for tax exemptions through an application to the Tax Administration (Skatteetaten). Conditions to be met are i.a. that the articles of association state that the purpose of the entity is to be non-profit and, in the event of closing down the entity, that the funds will be distributed to a non-profit purpose. For entities that run both commercial and non-commercial activities, the tax exemption can be granted for the non-commercial part. In cases with mixed activity separating the activities into for instance two separate aksjeselskap can be a preferred solution.
Volunteers and employees can receive up to NOK 10 000 tax free in reimbursement from tax exempt organisations (tax year 2024).
Tax deductions
Organisations in Norway and EEA (European Economic Area) can apply for tax deductibility for donors who give contributions over NOK 500.
In aksjeselskap (limited liability company) startups, personal shareholders can receive tax deductions on shareholder contributions from NOK 30 000 up to NOK 1 million in the 6 first years of the company. The average number of employees should be less than 25, operating revenues and net value shall be less than NOK 40 million and public bodies are to own less than 25 % of the company at the end of the year the share increase is registered in the Register of Business Entities. Further conditions apply.
VAT
Most entities must be registered in the Value Added Tax Register. The threshold for VAT registration is turnover on goods and services of NOK 50 000 for commercial companies and NOK 140 000 for non- commercial companies. Sale of some goods and services are exempt from VAT, for instance health and social services.
Funding
Social entrepreneurs are often eager to get started, and need funding for their activity. A common mistake is to not follow formal procedures when receiving funds. There can be confusion as to whether money received are gifts, share capital, loans or just unspecified investments.
When accepting investments, it should be clear who has contributed and what the investment is intended to be.
For loans, clear loan agreements with interest rates and conditions for repayment should be agreed upon.
Capital increase through shareholder contributions for aksjeselskap is a formal procedure, which increases the equity of the company. Capital contributions can be either through issuing new shares in the company or increasing the par value of the shares. The contribution can be a cash contribution, in kind or through a debt conversion. In any case, the formal procedure must be followed and registered at the Register of Business Entities.
If the organization is to apply for grants from NAV (the Norwegian Labour and Welfare Administration), the conditions are that the articles of association states it is a non-profit organization and that the organization is registered with Frivillighetsregisteret (Register of Non-Profit Organisations).
Daily business
Public procurement
Public entities are often potential customers or cooperation partners for social entrepreneurs. Public entities must act according to procurement laws and regulations when buying products and services. Many social entrepreneurs have difficulties in public procurement processes, e.g. because the procurer might not necessarily have social entrepreneurs in mind when issuing public procurements. Often it is necessary to approach public authorities before the procurement is announced, in order to suggest adapting the procurement in a way that is also suitable for social entrepreneurs.
We see a shift where public authorities give grants instead of public procurements for social entrepreneurs. Our experience is that this is a short term solution, as the organization will not have any commercial experience if the grants are not renewed.
Share transfer
We see that there are issues with transfer of shares between shareholders in aksjeselskap. This is sometimes done informally “between friends”, but this is an act with legal consequences and should be handled with care. The company must keep track of shareholders and is to report shareholders every year to the Tax Authorities. The shareholders should also keep track of the sale price of the shares as this is the basis for taxation.
Shareholder/ stakeholder conflicts
Sometimes conflicts arise between the shareholders or stakeholders. As with marriage, an agreement made in peacetime is a good investment for a successful work life together. A shareholder agreement which regulates, for instance, methods of conflict solution and exit is very often a good investment, although not mandatory by law.
Contractor or employee
Especially organisations which try to help people back to work (the Includers) have challenges seeing the difference between contractors and employees. An employee refers to anyone who performs work for and is subordinate to someone. In determining whether a person is an employee or a contractor, factors as whether the individual continuously provides their personal labor and whether they are subject to direction, management, and control should be considered. Contractors typically perform work in their own service and carry out assignments at their own expense and risk. The definition has consequences both for risk management, employer/ employee obligations and tax.
