What is in this guide?
- The similarities and differences between non-profit and for-profit organisations
- Choosing a legal structure
- The Nonprofit Organisations Act 71 of 1997
- Legal structures commonly used by NPOs
- Voluntary Associations
- Section 21 companies
- What about for-profit organisations?
- More information
An organised, vibrant civil society is essential for participatory democracy and development. There are many different kinds of civil society organisations: some are set up to make a profit for their members, others are not for profit but to provide some form of service or benefit to their members or the public. What all civil society organisations have in common is that they are not part of government.
The new South African constitution (Constitution of the Republic of South Africa Act 108 of 1996) guarantees everyone the right to freedom of association. This means that you have the right to associate with other people and form organisations. This right to freedom of association is essential for the formation of civil society organisations.
South Africa, like other countries, has a legal framework for civil society organisations. The legal framework serves two purposes:
We hope that the booklet will help everyone involved in building and strengthening NPOs to:
It is aimed at community leaders, service providers, paralegals, advice offices and NPOs themselves, and is part of a series of booklets which focus on the laws that affect NPOs, including 'Guide to the NPO Act' and 'New Tax Law for South African NPOs'.
Both NPOs and for-profit organisations are:
And both NPOs and for-profit organisations must:
|Non-profit organisations||For-profit organisations|
|Provide some 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).||Operate for the purpose of making profits.|
|May make a profit, but may not distribute their property or profits to their members. They use any profits they make to further their public interest objectives.||Distribute profits to their owners or members.|
|Frequently do not generate enough income to cover all their expenses, so they fundraise from the public or donors.||Frequently borrow money, at a specified interest rate, if they cannot self-finance all their capital and operating costs. They calculate that they will be able to pay back the loan plus interest from the profits they intend to make.|
|On dissolution, any surplus assets, after payment of all debts, are given to an NPO with similar objectives. Assets are not distributed to the members.||On dissolution, after payment of all debts, distribute any surplus assets to the owners or members.|
What are the legal structures that civil society organisations can choose from?
The table below shows some of the structures that civil society organisations can choose from. You will notice that some structures can be used by both NPOs and for-profit organisations. Some structures require that you register with a government registry.
|NPO||Law||For profit organisation|
|voluntary association||common law||partnership|
|trust||common law and Trust and Property Control Act 57/1988||trust|
|Close Corporations Act 69/1984||close corporation|
|Section 21 company||Companies Act 61/1973||private company (pty) ltd or public company (ltd)|
|Co-operatives Act 91/1981||co-operatives|
|communal property association||Communal Property Associations Act 28/1996||communal property association|
First it depends on whether your organisation is for profit or not. If it is not for profit, then you must select the non-profit structure best suited to your work. This depends on many factors.
The formal establishment and ongoing regulatory requirements are most complex for a Section 21 company, less complex for a trust and least complex for a voluntary association (VA). So the most common structure for small, newly established NPOs is the VA, while trusts and Section 21 companies are appropriate for larger, well established NPOs with big budgets, complex programmes and lots of staff. (While a VA is the simplest NPO to establish and manage in terms of ongoing regulatory requirements, it may nevertheless exercise all the powers and do the same things as a trust or Section 21 company.)
Sometimes people or organisations that your organisation will interact with, such as funders or government departments, may prefer a particular structure. This may influence your decision. For example, the business world tends to be familiar and comfortable with the legal framework which governs Section 21 companies. Your organisation will have to stick to the requirements of the law that governs the structure that you choose.
Your choice of structure does not influence your organisation's eligibility for tax exempt status and donor deductible status; the purpose, objectives and activities of your organisation do. (Tax exempt status means exemption from paying income and other taxes. Donor deductible status means that people who make donations to your organisation receive a tax deduction.) The tax law requires that the constitutions of all NPOs which apply for tax exemption include a list of clauses which bolster and reinforce their essential non-profit distributing clauses. Our booklet, 'New tax law for South African NPOs', deals with these issues in detail.
Not all legal structures have to register with a government registry, for example VAs and partnerships don't, while trusts and Section 21 companies do. If you comply with the necessary requirements for registration and then register your founding documents with a government registry they are available for public scrutiny. After that you will need to comply with the ongoing regulatory requirements for your particular legal structure, such as filing an annual report. There are certain advantages in choosing to register.
As organisations grow, they need to formalise their ways of operating. Working with an established set of legally binding rules helps to make things clear, to those within the organisation and to people outside the organisation who interact with it, work with it and do business with it.
