UNDERSTANDING THE DIFFERENCES, REQUIREMENTS, AND BEST PRACTICES
1. INTRODUCTION: WHY IT MATTERS
WE HAVE A VIBRANT NONPROFIT SECTOR, FROM SMALL COMMUNITY GROUPS TO NATIONAL CHARITABLE ORGANISATIONS. YET MANY PEOPLE CONFUSE THE TERMS NPO, NPC, AND PBO, NOT REALISING EACH PLAYS A UNIQUE ROLE.
WHETHER YOU’RE STARTING A FEEDING SCHEME, BUILDING A COMMUNITY CENTRE, OR MANAGING A FAITH-BASED CHARITY, UNDERSTANDING THESE STRUCTURES HELPS YOU STAY COMPLIANT, ATTRACT FUNDING, AND MAXIMISE YOUR IMPACT.
DID YOU KNOW?
THERE ARE MORE THAN 260,000 REGISTERED NPOS IN SOUTH AFRICA, BUT FEWER THAN 10% HAVE THE ADDED BENEFIT OF PBO APPROVAL FROM SARS.
2. WHAT EACH TERM ACTUALLY MEANS
A. NPO: NONPROFIT ORGANISATION (DEPARTMENT OF SOCIAL DEVELOPMENT)
AN NPO IS ANY ORGANISATION FORMED FOR A PUBLIC OR COMMUNITY PURPOSE RATHER THAN FOR PROFIT. IT’S REGISTERED WITH THE DEPARTMENT OF SOCIAL DEVELOPMENT (DSD) UNDER THE NONPROFIT ORGANISATIONS ACT OF 1997.
WHILE NPO REGISTRATION IS VOLUNTARY, IT GIVES LEGITIMACY AND ACCESS TO CERTAIN GRANTS AND DONORS WHO PREFER WORKING WITH REGISTERED ENTITIES.
TO REGISTER AN NPO, YOU’LL NEED:
- A WRITTEN CONSTITUTION THAT OUTLINES OBJECTIVES, GOVERNANCE, AND FINANCIAL RULES.
- A COMPLETED NPO REGISTRATION FORM (AVAILABLE ON GOV.ZA).
- ANNUAL SUBMISSION OF NARRATIVE AND FINANCIAL REPORTS WITHIN NINE MONTHS OF YEAR-END.
ADVANTAGES: QUICK TO REGISTER, ADDS CREDIBILITY, MINIMAL COST.
LIMITATIONS: DOES NOT AUTOMATICALLY GRANT TAX BENEFITS OR LEGAL PROTECTION FROM LIABILITY.
QUICK TAKEAWAY:
NPO = RECOGNITION BY GOVERNMENT THAT YOUR ORGANISATION EXISTS AND SERVES A SOCIAL PURPOSE- BUT IT’S NOT A LEGAL “COMPANY”.
B. NPC – NON-PROFIT COMPANY (CIPC)
AN NPC IS A FORMAL COMPANY STRUCTURE CREATED UNDER THE COMPANIES ACT, 2008 AND REGISTERED THROUGH THE COMPANIES AND INTELLECTUAL PROPERTY COMMISSION (CIPC).
IT’S IDEAL FOR ORGANISATIONS NEEDING A CLEAR GOVERNANCE FRAMEWORK, LIMITED LIABILITY FOR DIRECTORS, AND THE ABILITY TO ENTER CONTRACTS OR OWN ASSETS IN THE ORGANISATION’S NAME.
HOW TO SET UP AN NPC:
- DRAFT A MEMORANDUM OF INCORPORATION (MOI) STATING THE NONPROFIT OBJECTIVES.
- RESERVE A NAME OR USE A GENERIC ONE.
- SUBMIT INCORPORATION DOCUMENTS AND PAY THE CIPC FILING FEE.
- FILE ANNUAL RETURNS AND COMPLY WITH AUDIT OR REVIEW REQUIREMENTS.
ADVANTAGES: LEGAL PERSONALITY, TRUSTED BY DONORS, STRUCTURED GOVERNANCE.
LIMITATIONS: HIGHER COMPLIANCE AND FILING COSTS.
DID YOU KNOW?
NPCS REPLACED “SECTION 21 COMPANIES”; THE OLD TERM STILL USED BY MANY SOUTH AFRICANS WHEN REFERRING TO NONPROFITS WITH COMPANY STATUS.
