Non-Profit Companies (“NPCs”) are companies established to pursue public benefit, social, cultural, communal or other non-profit objectives.
The Companies Act 71 of 2008 (“the Companies Act”) provides the legal framework regulating the establishment, operation and dissolution of NPCs.
Here’s what you need to know.
Income and Assets of a Non-Profit Company
An NPC must have at least one object set out in its Memorandum of Incorporation (“MOI”), which must relate to a public benefit, cultural or social activity, or communal or group interest.
The income and assets of an NPC must be applied towards advancing its stated objects.
Although an NPC may conduct business or trade, such activities must be consistent with its stated objects. An NPC is prohibited from distributing its income or assets to its incorporators, members or directors.
This prohibition does not preclude legitimate payments, including:
- reasonable remuneration for goods or services rendered,
- reimbursement of expenses incurred in advancing the NPC’s objects, or
- payments made pursuant to bona fide agreements or legal obligations.
Liquidation, Winding-Up or Dissolution of an NPC
Upon the winding-up or dissolution of an NPC, its members and directors are not entitled to any portion of the company’s remaining net assets.
After the company’s liabilities and obligations have been satisfied, the remaining net assets must be distributed to one or more qualifying:
- non-profit organisations,
- voluntary associations, or
- non-profit trusts with similar objectives.
This provision ensures that assets accumulated for a non-profit purpose continue to be applied towards a similar purpose and are not distributed for the private benefit of members or directors.
Incorporators of a Non-Profit Company
The incorporators of an NPC are its first directors and, where applicable, its first members.
The MOI must provide for the appointment or election of directors. Directors are subject to restrictions regarding the provision of financial assistance to themselves and certain related persons, subject to limited exceptions.
An NPC is not required to have members. Where an NPC has members, its MOI must set out:
- the requirements for membership,
- voting rights,
- membership fees, and
- the circumstances in which membership may be suspended or terminated.
Conversion of an NPC and Disposal of Its Assets
An NPC may not convert into, merge with or amalgamate with a profit company.
Where an NPC has voting members, certain fundamental transactions, including the disposal of all or the greater part of its assets or undertaking, require the approval of its voting members.
The disposal of any part of an NPC’s assets to a profit company must be for fair value, unless the disposal occurs in the ordinary course of the NPC’s activities.
These restrictions serve to protect the NPC’s assets and preserve its non-profit character.
Tax Considerations for NPCs
Registration as an NPC does not automatically confer tax-exempt status.
An NPC must separately satisfy the requirements of the applicable tax legislation to qualify for tax exemption.
Conclusion
The central principle governing NPCs is that their income and assets must be applied towards advancing their stated non-profit objectives and not for the private financial benefit of their members, directors or founders.
Organisations intending to establish an NPC should ensure that its MOI is appropriately drafted and that governance structures, financial arrangements and activities comply with the Companies Act.
Where tax-exempt status is sought, appropriate tax advice should be obtained to ensure compliance with the applicable tax legislation.