Community organisations – what considerations apply to deciding whether to set up as a legal entity and how do I decide which entity?
Say for example you want to set up a sports club in your local area – do you need to be a legal entity? This is another way of saying, do you need to incorporate?
There are a few things to think about in deciding what structure to go for – it comes down to your aims and intentions.
Incorporated or unincorporated entity? – There are many benefits to incorporation. For example, incorporation provides for succession (the organisation can remain the same while the people move on) and it can also provide a degree of legal protection in that the incorporation is the legal entity and therefore carries the legal liability.
An incorporated entity is likely to be required if you are applying for funding as it provides an entity to receive the funds. It allows you to operate a bank account in the name of the organisation, sign contracts on behalf of the organisation etc
There are three options for an incorporated entity:
- Registered Charitable Trust
- Incorporated society
- Not for profit company.
A not for profit company is unlikely to be appropriate for a sports club. Instead, this is likely be useful for an organisation that is “in trade” / commerce in some way e.g selling goods.
Incorporated society or charitable trust?
The fundamental difference between an incorporated society and an incorporated charitable trust is that a society has democratic processes i.e. the committee (which runs the incorporation) is elected by its members and accountable to its members, whereas trustees can remain in place over time without any need for re-election – unless the trust deed specifically provides for this (and there are such examples[1]).
Incorporated societies are often used for sports groups. Eg see this page on the Sports NZ website.
An incorporated society needs to have at least 10 members, all of whom must consent to being members. It can be run by a much smaller committee but there needs to be AGMs where the committee reports to the members VS. a charitable trust has no members and the trustees run the trust in accordance with the trust deed. In the case of a charitable trust accountability is to the public, through the Attorney-General (and trustees must comply with the Trusts Act 2019).
This link on the Charities website has a useful table that compares charitable trusts to incorporated societies:
Tax matters:
Our firm does not provide tax advice. However, tax matters will also need to be considered as part of your set up:
https://www.ird.govt.nz/roles/not-for-profits-and-charities/types-of-nfps/sports-clubs-and-societies
It should be pointed out that just because you are a charitable trust under the Charitable Trusts Act, you have no tax advantage as a charity at all – you must be on the charities register for that.
Registering as a Charity
You may wish to consider whether registering as a charity could be beneficial. Either an incorporated society or a charitable trust can be a registered charity, provided they meet the legal requirements that their purposes qualify as “charitable”. There are various legal definitions of “charitable” that your organisation must meet in order to be able to register as a charity – a purpose that may appear charitable in normal parlance might not meet the legal test.
This link provide useful information about registering as a charity (see the benefits and obligations page for a quick summary):
Some grant funders will only fund organisations that are registered charities – so this is a reason that some entities chose to register as a charity.
Initial questions to consider:
- What are your key goals in wanting to incorporate?
- What are your aspirations for the future? E.g. do you anticipate leasing a premises, opening a bank account, applying for community grants
- If gaining access to grants and funding is an intention, have you looked at various funders and what their requirements are around legal entitles they will / won’t fund.
- Do you find yourself leaning more towards incorporated society (democratic, needs 10 members) or charitable trust (just needs trustees)
Conclusion
If you would like advice around these matters, please contact us. A charitable trust or an incorporated society is relatively straight-forward to set up, so long as you follow all the technical requirements. You will need a founding document i.e. a constitution or a trust deed that fulfils necessary requirements. There are plenty of templates that we can use as a starting point to keep costs down. There will also be a registration process to follow through with the relevant government organisation. You may wish to undertake the registration process yourself, or we have experience in this regard as well.
Raewyn Clark
May 2024
[1] Usually, charitable trust deeds provide that new trustees are appointed by the existing trustees. However, it is possible for the trust deed to have an election process by ‘stakeholders’ for trustees.
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