There are at least three forms of legal entities to choose from to start a non-profit organisation; namely a voluntary association, non-profit trust and non-profit company. Though they have the not-for-profit element in common, they are very different. The non-profit company organisation is the most complex of the three, the non-profit trust less complex and the voluntary association least complex.
The voluntary association is the most popular for this reason, however, when contemplating which non-profit organisation to elect, you should consider more than just the quick, easy and less expensive route to start off with.
Voluntary associations are formed by an agreement between three or more people. The agreement may be verbal but a written agreement is invaluable in the event disputes arise.
This form of non-profit organisation is suitable for small community-based organisations that do not need to own or manage substantial amounts of money or valuable property and equipment to carry out their activities.
There is no obligation on any volunteer association to register with any governmental regulatory body. However, if the volunteer association elects to register as a non-profit under the Non-profit Organisation Act 71 of 1997 (NPO Act) the voluntary organisation must adhere to the requirements set out in the NPO Act. Legal status is obtained when you define your volunteer association as an incorporation with its own legal identity in its constitution.
Trusts are regulated by the common law and the Trust Property Control Act 57 of 1988. A trust is an arrangement, set out in a written document called a trust deed in which an owner or founder hands over property and/or funds to a group of people called trustees. They administer the assets for the benefit of the beneficiaries for a stated objective. Public disclosure for trusts are very limited, in that they need no auditor or audited financial statements unless the trust deed requires it.
Except for specified circumstances, a trust does not have a legal personality. However, trust property is protected and a trust acting in that capacity is not personally liable for trust debts, except if he or she has been grossly negligent or committed fraud.
Non-Profit / Section 21 Company
The Companies and Intellectual Property Commission is responsible for the incorporations of non-profit companies. They are incorporated for either a public benefit or an object relating to one or more cultural or social activities, or communal or group interests. A non-profit company’s name will always end with the expression “NPC”.
Mainly the income and property of a non-profit company must not be distributable to its incorporators, members, directors, officers or persons related to any of them, subject to certain exceptions permitted by the Companies Act.
This form of non-profit organisation is especially applicable when your organisation has or aims to have complicated programmes, large budgets and staff compliments.
Registration in terms of the NPO Act
The NPO Act was established to provide for an environment in which non-profit organisations can flourish and to establish an administrative and regulatory framework within which nonprofit organisations can conduct their affairs.
As previously mentioned registration in terms of the NPO Act is not peremptory, however, registration makes practical sense, particularly for voluntary associations who wish to open a bank account. According to the NPO Directorate report, the Financial Intelligence Centre Act had made NPO registration a condition for financial institutions to open a banking account in the name of that organisation.
Incorporation or registration with the NPO Act as a non-profit organisation does not necessarily qualify the non-profit organisation for any particular treatment in terms of the Income Tax Act 1962, or any other legislation, unless that legislation provides otherwise. However, a non-profit organisation may apply to South African Revenue Services for a tax-exempt status, known as Public Benefit Organisation (PBO) status. This will allow the non-profit to take advantage of tax benefits to reduce their tax burden and obtain other benefits.
If registered as a PBO, donations made to the non-profit company are deductible from the donor’s tax liability in terms of section 18 of Income Tax Act.
Though non-profit companies do not have to register with the NPO Act to apply for PBO status, all forms of non-profits must be registered with the NPO Act in order to apply for government funding.
Article by Alayna Lewendal
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.