In the last issue of Rolling Inspiration I wrote to you about the importance, especially in our current economic climate, of establishing NGO’s as reputable and reliable concerns and we explored the option of registering as a Section 21 company. In this issue I would like to expand on that theme and explain some of the legal requirements involved.
Like any organization a Section 21 Company has documents that define its operations. Such documents have been developing since the beginnings of commerce and trade and are tried and tested as the most effective ways of managing an organisation. This prevents individuals from devising their own rules that could allow for the misuse of company assets. The Most important documents for the formation of such a company is the Memorandum of Association and the Articles of Association
The Memorandum is the founding and superior document of the company. It is the constitution of the company. It provides the basis for the whole corporate structure. As the founding document, the Memorandum determines the nature and scope of the company, similar to the Constitution in an NGO or NPO, but you cannot change it to say, for example, that a certain Director has perpetual power as is prevalent in some of our organisations. It is based on the structure of a company that has worked for many years.
The Articles, on the other hand, play a subordinate role. They govern the internal structure of the company. The rights, duties and powers of members, directors and general meetings of members are set out in the Articles, as well as the manner in which, and by whom, the affairs of the company are to be managed and administered. This is equally important as most of the problems of the NGOs and NPOs are around their leadership who, de facto, often become the owners with wide ranging powers and cause members to be demoted to the level of grateful recipients of the charity. Such behavior will not happen easily in a Section 21.
Memorandum and Articles of Association are therefore important as the building blocks of organisations. Sale and transfer of assets is restricted and section 228 of the Companies Act regulates such conduct by specifying that when such a company intends to dispose of any, or the greater part, of its assets it must do so with the approval of a general meeting and such assets should be transferred to a company with similar objectives as their core business.
Like any other company provided for in the Companies Act, a Section 21 company must be registered with, and obtain a certificate of incorporation from, the Registrar of Companies. Certificate of incorporation is what authorizes, or permits, the company to commence its business after the requirements have been met.
Once incorporated, a Section 21 company is obliged to comply with extensive provisions and formalities stipulated in the Companies Act.
The requirements for incorporation can be summarized as follows:
•The phrase “association incorporated under section 21” must be included in, or subjoined to, the company name.
•In order to be registered, a company must provide the Registrar with the original, and two certified copies, of its memorandum and articles of association.
•The memorandum sets out the name of the company, the names and addresses of its founding members, its purpose and main objectives, and its powers. The records filed with the registrar are public documents and may be read by any person on payment of the prescribed fee.
•The company must appoint auditors and the Registrar must be informed of such appointment on the prescribed form.
•The Register of the company members must be kept in the prescribed form containing the details or particulars of the company.
•The company must keep a register of directors, which must reflect certain prescribed information about each director.
The Pros and Cons
Because the provisions of the Companies Act are complex and detailed, companies are subject to substantial public disclosure obligations and statutory control. This means that the public can obtain copies of your tax returns and can learn about your salaries and other expenditure. Since our organisations rely on public money, disclosure and transparency is good for accountability.
The independent legal personality of a company means that the company is liable and can be sued, in its own name, separately and distinct from its Directors and members. This is a big advantage as it makes the liability of the company very clear and protects Directors and members. Therefore there will be no confusion about whom to sue in case of legal disputes.
Tax Benefits - Mere registration as Section 21 Company does not entitle the company to automatic tax advantage. However, the profit or surplus of such a company will sometimes be excluded from income tax under certain conditions. An application has to be made to the South African Revenue Service for exemption on any of the grounds set out in section 10 of the Income Tax Act 58 of 1962.