Often organisations want to publicly disclose and account to stakeholders, that is, donors, beneficiaries, the general public and the government. If an organisation is publicly accountable, stakeholders may trust the organisation more and be more willing to work with it, for example grant loans or donate money to it.
Some structures, for example Section 21 or for-profit private or public companies, clarify the legal status of an organisation by making it a separate legal 'person', meaning that the organisation has an independent legal identity which is distinct from its members' legal identities. This usually means that:
For some types of organisations (like VAs or for-profit organisations with less than twenty members) registering is a choice, based on the advantages described above. But other types of organisations are obliged to register to protect the public and people they interact with. For example, a commercial organisation with over twenty members, set up for the purpose of making a profit, must register as a company or a co-operative (with the exception of the organised professions, such as attorneys and accountants).
The Nonprofit Organisations Act 71 of 1997 repeals the Fund-Raising Act 107 of 1978 (with the exception of its chapter 2 which deals with disaster and relief funds). The Fund-Raising Act was able to be misused by the apartheid government to control the fundraising activities of civil society organisations and often to close them down. The NPO Act is the result of a lengthy policy and legal reform process in which civil society organisations and the state negotiated and made compromises. It came into operation on 1 September 1998.
The Act defines an NPO as:
a trust, company or other association of persons -
Primarily its objectives are to:
It aims to meet these objectives by creating a voluntary registration facility for NPOs.
The Act encourages NPOs to be accountable to the public, rather than penalising those which aren't, by allowing existing South African legal structures for NPOs (VAs, trusts, Section 21 companies and other non-profit associations) to register with the NPO Directorate of the Department of Welfare - if they want to and if the organisation meets certain minimum establishment and other ongoing reporting requirements, such as filing annual narrative and financial reports. Registration and the ongoing reporting requirements which go with it are intended to improve standards of governance and increase accountability and transparency, which will increase public and donor confidence in NPOs (and, in turn, encourage organisations to register).
The Act's mandatory requirements for the registration of an NPO are similar to the common law's requirements for the establishment of a VA, including clauses in the constitution that:
Registration as an NPO has different implications for different legal structures. We will deal with these in detail below. The benefits for all NPOs that register include:
Section 11 of the Act allows the Minister of Welfare to prescribe benefits or allowances for registered NPOs. These will not apply to NPOs that do not register with the department. In fact, it is likely that NPOs who receive any money or other benefits from government, such as a tax benefit, will be required to register.
It is too soon to tell whether voluntary registration is the best way to meet the Act's objectives.
The most common legal structures for NPOs are voluntary associations (VAs), trusts and Section 21 companies. Each of these is governed by certain laws. If an organisation chooses to register as an NPO then it will, of course, also be governed by the NPO Act.
In this section we look in some detail at each of these structures:
What is a voluntary association?
You create a VA by entering into an agreement with three or more people to form an organisation so that you can work together to achieve a common non-profit objective. The agreement can be verbal; it does not have to be in writing. But putting it in writing can help to avoid disputes.
Voluntary associations are suitable for small community-based organisations that do not need to own or manage substantial amounts of money or valuable property and equipment in order to carry out their activities. The Midrand Soccer Club or Ulunthu School Parent Association are examples of VAs.
Usually the constitution provides for the appointment of a group of people with executive powers, such as an executive committee, to manage the affairs of the VA subject to the terms of the constitution.
Which laws govern VAs?
VAs are governed by the common law, which requires that the VA's objectives must be lawful and not primarily for gain or profit for its members.
Independent legal personality
If you want to create a VA that is an incorporated association (universitas) with an independent legal personality, the common law requires that you have provisions in your constitution that specify that:
- the organisation will continue to exist despite changes in its membership (perpetual succession)
- the assets and liabilities of the organisation will be held separately from those of its members.
We have discussed the advantages of having an independent legal personality on page 7, above.
How to form a VA
An agreement (written or verbal) is all that that the law requires to recognise your organisation. There is no government registry with which you must register. If you choose to register a VA in terms of the NPO Act, it will have to comply with the Act's registration requirements. These are similar to the common law requirements for establishing a VA.
The founding document of a VA
The written agreement or founding document is called the constitution. The constitution sets out the agreed rules which will govern the VA, such as its main purpose and objectives, its membership and governance structures and procedures, and the rights and duties of the organisation and it members and office-bearers. A constitution provides clarity about these issues for everyone, both inside and outside the organisation.
