The Non-Profit Company

Lorette Terry
 November 07, 2014
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SAVVIC News

Non-Profit Companies are considered to be incorporated for public benefit, a cultural or social activity, or a communal or group interest. It is required to apply all of its assets and income, however derived, to advance the stated objectives set out in its Memorandum of Incorporation (MOI).

 

Unlike the ‘old’ Section 21 Company, the Non-Profit Company is not treated as a public company. This means that the obligations on public companies that automatically applied to Section 21 Companies in the past do not necessarily apply to Non-Profit Companies classified under the new Act. The Non-Profit Company now has a legal nature of its own, distinct from both the public and the private company, and to a large extent is treated uniquely under the new Companies Act.
The new Companies Act simplifies the registration process and this aims to increase accessibility to form enterprises and non-profit organisations.
Below are key issues to consider in terms of the registration of an NPO under the new Companies Act.


1. Name
Under the old Companies Act the phrase Association incorporated under section 21 was subjoined to the NPO’s name. However under the new Companies Act the name of the Non-Profit Company, irrespective of its form or language must end with the abbreviation “NPC.” This name must be reserved before the entity is registered. This process requires that the name first be lodged with the Companies and Intellectual Properties Commission for approval, before the registration application is submitted.


2. Comparing the founding documents


The old Companies Act referred to an organisation’s founding documents as the Memorandum and Articles of Association. In terms of the new Companies Act, this is now termed the Memorandum of Incorporation or MOI for short.

 

The Memorandum of Incorporation must contain the organisation’s objective/s which should reflect the public benefit intention of the Non-Profit Company or that should relate to either the communal or group interests or the cultural or social activities which it sets out to advance.

 

The contents of the Memorandum of Incorporation must comply with the following:

  1. All the Non-Profit Company’s property and income, whether obtained by donations or profit by means of income generating activities, must be used to further its objectives.
  2. No part of the Non-Profit Company’s income may be paid to an incorporator, member, or director. This is only permissible when:
  • The payment is reasonable remuneration for goods delivered and services rendered.
  • The payment is reasonable reimbursements for expenses.
  • The payment is an amount due and payable under a bona fide agreement between the Non-Profit Company and the incorporator, member, or director.
  • The payment is a fulfilment of any right arising from the advancement of the objective(s) of the Non-Profit Company. .
  • The Non-Profit Company is obliged by law to do so.

Unlike the ‘old’ Act, the new Companies Act requires that a minimum of three persons (termed the incorporators), complete and sign the Memorandum of Incorporation. These persons do not have to be the members of the company, but may be directors or solely incorporators.


3. Organisational structure of a Non-Profit Company?


One of the distinctive features of the new Companies Act is that it provides for greater clarity on the structuring of a Non-Profit Company. Because the old Companies Act treated Section 21 Companies as public companies, they were obliged to follow the organisational framework designed for public companies.


The main area that has been given greater clarity by the new Companies Act is that of NPO membership and board of directors.


3.1 Membership


In terms of the new Act a Non-Profit Company has the prerogative to choose whether it will have membership and a board of directors, or, simply just a board of directors. However the Memorandum of Incorporation must contain a provision that stipulates the choice. If it chooses to have members, it is permitted to have two classes of members, namely, voting members and non-voting members. The members need not be individuals and can be juristic persons.


3.2 The Board of Directors
Under the old Companies Act a Section 21 Company was required to have at least two directors. The new Companies Act requires that the Non-Profit Company have at least three directors. The Companies Act stipulates that if a Non-Profit Company fails to have the required minimum number of directors this would not limit or cancel out the board’s authority or accountability.


4. Role of directors


According to the new Companies Act directors may be held liable for any loss, damages or costs sustained by the company as a consequence of any breach of any provisions of the Companies Act, any provision of the company’s Memorandum of Incorporation, and, any of the duties.

 

What is important for directors of Non-Profit Companies to know is the provisions of section 77(3), whereby a director will be liable for any loss, damage or costs sustained by the company if he/she:

 

  • Was acting in the name of the company knowing that he/she lacked the authority to do so;
  • Agreed to carry on the company’s business knowing that it is being conducted in a manner prohibited by section 22(1);
  • Is a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or member of the company, or, had another fraudulent purpose;
  • Signed, consented to, or authorized the publication of any financial statements that were false or misleading in a material respect.

 

Where more than one director was party to any of the above, all such persons will be held liable provided it is for the same contravention. Provided there was no wilful misconduct, or, a wilful breach of trust, a court may on any terms relieve a director from these liabilities if he/she:

  • Acted honest and reasonably; or
  • It would be fair to excuse the director given the circumstances.

5. Financial assistance to directors


The Act prohibits direct or indirect financial assistance to directors of NPCs or related companies in the form of, for example, loans or debt securities or obligations. Exceptions to this rule are:

  • Assistance in the ordinary course of the company's business and for fair value;
  • Assistance that constitutes an accountable advance to meet legal expenses, in relation to a matter concerning the company; or anticipated expenses to be incurred by the person on behalf of the company;
  • To defray the person's expenses for removal at the company's request; or
  • In terms of an employee benefit scheme generally available to all employees or a specific class of employees.

NPCs are advised to thoroughly consider their financial assistance policies, if any, and clearly document how they manage such instances.


6. Matters with SARS


It needs to be borne in mind that registration as a non-profit company under the 2008 Act (as with registration as a section 21 company under the 1973 Act) does not automatically quality the company for tax exemption. It is only where the company satisfies the criteria laid down in the Income Tax Act as a "public benefit organization" and is given formal approval by SARS as such, that there will be any exemption from tax.


7. Other matters


Upon dissolution the entire net value of an NPC must be distributed to another NPC, voluntary association or non-profit trust with objectives similar to its own. Directors or members of the NPC are not entitled to any part of the net value of the NPC after its obligations and liabilities have been settled.


NPCs may not amalgamate or merge with profit companies. The disposal of any part of an NPC's assets or business to a profit company is limited to the extent that it must be for fair value and within the NPC's regular course of business. Where an NPC has voting members, their approval must be sought for an amalgamation or merger with another NPC, or the disposal of all or a greater part of the assets or undertakings of the NPC.


NPCs that are not required to be audited may opt for an independent review instead of an audit. A formal audit is, however, required if an NPC's public interest score (PIS) is 350 points or more; or if its PIS score is 100 points or higher, and the NPC's annual financial statements were internally compiled.

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Lorette Terry

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