Why Incorporate as a Charitable Trust?
There has been widespread acceptance that the Charitable Trust is the most convenient vehicle for non-profit membership structures for public benefit. Following is an article by James Mason outlining the benefits and drawbacks of the various types if incorporation.
THE LEGAL PERSON: The law recognizes two types of person. The ?natural person? who we become upon reaching full age and capacity, and the ?legal person? which is created by statute.
The statutory process is "incorporation?. It creates a legal entity distinct from its members. This cannot be achieved in any other manner.
There are three Statutes under which groups can incorporate:
1. The Companies Act 1993
2. The Incorporated Societies Act 1980
3. The Charitable Trusts Act 1957
COMPANIES:These are generally trading and in business. The requirements are complex and strictly controlled requiring Returns to be filed annually at a cost of $15 or free if filed on line at www.companies.govt.nz Name approvals cost $10 and Registration $50.
INCORPORATED SOCIETIES:
These are typically sports clubs. They are more expensive with registration costing $100. They must have at least 15 members and they are required to file Financial Statements annually. Changes to Rules require approval by the Registrar.
CHARITABLE TRUSTS:
Incorporation is restricted to bodies created exclusively or principally for charitable purposes, which are defined as:
1. The relief of poverty
2. The advancement of education
3. The advancement of religion
4. Other purposes beneficial to the community
There are no registration fees, no returns need to be filed and there are no ongoing charges, unless the charity is also to be registered with the soon to be formed Charities Commission for which fees are yet to be fully decided, but are expected to be minimal.
TAX EXEMPTION:
Two forms of application can be made for tax exemption.
The first, which can be obtained within a few weeks, is for ?non-profit status?. This exempts (a) Income derived within the circle of members such as subscriptions, and (b) Income derived from outside the circle of members, such as bank interest, up to a limit of $1,000 per annum.
The second, which can take some time to achieve, though again this will be simplified with the New Charities Commission, extends to full charitable status.
PECUNIARY GAIN:
Members cannot use their organisation for personal gain. Any profits must be used for the purposes of the organisation. This condition is required to be set out in the Trust Deed.
PERSONAL LEGAL LIABILITY:
Individuals can be held liable for their own acts. They can also incur financial liability for the actions of other members of their organisation if it is not incorporated.
Incorporation creates a separate legal entity and liability is limited to the assets of the corporate body. This removes the personal liability from the individual members provided they are acting within the authorised powers of their constitution.
THE DOCTRINE OF ULTRA VIRES:
If members act in any way which is not authorized by their Constitution they can be held to have acted ?Ultra vires?, that is, beyond the powers of their organisation. If they do this they become personally liable, to the extent that their acts were not authorized and therefore not protected by incorporation. It is for this reason, to ensure personal protection, that a well-drawn Constitution empowers members to do everything that can possibly be conceived.
CHARITABLE TRUST STRUCTURE:
The usual Charitable Trust involves a nominal Settlor who establishes the Trust. It also requires Trustees to execute the Trust Deed and to complete the application for registration under the Act.
FOUNDING TRUSTEES:
The initial Trustees fulfill the statutory requirements for incorporation under the Charitable Trusts Act. They can retire or be replaced from time to time without the necessity for any formal notification or payment to the Registrar.
STANDING ORDERS FOR THE COMMITTEE (or COUNCIL):
Registration of the Trust Deed immediately provides full legal protection for members. The management of the organisation can then be prescribed by ?Standing Orders?. These can take the form of rules providing for membership, the election of officers, subscriptions, meeting procedure and such other requirements as may be necessary.
This structure has the advantage of ease of amendment as the Standing Orders are not required to be registered under the Act and can be varied from time to time without undue formality as circumstances change. For example, a recent decision for Group Conveners to become members of the Committee can be included very easily. By contrast, changes to the Rules of an Incorporated Society require the Registrar?s approval and have to be registered.
Article by James Mason