The constitutions of VAs vary enormously depending on the organisation. The basic clauses that must be included for your constitution to comply with the requirements of both the common law and the NPO Act, as well as those that should be included in the constitution of any VA to enable it to function properly, are described over the page.
Background clauses describe the context, circumstances and motivations which gave rise to the creation of the VA.
Your constitution must state the full name, and any abbreviation of the name, of your VA. Usually, the name tells people what kind of VA it is.
The objectives describe the purpose of the VA and what it intends to do. These clauses should show that the VA exists to promote a public interest objective and not primarily for the self-interest, gain or profit of its members and office-bearers. You must list your main objectives in general terms.
Your constitution must define your VA as an incorporated association with its own legal identity.
Will not distribute profits to members
Your constitution must state that the income and property of the VA will be used to promote its objectives and will not be distributed to its members or office-bearers, except as reasonable payment for their work. You must make it clear that the members and office-bearers of your VA have no personal right to the property of the VA. This principle applies not only during the lifetime of the organisation but also when it closes down ('dissolution' in legal language). Your constitution must state that on dissolution of the VA its property will be given to an organisation with similar objectives.
A VA may need the power to purchase, mortgage and sell movable or immovable property, for example, or invest the funds of the VA in any way to employ and pay employees. Your constitution must set out your VA's powers and they must be consistent with its non-profit objectives.
Membership clauses define who may become a member of the VA, the procedures for admitting and removing members and the duties and privileges of members. You may include a list of your initial members in your constitution.
This is an important part of the constitution because structures and procedures build in accountability by the office-bearers to the members of the VA. There should be a clause which identifies the highest governing body of the VA, usually a general meeting of members or a managing body. There is usually a clause which entrusts all the powers of the VA to a managing body to enable it to manage and control the affairs of the VA. But if the managing body is not the highest governing authority, then such powers should be subject to the instructions of the highest governing authority, such as members in a general meeting.
Your constitution must specify the structure of your VA and the mechanisms and procedures for governing and managing it. You must include clauses that specify how your VA will conduct meetings and make and record decisions. There may also be clauses on the appointment of office-bearers.
This section of the constitution states how the money of the VA will be managed and accounted for. There should be clauses that describe how the organisation will prepare annual financial statements. You must have clauses which set a date for the end of the VA's financial year and state that the VA will use a banking account.
Amendments to the constitution and dissolution of the VA
You must have clauses which explain how the constitution can be changed and how the VA can be closed down by its members.
The constitution should provide that the members and office-bearers of the VA are not personally liable for any of its obligations and debts. These clauses reinforce the principle of limited liability captured in the legal status clauses.
The constitution may set out a procedure for resolving serious disputes between members about how to interpret the constitution.
Ongoing regulatory requirements
Because a VA does not have to register with a government registry, there may be no public authority which regulates its conduct or affairs. If a VA chooses to register as an NPO it will have to comply with the ongoing regulatory requirements of the NPO Act.
Advantages and disadvantages
Being easy to establish can be both an advantage and a disadvantage for VAs.
Quick, easy, cheap
Not having to register with a government registry means a VA can be established quickly, easily and cheaply.
Funders prefer more formal arrangements
VAs may not be particularly attractive to funders because of the lack of government regulation and statutory control. Even the general public who interact with the VA generally prefer greater formal accountability and transparency.
The constitution may not protect members of the VA
Members of the VA may not be protected if key clauses in the constitution are missing or not properly drafted, for example if the clauses relating to the legal status of the VA are not clear.
Implications of the NPO Act
In the past, VAs could not register with a government registry. This caused problems, because donors and others often require that organisations have a degree of legal formality and public accountability which registration provides. Now, the NPO Act provides a registration and regulatory authority for VAs. This is one of the ways in which the NPO Act is considered to be helpful to the non-profit sector.
We have seen that registering as an NPO can remedy the disadvantages of the VA structure through providing the opportunity to register and thus comply with the ongoing regulatory requirements of the registering authority.
What is a trust?
A trust is an arrangement, set out in a written document (called the trust deed) in which an owner or founder hands over property and/or funds to a group of people (called trustees) who administer the assets for the benefit of other people (called beneficiaries) for a stated objective.
The Legal Resources Trust (LRT), which was set up to establish and support the Legal Resources Centre to give legal assistance to the vulnerable and marginalised, is an example of a civil society organisation which is suited to being a trust.
