A keen group of young people set up a Charitable Trust.  Eventually, they decided they wanted to become a membership based entity, given the large number of people interested in the cause and discussed changing their governing entity to become a charitable Incorporated Society.

They thought this was a matter of filling in some forms to convert their Trust to an Incorporated Society.  They were surprised to find out that it was not that simple, and instead they would have to wind up the Trust, and set up an Incorporated Society with completely different governing documents.

Incorporated society

An Incorporated Society can be formed by any group of 15 or more members. It must be registered within the Incorporated Societies Register.

The key features of an Incorporated Society are:

  • Members are democratically elected.
  • It has its own legal status, separate to that of its members. Its membership can change, but the Incorporated Society will continue to operate.
  • Its members have limited liability status and cannot incur liability or debt on behalf of the Incorporated Society.
  • Money and assets owned by the Incorporated Society cannot be distributed among its individual members for personal gain;
  • It must have a set of Rules which outline the society’s purpose and operation.

 Charitable Trust

Charitable Trusts are trusts with a charitable purpose.  They must be formed with at least one trustee and a Trust Deed which sets out how trustees should manage and operate the trust in line with its purpose.

The key features of a Charitable Trust are:

  • A Charitable Trust does not have its own legal identity separate from its trustees (unless it is a charitable trust board, see below).
  • Trustees govern the Trust, enter into contracts, and hold assets for the Trust.
  • Trustees are liable for the Trust’s actions, but most Trust Deeds include indemnity from the assets of the Trust.
  • A Charitable Trust does not have members. Trustees are appointed as per the Trust Deed.

 Charitable Trust Board

A Charitable Trust Board is its own separate body with a distinct legal identity from its trustees. Generally most charitable trusts, in our experience, will choose to take the extra step of registering as a Charitable Trust Board.

The key features of a Charitable Trust Board are:

  • It is its own legal entity and can enter into contracts and manage assets in its own name (rather than as individual trustees).
  • It is unaffected by changes to the trustees over time (unlike a Charitable Trust). When the Board is registered, any property that was previously held by the trustees personally is vested in the Board as a whole. This can be beneficial for entities with a large number of trustees and/or have a number of assets being acquired and changing hands.
  • Trustees do not incur liability on behalf of the Charitable Trust Board (there are some exceptions).

Limited Liability Company with charitable status

If your not-for-profit entity is engaging in commercial activities, you can set up a limited liability company that is registered as a charity.

A company is better suited to engage in commercial arrangements such as entering into contracts and borrowing funds. For example, a Company Director can give more comprehensive personal guarantees in respect of the Company’s borrowing than a Trustee can.

A Company must be registered with at least one shareholder and one director. These can both be the same person.

The key features of a Company are:

  • A Company is managed by its Directors who must be individuals. At least one Director must live in New Zealand, or be a Director of a company incorporated in Australia.
  • A Company is owned by its shareholders, who control its activities by way of voting rights. A shareholder can also be a Trust.
  • In order for a Company to be charitable, its constitution must state that its dividends cannot be distributed to shareholders. This is because shareholders cannot personally profit from the company. To meet charity requirements, the constitution will also need to clearly exclude a shareholder with a conflict of interest from participating in decision making.

Changing Entities

It is not possible to ‘convert’ any of the above entities to any other type of entity (other than registering a Charitable Trust as a Charitable Trust Board).  If you have decided that you need to change the type of entity you are, you will need to take legal and tax advice about the best way to transfer any assets, and will need to create new rules. 

As part of the process, if your current entity is registered with Charities Services as a charity, you will need to register your new entity on the Charities Register (provided it meets the requirements), and remove the existing entity from the Charities Register. 

Your legal professional can assist with making the choice regarding which entity is best suited for your charity and/or provide advice about changing entities or transferring assets.