Legal entities: NGOs and NPOs explained

NGOs and NPOs, are acronyms that are always used in tax and donations and it can become confusing. What does NPO or NGO stand for and what are they about?
NGOs and NPOs, acronyms that are always used in the world of tax and donations and it can become confusing. What does NPO or NGO stand for and what are they about?

Legalities and definitions

NPO stands for Non-profit Organisation and means exactly what it says.

Non-profit organisations include NGO’s (Non-governmental organisations), CBO’s (Community based organisations) and FBO’s (Faith based organisations).

In general, to qualify as NPO’s all these organisations must exist for public benefit, and income and property may not be distributed to its members or office bearers except as reasonable compensation for services rendered.

A choice of legal entities

All NPO’s have a choice of legal entities. These are:

• A NPC (Non-profit company). This is formed in terms of the Companies Act and the steps that need to be followed are similar to forming a private company in that it is registered with a Memorandum of Incorporation as its founding document. An NPC needs to be registered with CIPC.

• A Trust (Public benefit trust). It must be registered with the Master of the High Court with a trust deed as its founding document.

• A Voluntary Association. A written agreement between the parties by way of a constitution as a founding document. A Voluntary Association is not regulated by statute. This is the most common form for smaller, regionally based NPO’s. Most voluntary associations register with the Department of Social Development as a NPO and is then issued with a registration certificate containing a NPO registration number.

The Non-Profit Organisations Act

In South Africa, NPO has become closely associated with organisations registered in terms of the Non-Profit Organisations Act 71 of 1997. The main aim of the Act is to create an enabling environment for NPO’s which are not part of government (most of whom want to raise money via donations) by improving their credibility through providing assurance to the world at large that the NPO maintains adequate standards of governance, accountability and transparency. Registration also helps in getting tax and funding benefits.

Any organisation that is not for profit and is not part of government (including any of the three entity types and including NGO’s) can register. However, registration is voluntary and NPC’s, because they are audited and regulated like an ordinary company, do not really need the credibility that comes with registration under the NPO Act.

However, registration under the Act does help (especially Voluntary Associations) gain recognition with SARS as a PBO so as to receive preferential tax treatment. NPC’s and Trusts can apply to SARS without being registered under the Act. Also, Voluntary Associations need to have a NPO registration certificate to qualify for Lotto funding while NPC’s and Public Benefit Trusts do not.

NPO and NGO – the differences explained

While it is accepted that NPO’s and NGO’s are both Non-Profit Organisations in the generic sense, commentators draw a distinction between them mainly based on the nature and scope of their operations.

NGO (Non-governmental organisation) refers to any non-profit that works independently from government to promote change, mainly in broad-based areas like health, education, human rights, wild life etc. NGO’s usually take on large projects and operate in wide geographic areas (either nationally or internationally or both). They often work in areas where government is active and sometimes receive funding from government and International Aid Organisations.

NPO’s on the other hand, are usually community or faith based, and are concerned mainly with regional and local matters receiving funding for specific projects. NGO’s often fund NPO’s. There is however some overlap between the two as there is no proper distinctive definition.

The admin - setting up an NPO

First you need to decide on a legal entity type. An NPC or a Trust (if suitable) are most probably better for larger organisations. A Voluntary Association is often favoured by smaller NPO’s.

Those NPO’s who elect to go with a Voluntary Association should contact the Department of Social Services to register as an NPO (NPC’s and Trusts may decide to do this as well but the benefits are not as meaningful). The Act (Section12 (2)) lists the points that must be included in the Voluntary Association’s constitution. Registration is free and takes about two months.

Sections 17 and 18 of the Act details the accounting records that the NPO needs to keep, and the reports that must be submitted. In essence, the NPO must provide the director with a narrative report of its activities for the previous year, together with its financial statements within nine months of its financial year end.

Authored by Jacky Botha

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