A trust is governed by its Board of Trustees. Trustees' powers are normally as wide as possible to enable them to achieve the objectives of the trust, and usually similar to the powers of a company. Trustees are expected to exercise their duties with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another. Trustees should not make self-serving decisions and should avoid taking decisions in situations where there is a conflict between what is best for the trust and what is best for a trustee personally (conflict of interests). They may receive reasonable payment for their work for the trust unless the trust deed forbids this.
Which laws govern trusts?
Trusts are regulated by the common law and the Trust Property Control Act 57 of 1988.
Trusts do not have an independent legal personality
Except in certain circumstances, such as for tax and insolvency purposes, trusts do not have an independent legal personality. If there is a legal dispute (litigation), the trustees acting in that capacity sue or get sued, not the trust, although trust property is protected and the Trust Property Control Act requires trust property to be kept separate from trustees' personal property. Also, trusts are required to have their own bank accounts.
How to form a trust
You need a notary public to write and attest your trust deed. (A notary public is an attorney with an additional qualification which authorises him or her to certify that documents to be filed in a government registry are authentic.) Then you must register the trust deed with the Master of the High Court. The trust deed names your intended trustees, but it is the Master who actually formally appoints them.
The Master of the High Court may ask the trustees to provide security for the proper performance of their duties. This is usually arranged through an insurance company. If you want to do away with the need for this security, the Master usually requires that you appoint auditors and give a full set of reasons why the trustees should be exempted.
The founding document of a trust
The trust deed is the founding document of a trust. Trusts vary enormously, but all trust deeds should contain clauses which deal with the following. Remember that the tax law requires certain clauses if you want tax exemption and the NPO Act will require certain other clauses if you want to register as an NPO.
Record of why the trust came into being.
Founding donations and future donations
Powers of the trustees
Use of trust funds
Clauses controlling how the trustees use the trust's funds and partial indemnity for losses sustained through reasonable error.
Appointment of trustees and alternatives
Exemption for trustees from paying security
Meetings and notices.
Financial control and annual filing of accounts
Amendments to the trust deed and dissolution of the Trust
Clauses recording the non-profit purpose and character of the trust
These clauses must state that:
- All income and property must be applied solely towards the promotion of the trust's main objective and no amount or asset may be given or distributed to the trustees, except as reasonable payment for their services.
- On dissolution of the trust, all surplus assets must be transferred to another organisation with similar purposes.
Ongoing regulatory requirements
The Master of the High Court registers the trust and oversees and controls the appointment of trustees. You must notify the Master if you change any of your trustees. The Master exercises a high degree of supervision over the appointment of trustees, but not over their activities. Even though the Master may call trustees to account about the administration of trust property, in practice this supervision is limited.
If a trust registers as an NPO it must comply with the ongoing regulatory requirements of the NPO Act.
Advantages and disadvantages of trusts
A trust is very flexible and can suit many NPOs, their objectives and situations.
You need professional assistance to establish a trust. This can be expensive and take some time.
Limited public disclosure
The requirements for public disclosure for trusts are very limited. For example, there need be no auditor or audited financial statements unless these are required by the trust deed.
No independent legal personality
Except in certain specified circumstances, a trust does not have a legal personality. However, trust property is protected and a trustee acting in that capacity is not personally liable for trust debts (except if he or she has been grossly negligent or committed fraud).
Implications of the NPO Act
Before the NPO Act was passed, trusts could not have an independent legal personality, other than for certain specific purposes such as tax and insolvency. Now, a trust that also registers as an NPO (in addition to registering with the Master of the High Court) is recognised by the law as a body corporate with an independent legal personality. Indeed, trusts acquire independent legal personality through such registration.
What is a Section 21 company?
Section 21 of the Companies Act 61 of 1973 allows for a 'not-for-profit company' or 'association incorporated not for gain'. Section 21 companies resemble business oriented (for profit) companies in their legal structure, but do not have a share capital and cannot distribute shares or pay dividends to their members. Instead they are 'limited by guarantee', meaning that if the company fails its members undertake to pay a stated amount to its creditors.
You may choose to be a Section 21 company if you are a large organisation like a development foundation, because a company has a well developed legal structure and its methods of operation are familiar to the business world.
A company has a two-tiered governance structure consisting of the members and directors. The members exercise their powers in general meetings. For example, they have the power to appoint and remove directors, amend the founding documents of the company, and dispose of the NPO's assets. The directors have broad executive responsibility. However, they must appoint independent auditors and convene an annual general meeting at which various matters, including the presentation of the audited financial statements, are attended to.
Which laws govern Section 21 companies?
Section 21 companies (like for-profit companies) are governed by the Companies Act and have independent legal personality.
