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Non-profit organisations registered as Section 21 companies have two years to amend their founding documents in order to comply with the new Companies Act.

Addressing the non-profit sector at a recent event organised by Inyathelo, the South African Institute for Advancement, Mandy Mudarikwa explained that while the new Act deems that companies registered in terms of Section 21 of the old Companies Act have complied with the required provisions of the Act, where amendments are required, they have until 29th April 2013 to comply.

For those considering or are in the process of establishing a not for profit entity, Mudarikwa advised that they keep their organisational structures and governance frameworks simple in order to limit conflict.

She also pointed out that some people in the sector tend to use terminology interchangeably. In many cases this leads to confusion internally as well as externally - in respect of the type of legal entity and fiduciary obligations of the office bearers - as certain words have specific meanings and operate under specific legal frameworks. For example, a voluntary association is a membership-based organisation that is governed by a constitution. Its management committee is accountable to members, and the governance structure very often sees the rotation of office bearers or election of office bearers from the membership. Whereas a Trust consists of a board of trustees who are accountable to each other, the founder and the Master of the High Court. And on the other hand, a non-profit company consists of directors and members or simply directors without members.

The new Companies Act governs non-profit companies, the Trust Property Control Act applies in the case of trusts and the Non-Profit Act applies to voluntary associations together with non-profit companies and trusts as they have to be registered as non-profit organisations. These Acts prescribe precise legal obligations that the organisations must abide by.

Deciding on which legal structure to go for depends on the purpose and intended structure of the organisation.

In addition to compliance with the governing laws, all NPOs are required to observe the Income Tax Act and to file annual financial statements with SARS and the NPO Directorate. Through the Tax Exemption Unit of SARS, NPOs can apply for preferential tax benefits which includes tax exemption and18A status for donors in respect of their income either from fundraising and/or generated through trading activities.

Mudarikwa emphasised that NPOs must ensure that they are well versed in the statutory obligations of their respective registered entities. In many cases NPOs experience difficulties due uncertainty or confusion around their legal status or their legal obligations. A common issue is the opening of a bank account - a simple process which could, due to said uncertainty or as a result of incorrectly using terminology, become onerous.

Founding documents are required to meet legal scrutiny and where they fall short, the entity might find that that the application for registration is rejected. “A founding document is a Constitution in the instance of a Voluntary Association, a Trust Deed in the instance of a Trust and a Memorandum of Incorporation in respect of the new Not For Profit Company.”
Where a founding document meets all the legal requirements, it is legally binding. It’s important, therefore, to ensure that all important clauses are included. By neglecting to include clauses which indemnify Trustees, in a trust for instance, there is a real risk of trustees incurring personal liability.

To avoid problems in establishing a non-profit organisation, she strongly recommended that aspirant NPO founders seek legal assistance with drawing up their founding documents.

For legal advice and enquiries refer to the Legal Resources Centre on www.lrc.org.za

For more information about Inyathelo visit www.inyathelo.org.za

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