Charities and Community Groups – choosing the right entity
So, you have come up with an idea for a new charity or group to support others. That’s great! New Zealand communities are built on volunteer groups. However, you may have heard horror stories about administrative problems with community groups and want to avoid these issues from happening to you.
Choosing the correct structure for your group will get you started on the right footing, making it easier to achieve your goals.
Incorporated or unincorporated?
The first question to ask is whether you require an incorporated entity. Becoming incorporated increases administration requirements which can result in a charity or group being run inefficiently. It can therefore be tempting to stay unincorporated. However, this comes with risks and drawbacks.
An incorporated entity has separate legal identity, meaning it can enter into contracts, own property and hire employees. Perhaps most importantly people participating in an incorporated entity have limited liability. This means that in most circumstances they will not personally be responsible for any costs or legal issues that the entity might incur. This is important from a practical as well as legal perspective, because most people are less willing to volunteer their time when it involves personal risk.
Examples of limited liability entities include, incorporated societies, charitable trust boards and companies.
Most people will be familiar with incorporated societies through various community clubs, associations and societies. An incorporated society is created with a specific set of objects or goals that it must work towards. For example, a local sports club might have the objects of supporting athletes and promoting sport within the local area.
An incorporated society must have at least 15 members, with corporate bodies being deemed as three members. The members are responsible for the direction the society takes by voting on resolutions and electing a committee for the day to day running of the society.
Incorporated societies are democratic and so they are well suited for collaborative ventures or community groups where members can vote on society decisions.
Note that the new Incorporated Societies Act 2022 recently came into force which will affect how societies are run.
Registered charitable trust board
Charitable trusts are entities that are created with an express charitable purpose. They operate as an incorporated entity through establishing a charitable trust board. This can be done by the trustees of a trust, or alternatively an unincorporated society can apply to incorporate as a trust board (this should not be confused with an incorporated society).
A charitable trust board needs at least one trustee or five members of a society. Being a registered charitable trust typically makes it easier to receive donations and grants that align with its charitable purposes.
Note that charitable trusts are not the only entities that can operate as a charity. Societies and companies can also achieve charitable status by becoming registered under the Charities Act 2005.
A more uncommon option is establishing a company to operate as a charity or community group. This may seem strange because most people only know of companies as for-profit entities. However, a company can register as a charity provided that its constitution excludes shareholders from receiving dividends.
Companies are very effective closely held entities, and can be established with just a single director and shareholder. This can give the entity more flexibility to operate without relying on multiple trustees or society members to vote on.
While a charitable company will not be suitable in some circumstances it is an option to consider when setting up a charitable entity.
Choosing which entity to use for a community group or charity is not just a simple box ticking exercise. The right entity and structure will help avoid administrative difficulties and costs in the future. It is important to get legal advice.
Holland Beckett Law is passionate about assisting local not-for-profit and community organisations. Please reach out if you would like to discuss setting up a community or charitable group. We would be happy to help you choose the best option for your circumstances and assist with registration requirements.