Paralegals and Advice Offices
Non-profit organisations and the Nonprofit Organisations Act
The information in this section is taken from the Non-profit Organisations Law and Practice Manual published by Legal Resources Centre. We have only included the most important points from this manual. If you would like a copy of the full manual contact your nearest LRC office.
What is a non-profit organisation?
A non-profit organisation (NPO) is a civil society organisation which is not part of government. They have self-governing boards which are accountable to their owners or members.
Non-profit organisations -
- provide a public service or have some public purpose that goes beyond serving the personal interests of the members of the NPO (such as the promotion of social welfare, economic development, religion, charity, education or research)
- may make a profit, but may not give any of the profits to its members - they can use the profits they make for the work of the organisation
- often have to fundraise from donors because they don't make enough money (income) to cover their expenses
Non-governmental organisations (NGOs) are usually non-profit organisations.
What kinds of legal structures can an NPO choose to be?
An NPO can choose to be one of the following structures:
Section 21 company
An organisation that is not-for-profit can be set up as a Section 21company under the Companies Act No 61 of 1973.
What is a section 21 company?
A section 21 company is similar to a normal profit company but it is not allowed to operate to make a profit and it can't share the profits out amongst the company members.
Large organisations which run big programmes and budgets and have got lots of staff usually set up a section 21 company. It is a difficult structure to set up because there are complicated procedures and legal requirements to follow.
Section 21 companies have a separate or independent legal identity which is distinct from its members. This means -
- the organisation, not its members and staff, are responsible for the organisation's debts, contracts and other legal repsonsibilities
- the assets of the organisation are in the name of the organisation, not its members
- the organisation carries on with its work even if its members or staff change
- the organisation can sue, be sued and enter into contracts in its own name
Who runs a section 21 company?
A company consists of members and directors. The members appoint the directors who have executive powers. The directors are responsible for the day-to-day running of the company.
How do you form a section 21 company?
All companies, including section 21 companies, are registered with the Registrar of Companies under the Companies Act. To register as a section 21 company your organisation must:
- be established for a lawful objective
- have as its main objective the promotion of religion, the arts, science, education ,charity, social activity or a communal or group interest
- only use its income and property to promote the main objective
- not distribute its money or property to the members or staff, unless they are being paid for work they have done
- appoint official auditors
- keep financial and accounting records
- hold an annual general meeting
When the company is dissolved, its assets must be transferred to another organisation with a similar purpose.
The memorandum and articles of association for a company
The founding documents for a section 21 company are the Memorandum and the Articles of Association. The memorandum sets out the purpose of the NPO and the Articles of Association say how it will work.
See - Resources for more information
Registering under the Non-profit Organisation Act
The Companies Act says Section 21 companies to be accountable and transparent to the public. There is therefore no purpose in registering under the NPO Act unless the organisation wants to benefit from government benefits under the Act.
See - Voluntary registration under the NPO Act
Trusts
An organisation can be set up as a Trust under common law and the Trust and Property Control Act No 57 of 1988. It is easier to set up a Trust than a section 21 company.
What is a trust?
A trust is a written arrangement between an owner and trustees. The owner hands over property and/or funds to a group of people (called trustees) who look after the property and funds and use it for the benefit of other people (called beneficiaries) for a specific objective.
Who runs a trust?
A trust is run by a Board of Trustees. A deed of Trust will say what the powers and duties are of a trust. Trustees can be paid for the work they do for the NPO.
Which laws govern trusts?
Trusts are governed by the common law and the Trust Property Control Act No 57 of 1988.
Trusts do not have a separate legal personality. If there is a legal dispute, the trustees, not the trust, can sue or be sued. The property of the Trust is protected and the Trust Property Control Act says trust property must be kept separate from the trustees' personal property. Trusts must have their own bank accounts.How do you form a trust?
A notary public must write and attest your trust deed and the trust must be registered with the Master of the High Court. If there are any changes to trustees at any stage, then the Master must be given notice of this.
The trust deed
The trust deed is the founding document of a trust.
Registering under the Nonprofit Organisation Act
If a trust registers as an NPO under the NPO Act ( in addition to registering with the Master of the Court) it will become a body corporate with an independent legal personality.
See - Voluntary registration under the NPO Act
Voluntary association
This is the easiest and simplest structure to set up and manage. It also has the same powers and can do the same thing as a trust or Section 21 company.
What is a voluntary association?
A voluntary association can be set up when three or more people enter into an agreement to form a non-profit organisation. Voluntary associations are best suited to small community-based organisations that do not need to own or manage large amounts of money or property and equipment. For example, a School parent association.
A voluntary association is the quickest and cheapest structure to set up.
Who runs a voluntary association?
There is usually a constitution that provides for the appointment of a group of people with executive and/or management powers.
Which laws govern voluntary associations?
The common law and the Communal Property Associations Act No 28 of 1996 govern voluntary associations.
If you want to make a voluntary association an independent legal personality, the law says the constitution must specify that:
- the organisation will continue to exist even if the membership changes
- the assets and liabilities (debts) of the organisation will be held separately from those of its members
How do you form a voluntary association?
You can form a voluntary association by having a written or verbal agreement. There is no government registry that you have to register with but you can register under the Nonprofit Organisation Act (see Voluntary registration).
