Introduction
The long awaited Social Enterprise Accreditation Guidelines (“Guidelines”) was finally launched on 12 April 2019 by the Ministry of Entrepreneur Development (“MED”).
Presently, many social entrepreneurs operate their SE businesses under existing regulatory framework which does not specifically cater for SE businesses. Over the years, we note that many SE entrepreneurs have formed their entities as a private limited company (or better known as Sendirian Berhad ‘Sdn Bhd’) under the Companies Act. The Guidelines seem to have recognised this trend and allowed wider flexibility for SE entrepreneurs to operate (more below).
This post aims to give an overview of the accreditation criteria under the Guidelines. We will look at how the Guidelines define “social enterprise” (“SE”) under the Guidelines and the criteria for an entity to be accredited as a SE.
Definition of “social enterprise” (“SE”)
At the outset, it is also worth noting that the MED has not published an English version of the Guidelines. The Social Enterprise Accreditation (SEA) Guidelines is available for download here (in Bahasa Malaysia). Therefore, the definition below is our attempt in translating it into English.
Under the Guidelines, an SE entity is defined as:
a business entity registered under any written law in Malaysia that creates social impact or positive environmental impact in a proactive manner and financially sustainable. (emphasis ours)
Definition of “social enterprise” under the Guidelines
Based on the definition above, it may be summarised that an SE entity must fulfil the following conditions to be accredited by the MED:
- a business entity registered under any written law in Malaysia; AND
- creates social impact OR positive environmental impact in a proactive manner; AND
- financially sustainable.
Accreditation criteria
To be accredited, an SE firm must fulfil three main criterias below.
- Create social impact OR positive environmental impact in a proactive manner.
- Contribute significant resources to social objective or environment.
- Financially sustainable
In the next post, we will be looking at these three criteria above and potential issues in greater detail.
1. Business entity
It is interesting to note that the Guidelines allows for a great flexibility for SE entrepreneurs to decide on how the SE entity should be formed.
As stated earlier, one reason why the Guidelines is silent is perhaps is to address the present issue that Malaysia still does not have a legal entity that caters specifically for SE activity. For instance, United States allows an SE entity to be formed as a B Corp whereas in the United Kingdom an SE entity may be formed as a Community Interest Company. A set of tax incentives and other benefits are attached to these respective formations.
If the Guidelines were to impose a requirement for an SE entity to be formed under a specific legal entity, this will cause great impediment to be accredited as the SE entity may need to set up a new entity to comply with the Guidelines.
As a social entrepreneur, this potentially means is that your SE entity may be formed as:
- a company
- a limited liability partnership
- a society, club or an association
- a cooperative
- a foundation
- an entity formed under Labuan laws
Please also note that the SE entity must be a entity formed under Malaysian laws.
2. Creates social impact OR create positive environmental impact in a proactive manner
Clear social impact objective
Broadly speaking, the SE entity must state clearly its objective to create social impact. The objectives must be displayed on its website including its constitution (this only applies if the SE entity is a company like a private limited company ie Sendirian Berhad ‘Sdn Bhd‘). To illustrate, a good SE entity’s objective is “To reduce the amount trash sent to the landfill.”
Contribute significant resources to social mission or environmental causes
Any SE entity seeking to be accredited must qualify with any of the following criterias:
- Channel at least 50% of the profits made by an SE entity must be channeled to social impact or environmental causes.
- Or alternatively, employ at least 51% of employees from underprivileged community.
- Allocate at least 35% of the cost of products / services in helping target groups or executing social impact or environmental causes
- Use 51% from the profits to achieve social or environmental mission
The requirement above may be assessed by the MED on a case by case basis.
3. Financially sustainable
An SE entity must demonstrate that it is financially sustainable. As an SE Entity, more than 50% of the annual income made by an SE entity must be derived from the goods sold or services rendered to its clients. The
income must not be derived from financial assistance or grants.
In the event that the SE entity is a “startup”, the entity must demonstrate that it has a business model which is financially viable. But the Guidelines is silent on the details of what is a “startup”. It is not clear whether the SE entity must be formed within time frame for an entity be considered a “startup”.
The word “income” is defined in accordance with the Malaysian Financial Reporting Standards (MFRS) 9.
The applicant will be assessed based on the latest financial statements. This may be potentially difficult to demonstrate if the SE entity is newly formed. For instance, a Sdn Bhd is not required to file its financial statements for 18 months from the date of its incorporation.
Benefits of accreditation
An accredited SE firm will also enjoy the following benefits:
- Listed on MED managed online directory. The directory aims to help potential customers get details and find out more the SE entity’s activities
- Entry into ‘Buy for Impact’. The campaign seeks to promote private and public sectors to get products and services from social enterprises
- Access to financing and support from time to time
- Entry into notable SE network in Malaysia
However, the Guidelines does not specify further on the type of financing opportunities that may be available for SE firms.
Application process
An SE entity seeking to be accredited may apply online on MED’s SEA platform at http://www.med.gov.my/portal/. But, at the date of this post, the platform does not seem to be up yet.
In the next post, we will be looking at different accreditation levels that an SE entity may qualify including potential tax incentives.
Conclusion
The Guidelines provides a general overview of the accreditation criteria for SE entity seeking to be accredited notwithstanding the growth stage of the business. More clarity is still be needed under the Guidelines such as when an SE entity which may deemed to be a “startup”.
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For more information on starting or structuring your social enterprise business in Malaysia, please contact us Izwan at [email protected]