How to form a Section 21 company
All companies, including Section 21 companies, are registered with the Registrar of Companies in terms of the Companies Act. Before you are registered, the Registrar must approve the name you have chosen. A company may not begin its work until it is registered, which takes about two to four months.
To register as a Section 21 Company:
- Your organisation must be established for a lawful objective.
- Your main objective must be the promotion of religion, the arts, science, education, charity, social activity or a communal or group interest.
- All income and property must only be used for the promotion of the main objective and no amount or asset may be given or distributed to the organisation's members or office-bearers, except as reasonable compensation for their work for the organisation.
- On dissolution of the company, all surplus assets must be transferred to another organisation with similar purposes.
- Along with other public companies, your organisation must have at least seven founding members and two directors.
The founding documents of a Section 21 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; the articles of association regulate how it operates. A typical memorandum and articles of association will contain clauses dealing with the following:
The phrase 'association incorporated not for gain' must follow the name.
Statement of purpose
Describing the main object and the main business of the company.
Powers of the company
Meetings, quorums, notice periods and so on.
Financial control and reporting
Standard of conduct required of office bearers
Indemnity for officers acting in good faith
Ongoing regulatory requirements
In order to be registered and then remain registered, a company is obliged to comply with the extensive formalities and ongoing reporting requirements of the Companies Act, including the following:
- The company must appoint auditors and inform the Registrar of Companies of any change of auditors.
- The company must appoint a registered address and inform the Registrar of any change of address.
- The company must keep up-to-date registers of members and directors in the prescribed form.
- The directors' names must appear on all letters, catalogues and circulars distributed or published.
- Directors must ensure that proper minutes and attendance registers are kept of all meetings.
- The company must hold an annual general meeting in accordance with the prescribed procedures.
- The company must keep financial and accounting records in the prescribed form, present these to the AGM of members and file them with the Registrar.
- The directors' report must be presented to the AGM.
Advantages and disadvantages of a Section 21 company
Substantial public disclosure and internal independence
Because the provisions of the Companies Act are complex and detailed, companies are subject to substantial public disclosure obligations and statutory control. But they have considerable freedom in their internal management and the day to day running of their affairs.
Independent legal personality
The independent legal personality of a company is a clear and well understood concept.
You will need professional assistance to set up a company.
Complex reporting requirements
The annual reporting requirements for companies are complex and extensive and not always suitable for small community-based organisations.
Implications of the NPO Act
The requirements of the Companies Act make Section 21 companies accountable to the public. So, unlike VAs, which need the Act to register, and trusts, which need the Act to acquire independent legal personality, there is no particular reason for Section 21 companies to register in terms of the NPO Act. However, in the future, if they wish to be eligible for government benefits (such as tax benefits) they may need to register.
What about for-profit organisations?
Partnerships, close corporations, private and public companies and co-operatives are the commonly used legal structures for for-profit enterprises. They differ in certain ways and are appropriate for different sizes and kinds of businesses. The founding documents always set out how profits are to be made, declared and distributed. All of them usually require professional assistance to set up and establish.
These resources will provide you with more information on the laws that govern non-profit organisations.
Bamford, B. The law of partnership and voluntary association in South Africa. 1982. Juta
Commonwealth Foundation. Non-Government Organisations: Good Policy and Practice Training Kit. 1997
Department of Welfare, Directorate: NPOs. Legislation Affecting the Nonprofit Sector. Information Series No. 1. 1999.
Rosenthal, R. and Walton, M. Guidelines to Section 21 Companies, Trusts and Voluntary Associations. Memorandum prepared
for the Legal Resources Centre 1998.
Honore, T. & Cameron, C. Honore's South African Law of Trusts. Juta. 1992.
Honey, M. A Guide to the NPO Act 71 of 1997. Information Series No. 2. Legal Resources Centre.
Honey, M. New Tax Laws for South African NPOs. Information Series No. 3. Legal Resources Centre. 2000.
Schoeman, T. & Geach, WD. Guide to the Companies Act and Regulations. Juta.1992.
This information was prepared by the NPO Legal Support Project of the Legal Resources Centre (LRC) in Cape Town. The LRC is an independent non-profit law centre which uses the law to pursue justice, democracy and the realisation of socio-economic rights. The NPO Legal Support Project provides legal support for the establishment and good governance of non-profit organisations (NPOs).
Publishing was made possible primarily through the generous support of the Charles Stewart Mott Foundation and another private donation.
Researched and written by Mary Honey
Edited by Karen Martin, Richtext
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