A Non-Profit Company (“NPC”) is a company that is incorporated for one of more objectives, either for public benefit, or an objective relating to cultural or social activities, or communal group interests.
This will be discussed more fully below. Should however such a company wish to be approved as a Public Benefit Organisation (“PBO”), it must apply at the South African Revenue Services (“SARS”). Thus, the mere fact that a company is incorporated as a non-profit company, and its name ends with “NPC”, does not automatically mean that it is a PBO and that it will obtain the benefits that goes together with such a status.
In South Africa, all non-profit organisations are governed by the Non-Profit Organisations Act, No. 71 of 1997, as amended from time to time, (hereinafter “the NPO Act”). The NPO Act makes provision for either a trust, company or other organisation or association of people established to serve a public purpose, to register as a non-profit organisation (“NPO”). Although the NPO Act is designed to provide an environment in which NPOs in South Africa could flourish, the reality is, unfortunately, quite different. There are various structures which may be used to set up a NPO. These are, voluntary associations (“VA”), non-profit trusts, and non-profit companies (“NPC” - formerly known as Section 21 companies). The latter, Section 21 Companies, were structured in terms of the old Companies Act, No. 61 of 1973 (“Old Act”), while the current NPCs are regulated in terms of the new Companies Act, No. 71 of 2008 (“the Act”).
Therefore, your NPC may register as an NPO, however, this is voluntary and might not always include all the benefits you have hoped for. Thus, it might be prudent to consider registering your NPC as a PBO rather than an NPO. I will discuss some of the benefits and procedures below.
Brief overview of the NPC
An NPC is a company incorporated for a public benefit or other object relating to one or more cultural or social activities, or a communal or group interest. This was previously known as the Section 21 company, which was governed by the old Companies Act as aforementioned. Different to that of a profit company, the income and property of a non-profit company is not distributable to its incorporators, members, directors, officers or persons relating to any of them (collectively we will refer to them as “members”) and must be used to advance the purposes for which it was created, as set out in its Memorandum of Incorporation (“MOI”). It is not compulsory for the NPC to have members, and the NPC can be comprised of participants of public benefit activities, such as church members.
The Companies Act in Schedule 1, item 1(3) makes provision for the extent to which income and property may be distributed, in an NPC, to its members:
“(3) A non-profit company must not, directly or indirectly, pay any portion of its income or transfer any of its assets, regardless how the income or asset was derived, to any person who is or was an incorporator of the company, or who is a member or director, or person appointing a director, of the company, except:
(a) as reasonable:
(i) remuneration for goods delivered or services rendered to, or at the direction of, the company; or
(ii) payment of, or reimbursement for, expenses incurred to advance a stated object of the company;
(b) as a payment of an amount due and payable by the company in terms of a bona fide agreement between the company and that person or another;
(c) as a payment in respect of any rights of that person, to the extent that such rights are administered by the company in order to advance a stated object of the company; or
(d) in respect of any legal obligation binding on the company.”
Furthermore, it is important that the NPC’s MOI meets the requirements of Section 30 of the Income Tax Act, No. 58 of 1962 (the “ITA”), particularly if it wishes to be recognised as a PBO. The Tax Exemption Unit (TUE), will only approve a PBO if it complies with all of the conditions and requirements of Section 30 of the ITA. It goes without saying, that any entity or structure complying with these requirements can register as PBO – thus it can be an NPC, a Trust, or an association (VA).
As is clear from the above, the regulatory and legislative requirements differ when setting up a VA and setting up an NPC. The Companies and Intellectual Property Commission (“the CIPC”) is responsible for the incorporation of NPC’s in the same manner as it is for all other types of companies. Although registration may take longer and require more compliance measures at the outset, it is one of the most credible of entities due to its separations of power and established regulatory framework. This structure is appealing to potential funders and would attract, in my view, a better caliber of managers – i.e. directors serving and managing the organisation.
Incorporation of NPCs and qualification as a PBO
It is not a pre-requisite for an NPC to have members, although it must have a minimum of three directors. Incorporators are the non-profit company’s first directors and members, if any, and an NPC is recognised as a legal entity separately from its members, same as normal companies incorporated in terms of the Act.
An NPC’s Memorandum of Incorporation must set out at least one non-profit object. Further to this, and in order to apply for the status of a PBO, in terms of the ITA, the company must have at least one of the following Public Benefit Activities as a primary objective to be able to register as a PBO:
• welfare and humanitarian
• health care
• land and housing
• education and development
• religion, belief or philosophy
• conservation, environment and animal welfare
• research and consumer rights
• providing funds, assets or other resources
The above objectives are listed in Part 1 of Schedule 9 to the ITA.
Incorporation as an NPC does not necessarily make the NPC eligible for any particular treatment in terms of the ITA, or any other legislation, unless that legislation provides otherwise.
Effects, benefits, and requirements in terms of the Income Tax Act
As mentioned above, an NPC can apply to SARS for a tax-exempt status, known as PBO status. This will allow the company to take advantage of tax benefits to reduce their tax burden and obtain certain other benefits. Once registered as a PBO, donations made to the non-profit company are deductible from the donor’s tax liability in terms of section 18 of the ITA. Depending of the activities of the NPC, its donors will be provided with a Section 18A receipt.
Naturally, together with any benefits a company may receive from registering as a PBO, there will be certain strict requirements that must be adhered to. An NPC is required to apply all its assets and income to advance its non-profit objectives. It may therefore, not dispose of any of its assets or business to a profit company, except for fair value, unless this occurs in the ordinary course of the activities of the NPC. The assets and income may not be distributed to the incorporators, members, directors or officers of a non-profit company, except as reasonable compensation for the services rendered by them
Whether you decide to register your NPC as an NPO or as a PBO, it is important to know the basic concepts, differences, disadvantages, and benefits of each. It is important to be aware of the various legislation involved with each to ensure your organisation fully complies. We recommend that you read the Basic Guide to the Income Tax Exemption for PBOs on SARS’ website, and preferably consult with a professional to assist with the legal technicalities.
By André Nortjé – SchoemanLaw Inc.