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:
“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:
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.
The Ziyo team is led by Chartered Accountants and includes accountants, bookkeepers and support staff. They have served the nonprofit sector for over 20 years, helping organisations to build financial health and sustainability so that their resources can be used more effectively in making a real difference. http://www.ziyo.co.za