Social enterprises will be able to operate as a Community Interest Company (CIC), which will have safeguards to ensure they benefit the community and that assets are not used for private gain.
The DTI's consultation document marks the first attempt by government to implement any of the 61 recommendations contained in last year's Private Action, Public Benefit report on the regulation of charities and the not-for-profit sector.
The DTI says the CIC legal form will be appropriate for organisations pursuing social objectives such as childcare, environmental improvement and community transport. It will attract enterprises that don't want to register as charities because of the restrictions on trading that come with charitable status.
"The social enterprise and voluntary sector has been crying out for a new vehicle to take its agenda forward," the document states.
"Social entrepreneurs who want their companies to operate on a not-for-profit basis run into difficulties because company law provides no simple and transparent way to lock profits into a company."
Under the DTI's proposals, CICs will register as companies but be subject to an additional test to show they benefit the community. They will have to report annually to an independent regulator on how they are delivering for "the community or wider public interest" and involve stakeholders in their activities.
Social enterprises that register as CICs will also be able to put a "lock" on profits to ensure they are always used for public benefit.
Secretary of State for Trade and Industry Patricia Hewitt said: "Community Interest Companies will help liberate the entrepreneurial spirit of individuals with public sector values, creating new opportunities at a local level and providing services where they are needed most.
"There is no reason why, for example, a group of residents that care about a community transport venture or local environmental improvement scheme shouldn't actually own it and run it in trust for the wider community."
Jonathan Bland, director of Social Enterprise London, who was a member of the Cabinet Office steering group which produced the original proposals, welcomed the initiative.
"It will allow companies to have a clear social focus with limits on the distribution of profits," he said. "Large numbers of organisations in the voluntary sector are moving in the direction of social enterprise but those that are registered as companies limited by guarantee have no protection against turning into a private interest company."
Bland said that the new form would encourage new forms of long-term "patient capital" investment in social enterprises.