New s10 Non–Profit Company versus old s21 Company
The s10 non-profit company in terms of the 2008 Companies Act is the successor to the s21 company under the 1973 Act, which was also known as the incorporated association not for gain.
Every pre–existing company incorporated in terms of s21 of the 1973 Companies Act is deemed to have amended its Memorandum and Articles of Association as of 1 May 2011—the effective date of the 2008 Companies Act—to expressly state that it is a non-profit company, and to have changed its name to end with the abbreviation ‘NPC’.
Every s21 company in terms of the 1973 Act was deemed to be a public company. In terms of s19(3) of the 1973 Act, a s21 company was classified as a company limited by guarantee, and such a company was deemed to be a public company for the purposes of the 1973 Act.
Now, under the 2008 Act, a s10 non-profit company is an entirely separate type of company, which makes the distinction between public and private companies wholly inapplicable to a s10 non-profit company.
The Transitional Arrangements in Schedule 5 of the 2008 Act provide that pre-existing companies that were incorporated under s21 of the 1973 Act are recognised as non-profit companies under the 2008 Act. All previous s21 companies are deemed to have amended their Memorandum and Articles at the general effective date of the Act, that is, 1 May 2011, to state that they are non-profit companies and to have their company names end with the suffix NPC.
Fundamental Rules for s10 Non–Profit Companies
The Act sets out a special set of fundamental rules for NPCs in Schedule 4, which must be incorporated in the MOI and which is in line with the stated purpose of the Act set out in section 7 to “provide for the formation, operation and accountability of non-profit companies in a manner designed to promote, support and enhance the capacity of such companies to perform their functions.”
An NPC is not subject to the extended disclosure, transparency and audit requirements of the Act and accordingly it need not appoint an auditor, audit committee or company secretary, unless its MOI states so.
Every NPC is subject to the Public Interest Score in terms of the Companies Regulations and generally, the Annual Financial Statements of an NPC require an audit or an independent review subject to the Regulations. Where the NPC holds assets in a fiduciary capacity for a third party or a group of persons not related to the NPC and the aggregate value of such assets held at any time during the financial year exceeds R5–million, the Annual Financial Statements of the NPC are subject to audit. The NPC may also voluntarily opt for an audit.
The Memorandum of Incorporation of a Non-Profit Company
The MOI of an NPC must set out at least one object of the company and each such object must be either a public benefit object or an object relating to cultural or social activities, or communal or group interests. The phrase ‘communal or group interests’ relates to cultural or social activities and excludes those of a purely commercial nature. Solely commercial enterprises are thus excluded from the ambit of an NPC.
The MOI of an NPC must also be consistent with all the other requirements of Item 1 of Schedule 1, which deals with the objects and policies of NPCs, with emphasis on the application of their assets and income, the distribution of their residual assets on dissolution, and the voting rights of voting members.
Non-Profit Companies and Members
An important innovation of the new Act is that a non-profit company may be incorporated with or without members. Where an NPC has members, the members do not need to be voting members. No more than two classes of members may be provided for in the MOI, that is voting and non-voting members.
Where there are voting members each voting member has at least one vote and generally, the votes of voting members carry equal weight on any matter unless the MOI provides otherwise.
In other words, the voting rights in an NPC may be loaded disproportionally in terms of its MOI. Section 58 and section 65 of the Act, which deal with holders and the governance of companies, only apply to the NPC if it has voting members.
It is important to note that an NPC in terms of the 2008 Act may acquire and hold securities issued by a profit company or directly or indirectly, alone or with any other person, carry on any business, trade or commercial undertaking consistent with or ancillary to the NPCs stated objects.
Non-Profit Companies and Fundamental Transactions
An NPC is prohibited from converting to a profit company, and is prohibited in terms of the 2008 Act to amalgamate or merge with a profit company. It is important to note that no NPC may dispose of any part of its assets, undertaking, or business to a profit company, other than for fair value, unless such disposals of assets occur in the ordinary course of the activities of that NPC.
At all times an NPC is subject to the solvency and liquidity test, which has extreme implications for the fiduciary duties of past and current directors of that NPC.
Non-Profit Companies and Tax Concessions
There is no guarantee that any NPC that complies with the 2008 Act automatically qualifies for any tax concessions. It specifically does not qualify for any particular status, category, classification, treatment, or advantage in terms of the Income Tax Act 58 of 1962, except to the extent that the legislation provides otherwise in terms of Item 1(6) of Schedule 1 of the Act.
This position also applies to a registered external NPC, and to obtain any tax exemption or tax advantage the external NPC must satisfy the requirements of the Income Tax Act.
OnlineMOI for s10 Non-Profit Companies ensures compliance with all of the requirements of the 2008 Act, and has been structured in the best interests of the non-profit company, its directors and members, if any.