There is much confusion around these terms in the not-for-profit / development sector.
When a non-profit-organisation is started, it can take the form of either a Voluntary Association (VA), a Non-Profit Trust, or a Non Profit Company (NPC). This is your legal structure.
At that point, once the organisation has formed as one of the above three structures, it can apply for Non Profit Organisation (NPO) status with the Department of Development, and/or Public Benefit Organisation (PBO) status with SARS. (See further down for the benefits of applying for these).
In other words, you are either a VA, Non-profit Trust, or an NPC which can have NPO or PBO status. You cannot be an NPO or PBO and not one of the three legal structures.
Lastly, NGO stands for Non-Governmental Organisation. The term doesn’t have any legal meaning and is used to refer to all civil society and community organisations, whether registered or not. These include NPCs, charitable trusts, voluntary associations, not-for-profits, social enterprises, CBOs, NPOs, PBOs, Foundations, Professional and Sporting Associations, Home Owner Associations, private and public schools, educational institutions, human rights activist movements, funders, clubs and more.
If you would like to provide a public service, you may do so without registering an organisation, and can simply provide this service as a means of giving back to your community. However, if your goal is to create a bigger impact and eventually apply for funding for this service, most funders require that you are part of a formal structure so that they have the assurance that their funding is being used for the intended purpose.
Below are some suggested steps to guide you in your journey of starting your organisation:
Define the object of your organisation. Before registering your organisation, the first step is to determine what the organisation will do or be known for. Clearly define your mission.
Choose your members / trustees / board of directors. Carefully selecting the management of the organisation is a crucial step. Potential members should be passionate about your cause, and it is prudent to bring like-minded people on board. It is also a good idea to have members from a broad spectrum who can offer different skill sets.
Choose your organisation structure. There are three different options: (1) a Voluntary Association; (2) a Non-profit Trust; or (3) a Non-profit Company. See further down to guide you in your choice of structure.
Draft your organisations founding document. Each type of organisation structure has a document which sets out how the organisation will be governed. For a for a Voluntary Association it is its Constitution; for a Non-profit Trust it is its Trust Deed; and for a NPC it is its Memorandum of Incorporation (MOI). The NPO Act requires a few core provisions be stated in these governing documents for your organisation to be registered as a non-profit.. See more in NPO registration below.
Register your organisation. After choosing the name of your organisation, its objectives and goals, you can proceed to register your organisation. (This is only applicable if you chose an NPC or Trust structure.)
Apply for NPO and PBO status. Registering for NPO and PBO status allows you to access tax benefits for your organisation, and provides funders with the assurance that your organisation is being administered in a charitable manner. See more in NPO and PBO registration below.
A Voluntary association (VA) is one of the three legal structures available to not-for-profit organisations in South Africa. It is created by three or more people entering into an agreement to achieve a common objective, without making a profit. This agreement may be verbal or in writing, but a written agreement is advised. The VA is managed from within, according to a constitution which is drawn up by the members.
VAs are suitable for small community-based organisations that do not need to own or manage large sums of money or valuable property and equipment in order to carry out their activities. They are therefore usually formed by small and informal community groups. A sport club, faith-based organisation or school parent association are examples of VAs. Most of the not-for-profit organisations in South Africa are established as VA’s.
Pros and cons: As VA’s do not need to register with a government registry, they can be established quickly, easily and inexpensively. However, this may mean that VAs are less attractive to funders and the general public since the lack of registration means the organisation is not subject to regulation. Further, members of the VA may not be protected if key clauses in the constitution are missing or not properly drafted, for example the clauses relating to the legal status of the VA.
Registering as an NPO with the Department of Social Development (DSD) can solve some of the disadvantages of the VA structure as registration with DSD would make the organisation subject to ongoing regulatory requirements. However, registration can take up to 12 weeks.
