In order to increase the impact of your not-for-profit activities and ensure that they outlast those who are currently running them; attract donor funding; build donor confidence; avoid some of your funding going to SARS as donations tax; and protect yourself and others involved from personal liability, you first need to establish a separate legal structure to ‘own’ and manage them. The setting up of this organisation will result in some additional administrative tasks, the obligations to follow good governance procedures and the relinquishing of ultimate personal control.
It is most important that you consider the various sorts of legal structures available, and choose the one which best suits your activities and objectives. Once you have set up this structure, and have all sorts of other registrations and contracts in place, it is very difficult and costly to go back and make a change.
MAKING CHOICES: THE THREE STRUCTURES
The only three not-for-profit legal structure options available in South Africa that will gain you the registration and status needed to attract donations are the following:
This is a membership-based, democratic organisation, and it is formed under common law, by the members agreeing to do so and, usually, adopting and signing a founding document called a constitution.
There are no other or external registration requirements, but you need to be careful to ensure that the voluntary association is actually suitable, and, if it is, that the constitution is drafted so that members and office-bearers are protected and the organisation is properly governed.
This is a top-driven/vision-driven sort of organisation, as it has just board of trustees, and no members.
It is registered with the Master of the High Court, and proof of registration is a single page, called a “letters of Authority”. The founding document is trust deed (or a will).
The trust registration is a charming but antiquated paper-based system, which requires filing all documents in original with original (wet-ink) signatures by all trustees on the same actual pieces of paper. It is not recommended for organisations with overseas or widely-spaced board members, and the offices of the Master frequently go into the doldrums or grind to a halt, making both set-up and the process of changing trustees in the future, laborious.
This used to be called a ‘section 21’ company, and it can be structured to suit either a democratic or a top-driven organisation.
This structure is highly esteemed and trusted by donors and gives stakeholders a high degree of comfort, in that the existence and directors of an NPC are verifiable online at any time.
The registration is effected via email, and director changes are made online. No wet-ink or original documents are required, and the process is speedy and convenient.
The founding document is a memorandum of incorporation (MOI) and we always draft and use a ‘unique’ one, which has a comprehensible narrative flow, accurately describes the governance of the particular organisation, and contains the clauses required for NPO and PBO (tax exemption) registrations. You can buy a shelf NPC, but amending its founding documents and changing its directors will cost as much, and take as long, as setting up a new one, properly, from scratch.
Each of these types of entities may register as NPOs and PBOs and all will protect you from liability. The main factor when deciding which one to use will be which is most appropriate to your situation and abilities. Donor perception often plays a role in the decision. The most basic determining factor, is whether you are membership-based or not- if you are, then a voluntary association or an NPC with members would work, if not, then you would need to establish either a trust or an NPC without members.
In any of these entities, you will require a minimum of three people to serve on your Board/ committee. Regarding family involvement as board members, the rules are as follows:
- NPO Directorate allows a maximum of two related board members;
- SARS requires at least three board members who are not related to one another; and
- Donors generally like the unrelated board members to be in the majority.
Regarding executive/non-executive board/committee members, you can run an organisation (and achieve PBO status) with only paid employees on the board, but you will find that credibility with donors/other stakeholders is improved if non-exec/ independent board members are included. If executives are included on the board, it is best to have more independent board members than those who are employed.
You will need at least one South African citizen to be on your board, if you register a trust. An NPC may be set up with all foreign Board members, but will require at least one South African ‘officer’ (even if it is only the company secretary) in order to be registered as an NPO.
Once the organisation is set up, it may open bank accounts, enter into contracts, employ people, etc
After the organisation is established, it may make two additional registration applications. Neither is compulsory, but funders usually require them:
- as a NonProfit Organisation (NPO) with the Department of Social Development: these applications take about 3 months to be processed by DSD, once lodged by us online (an NPO number can be issued within a month, but it takes about another 3 for the certificate to arrive).MYTH: an NPO is a sort of organisation. It is not, it is an add-on, optional registration available to voluntary associations, charitable trusts and NPCs
- for tax exempt/ Public Benefit Organisation status: SARS takes about 4 months or so to process them. The 18A application, if applicable, is part of the same process.MYTH: TAX EXEMPTION IS AUTOMATIC – it is not, you are not tax exempt and you do not have 18A status until SARS says you do.
*Please be aware that 18A status (which allows your local donors to claim tax deductions) is not nearly as easy to achieve as just PBO status. Your work will have to fit within certain categories, and these are strictly adhered to by SARS.
Depending on the legal structure you have chosen, the work you do, your tax status and the percentage of beneficiaries who are ‘Black’ as defined in the Amended Codes of Good Practice, you may be eligible for enhanced BEE status, which will mean that your donors can gain more BEE points from donating to, supporting, or procuring services from your organisation. In order to form part of a hybrid social enterprise structure you may need to include certain provisions in your founding documents.
MYTH: enhanced BEE STATUS IS NOT AUTOMATIC for all not-for-profit entities.