A group of young artists had been regularly getting together to work with children with behavioural difficulties, as they found that creating artworks encouraged the children to express themselves.

They approached an organisation for funding to grow the venture and were advised that as they were not a registered charity they did not fulfil the organisation’s criteria to receive funding.

They hadn’t thought about registering as a charity as being an option for them, and were surprised to hear of the number of options available to them.

What criteria need to be fulfilled to be a charity?

The primary criteria is that the organisation has a ‘charitable purpose’.  This includes:

  • the relief of poverty
  • the advancement of education
  • the advancement of religion, or
  • anything else that benefits the community.

The charitable purpose must also provide a public benefit, being something that is recognised by law as being beneficial, and is available to the public generally, or at least a sufficient section of the public. 

What are the options?

Not all not-for-profit organisations are charitable, but examples of types of entity that can be registered as charities, provided they meet the relevant criteria, are Incorporated Societies, Charitable Trusts, Charitable Trust Boards and Limited Liability Companies.

What are my options when setting up a Charity?

There are a variety of entities which can be registered as charities, provided they meet the relevant criteria.   Below are some of the key features of the most common types of charitable entity.

Incorporated Society

An Incorporated Society is an organisation of members who have a mutual interest in a particular activity or subject.  Societies are run democratically, with members having voting rights. 

Key features of an Incorporated Society are:

  • They must:
  1. Be established for lawful purposes and activities
  2. Not operate for pecuniary gain (i.e. make a profit for the benefit of some or all members)
  3. Be registered with the Registrar of Incorporated Societies
  4. Act within the objects stated in its Rules
  • Once registered, the Incorporated Society becomes a separate legal entity distinct from its members.  Membership of the society can change from time to time, but the society will continue to operate.
  • Generally an Incorporated Society will be a limited liability entity, unless otherwise provided in its Rules.  This means that the members do not incur liability on behalf of the society.

Charitable Trust

Charitable Trusts are trusts that have a charitable purpose.  Trustees are responsible for holding and managing the Trust’s assets, to carry out the purposes of the Trust.

Key features of a Charitable Trust include:

  • Trustees govern the Trust.  The Trustees have various powers by law and under the relevant Trust Deed.
  • It does not have a separate legal identity from its Trustees – i.e. the Trustees are the ones who enter into contracts and hold assets for the Trust (unless a Charitable Trust Board is established as below).
  • The trustees of the Trust are liable for their actions, although most charitable trust deeds would include an indemnity from the assets of the trust to some extent.

Charitable Trust Board

A Charitable Trust Board is a separate body that acquires its own legal identity independent of the Trustees of a Charitable Trust.  A Charitable Trust can choose to register as a Charitable Trust Board.

Key features of a Charitable Trust Board are:

  • It is its own legal entity.  It can therefore enter into contracts and hold property in its own name (rather than as separate 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 extremely beneficial for entities with a large number of Trustees and/or who have a number of assets being acquired and changing hands.
  • It gives the Trustees protection from personal liability (with some exceptions).

Limited Liability Charitable Company

If a not-for-profit entity is likely to be engaging in commercial activity as part of furthering its charitable purpose, then it may make sense to set up a limited liability Company to be registered as a Charity.   A Company is more suited to carry out 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. 

The key features of a Company include:

  • 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.  Another entity, such as a Trust, can be a shareholder.
  • In order for a Company to be charitable, its constitution must include a clause saying that its dividends cannot be distributed to shareholders.  This is because the shareholders cannot profit personally 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. 

Charities can be a complex area, so it pays to take professional advice from your lawyer or legal advisor to work out what is best for your organisation.

Claire Tyler
Partner
Wellington