A Non-Profit Trust is one of the three legal structures available to not-for-profit organisations in South Africa. Non-Profit Trusts are created when an owner transfers property and/or funds by written agreement, testament or court order (known as the trust deed) to another party/group (called trustees), who administer the assets for the benefit of others (known as beneficiaries) or for the achievement of a particular goal. A trust is governed by its Board of Trustees. Trusts are often created during the lifetime of the founder of the Trust, with the specific intention of using assets to carry out public benefit activities.
Pros and cons: A trust is flexible, the public disclosure requirements are very limited, and the structure can suit many NPOs, their objectives and situations. However, you will require professional assistance to establish a trust. This can be expensive and take some time.
Further, except in certain specific circumstances, a trust does not have a legal personality. Trust property is, however, protected and a trustee acting in that capacity is not personally liable for trust debts (except if they have been grossly negligent or committed fraud). By registering as an NPO with the Department of Social Development, your trust may then gain legal personality.
A Non Profit Company (NPC) is one of the three legal structures available to not-for-profit organisations in South Africa. A NPC is recognised as a separate category of company which has been established for a public benefit purpose, to promote specific cultural or social activities, or communal or group interests. Its income and property may not be distributed to its members, officers, incorporators or directors, except as reasonable compensation for services. NPC’s were previously known as Section 21 Companies. NPC’s operate in terms of a Memorandum of Incorporation which sets out the objectives of the Company, and they are governed by a Board of Directors.
Pros and cons: Most people are familiar with companies and therefore understand how this legal form operates. NPCs may be established quickly and relatively cheaply, and a bank account may be opened on registration – allowing NPC’s to start operating fairly quickly. The independent legal personality of a NPC is clear, and there is quite a bit of freedom in their internal management. However, the annual reporting requirements for companies are complex and extensive and not always suitable for small community-based organisations. You may also require professional assistance to set up your company.
A Voluntary Association (VA) is formed when three or more people agree (verbally or in writing) to achieve a common objective, without making a profit. To avoid future disagreements, it is highly recommended that the agreement be put in writing. This written agreement or founding document is called the constitution. The constitution sets out the VAs main purpose and objectives, its membership, governance structures and procedures, and the rights and duties of the organisation and its members and office-bearers. A VA does not have to register with a government registry, the written or verbal agreement is all that that the law requires to recognise your organisation.
In order to be deemed a separate legal entity VAs must meet three legal requirements:
the organisation must be able to continue even if there is a change in membership (perpetual succession)
the assets and liabilities of the organisation are to be held separately from those of its members
it must declare that no member may have any rights to the property of the association
If you would like to register your VA as an NPO, it will have to comply with the requirements of the NPO Act. See further below.
Non-Profit Trusts are legal arrangements whereby control over funds and/or property is transferred to a person or organisation (the trustee) for the benefit of someone else (the beneficiary), or for the achievement of a particular goal. There are two types of trusts, an inter-vivos trust and a testamentary trust. The inter-vivos trust is created between living persons, and a testamentary trust is created from the will of a deceased person.
You need a notary public to write and attest your trust deed. A notary public is an attorney with an additional qualification which authorises him or her to certify that documents to be filed in a government registry are authentic. The Trust Property Control Act requires that the first trustees must lodge the trust deed with the Master of the High Court. The Master of the High Court oversees the appointment of trustees and polices the proper performance of the trustees’ duties with respect to the trust property. Trustees can only act in their capacity as trustees after having been authorised in writing by the Master.
To register a NPC, you will need a minimum of three natural people to head your organisation, an address in South Africa, and the object (purpose) of the organisation should be of a charitable nature. You can register directly on the Companies and Intellectual Property Commission (CIPC) website, or you can use the services of a company like NGO Setup.
A NPC may be established with or without members, but the Memorandum of Incorporation (MOI – founding document) must be signed by at least three people, known as incorporators. It’s MOI must also state that its income and property may not be distributed to its members, officers, incorporates or directors, except as reasonable compensation for services.
