“Changing” the legal structure of your NPO
It has surprised us how often staff, or governing body, members of non-profit organisations (“NPO’s”) have not been able to tell us which legal structure their organisation is established as – “we are an NPO” they insist!
The Nonprofit Organisations Act defines, in section 1, an NPO as a trust, company or other association of persons established for a public purpose, the income and property of which are not distributable to its members or office bearers, except as reasonable compensation for services rendered. This definition makes provision for organisations that have been formed in terms of the:
- Trust Property Control Act 57 of 1988 (as amended) [ie. charitable trusts];
- Companies Act 71 of 2008 [non-profit companies]; or
- Common law [voluntary associations].
“NPO” is therefore not a formal legal structure, but rather describes, in a general way, all three types of legal entity, or identifies those organisations which are registered as NPO’s under the Nonprofit Organisations Act.
The vast majority of (registered) NPO’s in South Africa have been established as voluntary associations. Voluntary associations are inherently democratic – to be validly constituted, they must have a membership base and the members then elect the governing committee or board. For those organisations which do have members and hold proper elections, the voluntary association is a very good legal structure, and works for organisations of all sizes and levels of resource. For those voluntary associations which don’t really have members, they may not have considered this required ‘double structure’ when the organisation was set up, or their membership base may have fallen away over the years. If so, being a voluntary association no longer reflects/suits the way the organisation is governed. This ‘misfit’ could become a legal issue, but it is chiefly about perceptions, and the expectations of donors and other stakeholders; if your organisation is a voluntary association, you will be expected to have a list of members, people will expect to be able to ‘join’ and those already involved will expect to have a say in who is in charge (which can lead to unexpected changes in leadership).
If your legal structure is that of a voluntary association and it doesn’t really ‘fit’, the organisation could “change” its structure to be either a charitable trust (which has just a board of trustees and no members) or a no-member non-profit company (which is an option offered by the Companies Act). However, it is not possible to simply ‘change’/convert a voluntary association into a trust or a non-profit company. If your organisation wishes to undertake this sort of transition, you will be setting up a new legal entity (one which suits you better), transferring what can be transferred from the old to the new, and then closing down the old one. If you are considering embarking on this process, please be aware that:
- The Tax Exemption Unit at SARS has confirmed that PBO approval (income tax exemption) is not transferrable between legal entities. If the governing structures of your organisation decide to set up a new non-profit company or trust to take over the projects of a voluntary association, then the new legal entity will have to apply to SARS from scratch for income tax exemption and, if applicable, section 18A status.
- Technically, NPO status is also not transferrable, although the NPO Directorate has advised that it is possible to follow the procedure used for a change of name (by sending through relevant resolutions and documents). However it does not appear that the legislation provides for this, and we would advise that a fresh application should be made by the new entity, especially as this will probably be quicker than the time taken for the issue of a new certificate!
- The income tax exemption application and the NPO registration for the new non-profit company/trust would have to precede the handover and dissolution as the assets can only be given to a registered NPO and approved PBO – expect a delay of about 6 months for this.
- Once the new entity has its registrations in place, you would need a dissolution resolution for the old organisation so that its projects and assets are transferred to the new NPC/trust.
- Registration as an employer with SARS, Department of Labour etc. will all need to be redone for the new legal entity and closed for the old entity.
- All contracts with donors, staff, suppliers etc. will need to be transferred from one entity to the other.
- There is likely to be a minimum timeline of about 7/8 months for the transition (depending on how quickly the required documentation can be prepared/gathered).
If the process is not followed carefully, it could result in there being two separate legal entities, giving rise to much confusion around where the assets and resources are located and where they should be reported on. We therefore strongly advise organisations who may be considering a ‘change’ in legal status to secure the services of an experienced NGO lawyer and/or accountant to support them in the process.