NZ’s legal structures holding back impact-driven business

Restrictions in New Zealand’s legal structures are holding back impact-driven business says a new report, enabled by the Law Foundation and released this week as part of the Social Enterprise Sector Development Programme, a partnership between Ākina and the New Zealand Government.

The report, Structuring for Impact: Evolving Legal Structures for Businesses in New Zealand, explores whether legal structures are disadvantaging social enterprises. The report also identifies that structural barriers are preventing organisations more widely from prioritising positive social and environmental impact alongside profit. The report outlines an opportunity to create a fit for purpose legal structure to enable more impact-driven business, which would deliver significant positive change for New Zealand.

Impact-driven businesses are different from traditional profit-driven businesses in that they trade to deliver social or environmental impact. They generally reinvest their profits into their mission. New Zealand currently has no legal structure for businesses that exist to deliver positive impact in this way. Ākina Foundation CEO, Louise Aitken, says this means many businesses are restricted by current structures.

“Our legal structures are built around very traditional ideas that you’re either a business like a limited liability company, or you’re a charity.” says Aitken “Social enterprises are telling us that they’re caught in the middle. They exist to create maximum positive social or environmental impact, but our current business structures make it challenging for them to do this” she says. “And more broadly, we’ve found there are multiple barriers preventing businesses from delivering impact, from innovating, scaling and accessing finance.”

The report Structuring for Impact draws on findings from interviews with 25 organisations, including a range of social enterprises like Trade Aid, Kilmarnock, and Eat My Lunch, Māori enterprises Te Rūnanga-ā-Iwi O Ngā Phui and Hikurangi Enterprises, as well as other organisations like Kiwibank, Inland Revenue and Charities Services.

One organisation interviewed is Patu Aotearoa – a Hawkes Bay health and fitness business that delivers significant outcomes for Māori health and wellbeing. Patu founder Levi Armstrong says their business structure means the company has had to turn down multiple funding offers that would have enabled Patu to scale.

“If we had been able to take them [funding opportunities] we probably would’ve had 30 sites around the country now. We would’ve amplified our impact. We could’ve stopped someone from committing suicide… I’ve had a few bros come into me and tell me, ‘you know, if it wasn’t for Patu I probably wouldn’t be here.’ There have been so many transformations… even bros getting into work.” says Armstrong.

Currently, impact-driven businesses face hurdles in accessing funding from banks, because they are unable to effectively convey their impact as part of their commercial viability. After initially setting-up as a limited liability company, Patu also created a charitable trust as they were missing out on philanthropic funding and tax benefits. This decision has come with the burden of increased administration and compliance costs, such as increased financial reporting requirements.

“You just want to give up sometimes… it’s the behind-the-scenes stuff, the legal structures, the business, the tax, everything else that we have to deal with. We know that we’re doing a good job on the ground but… at times you just want to give up” Armstrong says.

Structuring for Impact is focussed on the challenges created by current legal structures, though it does pave the way for more work to be done on potential solutions. One such solution could be to explore the possibility of changes to the Companies Act 1993, to determine if legislative change could support impact-driven businesses, possibly through an optional ‘impact status’.

It is estimated that social enterprises contribute $1bn to New Zealand’s economy every year.  Louise Aitken says Ākina will continue to work with business leaders and the government on solutions that unlock the potential of impact-driven businesses.

“The number of businesses focussed on impact is growing, at the same time that the government is beginning to measure the broader well-being of our economy. If we can make it easier for businesses to deliver impact there would be huge positive flow on effects for the wellbeing of New Zealanders.” she says. “Impactful organisations like social enterprises are the future of business. They can build strong resilient communities and contribute solutions for the restoration of our environment. If there were more businesses like this, we would all be better off, and so would our planet.” Aitken says.

Background to Structuring for Impact

Structuring for Impact: Evolving Legal Structures for Business in New Zealand is part of the Social Enterprise Sector Development Programme, which is a three year partnership between the Department of Internal Affairs on behalf the government, and the Ākina Foundation. It is supported in partnership with the Community Enterprise Network Trust (CENT). The programme aims to create the conditions for social enterprises to thrive, and inform the Government’s ongoing contribution to the sector.