Non Profit Organisation (NPO) status is awarded by the Department of Social Development (DSD). Registration is voluntary, and if the organisation meets the requirements, DSD will enter its name into a register and issue it with an NPO number.
To register as an NPO, your organisation must be a non-governmental organisation (NGO); community-based organisation (CBO); or faith-based organisation (FBO). Further, the NPO Act requires a few core provisions be stated in the founding or governing documents. These include:
that the income and property of the organisation may not be distributed to its members and office bearers, except as reasonable compensation for services rendered. (In other words, you may pay reasonable salaries for work done, but any income or profit may not be paid over to directors or office bearers);
that the members or office bearers have no rights in the property or other assets of the organisation solely by virtue of their being members or office bearers; and
that a provision should be made that, when the organisation is wound up or dissolved, any assets remaining after all its liabilities have been met, must be transferred to another non-profit organisation having similar objectives.
Once an organisation is NPO registered, it becomes a body corporate irrespective of whether it is a voluntary association or trust (neither of which would under other circumstances be legally seen as separate legal entities). This means that its identity is distinct from that of its members or office-bearers; and the organisation’s existence continues notwithstanding any changes to its members or office-bearers.
NPO registration improves your organisations credibility as it proves that you have been properly set up and that proper management procedures have been put in place. It can also increase your funding opportunities as many donors require NPO registration.
Public Benefit Organisation (PBO) status is awarded by the South African Revenue Services (SARS). Registration is voluntary. Your organisation may apply for PBO status if it meets the requirements of the Income Tax Act of 1962. These include that the founding or governing document of the organisation must provide for the following:
at least 3 unconnected persons should accept responsibility of the organisation, and no one single person may be in control of the decision-making powers;
the organisation may not distribute any of it funds to any person other than in the course of undertaking a public benefit activity;
the organisation must use its funds solely for its object;
it cannot award excessive remuneration to any employee, office-bearer, member or other person;
on dissolution it must transfer any assets to any other approved PBO.
To qualify, organisations must have as their primary objective, one or more of the following Public Benefit Activities listed in Part 1 of the Ninth Schedule to the Income Tax Act:
Welfare and humanitarian
Health care
Land and housing
Education and development
Religion, belief or philosophy
Cultural
Conservation, environment and animal welfare
Research and consumer rights
Sport
Providing of funds, assets or other resources
PBO registration entitles organisations to certain tax benefits. This means certain receipts (mainly income derived from Donors) are exempt from Income tax. PBO’s are also exempt from paying Transfer Duty on the purchase of Immovable property, and from paying Capital Gains tax on the sale of any immovable property. And lastly, for VAT purposes, a PBO will be classified as a welfare organisation (if it undertakes welfare activities), and will therefore be able to claim back all input VAT upon VAT registration.
Most donors require PBO registration. Further, if your organisation is PBO approved and receives S18A status, it will allow donors to deduct donations for tax purposes. This is a big incentive for corporate funding. And, if a person makes a bequest to a PBO, the deceased’s Estate will also be able to deduct the bequest and save on the 20% Estate Duty that would be payable. This means, a person could potentially leave more funds to their heirs.
Firstly, yes you can apply for VAT registration as a non-profit organisation even though you do not supply goods or services for a consideration. The main requirement is that you qualify as a Welfare organisation. In order to do so, your organisation must be PBO registered and carrying out any of the following welfare activities, as determined by the Minister of Finance in Regulation No 12 of 2005 under the following headings:
Welfare and humanitarian
Health care
Land and housing
Education and development
Conservation, environment and animal welfare. (Refer to Annexure A.)
Although this list of activities has as its source the Ninth Schedule to the Income Tax Act, it is a lot more restrictive as it excludes activities that would generally be exempt activities for VAT purposes.
Once you are VAT registered, you can claim back all input VAT on qualifying welfare expenditure and use these funds for future projects and activities.