There are three legal structures for non-profit entities in South Africa, namely voluntary associations, trusts and non-profit companies. You are one of them but it is important to know what other options exist.
Most community-based organisations begin as voluntary associations because it is simple and inexpensive. All you need to start one is three or more members.
Voluntary associations are governed by common law, but there is no regulatory statute. A voluntary association in good standing has its own legal personality. An association can conduct subsidiary activities to make some profits, as long as its main objective is not the acquisition of gain. The money raised from the enterprise must be used for the benefit of the association.
An example of this would be if your community association held a market day or sold merchandise in order to finance its ambitions.
Trusts in South Africa are governed under the Trust Properties Control Act and are pretty flexible in terms of what they can do. Their roles must be clearly set out in the Deed of Trust.
While a trust does not have a separate legal personality, trustees still enjoy limited liability providing they are acting in the best interests of the trust at all times. All rights and responsibilities vest collectively in the trustees in their capacity as trustees.
A trust itself cannot be sued as it is not recognised as a legal person in South Africa. It is the trustees in their official capacity who can be sued.
A trust can be established for private benefit or for a charitable purpose
The person(s) who administers the trust property is called a trustee while the Master of the High Court has jurisdiction over a trust if the majority of the trust property is situated in its jurisdiction. The Master holds the trust instruments, oversees the appointment of trustees, and polices the trustees’ performance with respect to the trust property.
You can read more about trusts here.
The South African Companies Act of 2008, which came into force on May 1, 2011, provides for the incorporation of a non-profit company. Every provision of the Companies Act applies to a non-profit company except for certain limitations as set out in the act.
Unlike a profit company that requires only one person, three or more people are needed to incorporate a non-profit company, or NPC for short.
As outlined in Schedule 1 of the act, the NPC’s Memorandum of Incorporation must set out at least one objective of the company that has a public benefit or support the interests of a group that involves cultural or social activities.
A key point to remember is that an NPC, while being able to hold securities from a profit company and undertake any business activities in order to meet its intended objectives, may not pay a portion of its income or transfer any of its assets to any person involved in the NPC except be it for fair remuneration for goods and services, legal, administrative or otherwise that help the organisation fulfil its mandate.
When it comes to dissolving the NPC, the entire net value of the company can only be distributed to other non-profit companies, voluntary associations, or non-profit trusts.
The company cannot pay out dividends to its directors or members.
Non-profit companies have a legal personality and therefore offer limited liability to their members and directors. They can enter into contracts and sue and be sued in their own name. Non-profit companies are best suited for large or established organisations.