The constitution of a voluntary association
The written agreement of a voluntary association is called the constitution. These are the rules which say how the organisation will run. It also says what its main purpose and objectives are, who will make the decisions and how decisions will be made.
The Constitution of a voluntary association will usually have detailed and clear sections on:
- The purpose of the organisation
- The objectives of the organisation - what it wants to achieve
- The type of organisation it is: for example, nonprofit voluntary association
- The membership of the organisation- who may become a member and the rights and duties of members; how people can join, resign or be expelled
- The structures and main procedures of decision-making in the organisation:
- Annual general meetings and other meetings
- Elections and appointments for the different structures of the organisation
- Their powers and functions
- Who makes what decisions
- How the organisation is governed and how decisions are made
- How it is organised to get the work done
- The roles, rights and responsibilities of people holding specific positions and of the idfferent structures: what individuals and structures are responsible for, to whom must they account.
- How the finances and assets of the organisation are controlled
- Financial year and audit process
- Closing down the organisation - what process must be followed and what will happen to the money and assets of the organisation.
See - Resources for other references to information on voluntary associations.
Registering under the Nonprofit Organisation (NPO) Act
If a voluntary association wants to register as an NPO under the NPO Act it will have to follow the requirements set out in the Act. It can be an advantage to register under the NPO Act because funders generally prefer to work with organisations that have been formally and legally recognised. NPOs that have registered under the Act also have access to certain government benefits.
See - Voluntary registration under the NPO Act
Guide to choosing a structure for an NPO
The following factors are guidelines to help you choose a structure for your organisation.
- Size, capacity and complexity of your organisation
Large organisations with big programmes and budgets will usually set up a section 21 company. Smaller organisations will usually set up a Trust of Voluntary association.
- Funder's needs
People funding the organisation, for example, overseas funders or government may prefer a particular structure. For example, corporate (business) funders usually prefer organisations to be section 21 companies.
- Paying tax
It doesn't matter which structure you choose this does not affect the amount of tax your organisation might have to pay. The factors that influence your tax status are the purpose, objectives and activities of the organisation.
- Registering with a government registry
Only section 21 companies and trusts have to register with a government registry. The advantages of doing this include:
- there are rules and regulations which organisations have to follow if they are registered, this helps to make things clear to those inside and outside the organisation
- organisations have to be accountable to the public which means all stakeholders, for example, donors, people benefiting from the organisation's work, the general public and the government are aware of how money is being spent by the organisation
The Non-Profit Organisations Act
The Non-profit Organisations Act (No 71 of 1997) (the NPO Act) has repealed the Fund-raising Act (No 107 of 1978) except for chapter 2 of the Fund-raising Act which deals with disaster and relief funds.
Definition of an NPO under the NPO Act
The NPO Act says an NPO is-
- a trust, company or other association of people
- established for a public purpose, and
- the income and property are not distributed amongst its members or staff except to pay for a service
So, in terms of the Act, NPOs are organisations that are not set up for a person's own profit but are there to serve the public or some common interest of their members.
Objectives of the NPO Act
The main objectives of the NPO Act are to -
- make it easier for NPOs to do their work
- set standards for organisations so that they are accountable and transparent in their work
The Act aims to meet these objectives by allowing organisations to register with the Directorate of the Department of Social Development. This is called voluntary registration.
Voluntary registration
The NPO Act encourages section 21 companies, trusts and voluntary associations to register with The Directorate of the Department of Social Development. NPOs only have to register if they want to and if they meet certain requirements, which are:
- it must not operate for profit (it must be a non-profit organisation)
- it must be have a separate legal identity to its members
The purpose of voluntary registration
The purpose of voluntary registration is to make NPOs more accountable and transparent to the public by prescribing certain rules on how they must function.
The benefits of voluntary registration
NPOs that register with the Department of Social Development will qualify for certain benefits and allowances from the government. In the future it is possible that the government will not pay benefits or allowances to an NPO unless it is registered with the Department. The following acts also say that NPOs must be registered under the NPO Act in certain circumstances:
- the Lotteries Act - if the NPO wants to run a lottery
- the new tax laws - if the NPO receives a tax benefit
How does an NPO register?
NPOs must first check that their founding documents are in order and meet the requirements of section 12(2) of the NPO Act.
Founding documents are:
- the constitution for a voluntary association
- the deed of trust for a trust
- the Memorandum and Articles of Association for a section 21 company
NPOs should then send two copies of their founding documents together with the application form to the NPO directorate.
See - Resources for contact details on where to get an application form and who to send it to.
Duties of NPOs that have registered
Once an NPO has registered with the department, it must follow certain procedures. The most important procedures are:
- To keep all accounting records
- To draw up financial statements within six months of the end of the financial year (these must include a statement of income and expenditure and a balance sheet)
- To arrange for an accountant to compile a written report within two months after drawing up its financial statement. The report must say that the financial statements are consistent with the accounting records and that the NPO has complied with all the financial reporting requirements of the NPO Act.
Tax law for NPOs
The Tax laws Amendment Act No 30 of 2000 has amended the Income Tax Act No 58 of 1962 (the Tax Act). There are two main tax benefits for NPOs under the Tax Act:
- income tax exemption - the NPO doesn't have to pay any tax on its income
- donor tax deductions for people or bodies that donate money to the NPO
See - Resources for details on where you can find out more about NPOs and the tax laws.
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