C. PBO – PUBLIC BENEFIT ORGANISATION (SARS)
A PBO IS NOT A LEGAL STRUCTURE, BUT A TAX STATUS GRANTED BY SARS UNDER SECTION 30 OF THE INCOME TAX ACT.
ANY ENTITY (NPC, TRUST, OR NPO) CONDUCTING PUBLIC BENEFIT ACTIVITIES, LIKE EDUCATION, HEALTH, POVERTY RELIEF, OR ENVIRONMENTAL WORK, MAY APPLY FOR PBO APPROVAL.
IF THE ORGANISATION ALSO QUALIFIES UNDER SECTION 18A, IT CAN ISSUE TAX-DEDUCTIBLE DONATION RECEIPTS, MAKING IT HIGHLY ATTRACTIVE TO DONORS.
HOW TO APPLY:
- GATHER FOUNDING DOCUMENTS, GOVERNANCE POLICIES, AND FINANCIALS.
- APPLY TO THE SARS TAX EXEMPT INSTITUTIONS (TEI) UNIT.
- ENSURE COMPLIANCE WITH ANNUAL REPORTING AND RECORDKEEPING REQUIREMENTS.
ADVANTAGES: INCOME TAX EXEMPTION, DONOR TAX BENEFITS, CREDIBILITY.
LIMITATIONS: STRINGENT SARS COMPLIANCE. FAILURE TO MEET OBLIGATIONS CAN LEAD TO REVOCATION.
QUICK TAKEAWAY:
PBO = TAX BLESSING FROM SARS, NOT A COMPANY TYPE, BUT A STATUS THAT BRINGS MAJOR FINANCIAL ADVANTAGES.
3. CORE DIFFERENCES BETWEEN NPOS, NPCS & PBOS
| FEATURE | NPO | NPC | PBO |
|---|---|---|---|
| LEGAL STATUS | REGISTRATION WITH DSD | INCORPORATED COMPANY (CIPC) | TAX STATUS FROM SARS |
| MAIN LAW | NPO ACT | NPO ACT | INCOME TAX ACT |
| PURPOSE | PUBLIC OR COMMUNITY BENEFIT | STRUCTURED NONPROFIT OPERATIONS | TAX EXEMPTION FOR PUBLIC BENEFIT |
| REGISTRATION TYPE | VOLUNTARY | MANDATORY (IF OPERATING AS COMPANY) | OPTIONAL (FOR TAX BENEFITS) |
| ANNUAL FILINGS | NARRATIVE + FINANCIAL REPORTS TO DSD | ANNUAL RETURNS TO CIPC | TAX SUBMISSIONS + DONOR RECORDS TO SARS |
DID YOU KNOW?
ONE ORGANISATION CAN BE ALL THREE:
AN NPC (LEGAL ENTITY) THAT’S REGISTERED AS AN NPO (WITH DSD) AND APPROVED AS A PBO (BY SARS).
4. PROS AND CONS
NPO
- SIMPLE AND FAST TO REGISTER
- BUILDS TRUST WITH THE COMMUNITY
- NO AUTOMATIC TAX EXEMPTION
- NO LIMITED LIABILITY PROTECTION
NPC
- LEGAL STRUCTURE WITH LIMITED LIABILITY
- IDEAL FOR LARGER OR FUNDED PROJECTS
- ANNUAL RETURNS AND POSSIBLE AUDITS
- MORE ADMINISTRATIVE WORK
PBO
- TAX EXEMPTION AND DONOR INCENTIVES
- IDEAL FOR LARGE CHARITIES AND SCHOOLS
- ONGOING SARS COMPLIANCE
- RISK OF LOSING APPROVAL IF MISMANAGED
5. TAX CONSIDERATIONS
PBOS ENJOY SUBSTANTIAL TAX BENEFITS:
INCOME TAX: EXEMPT ON QUALIFYING ACTIVITIES.
SECTION 18A: ALLOWS DONORS TO CLAIM TAX DEDUCTIONS ON APPROVED DONATIONS.
DONATIONS TAX & CGT: OFTEN EXEMPT WHERE APPLICABLE.
DID YOU KNOW?
A PBO CANNOT USE ITS FUNDS TO BENEFIT ANY INDIVIDUAL, DOING SO CAN TRIGGER TAX PENALTIES OR LOSS OF APPROVAL.
TIP: ALWAYS USE SARS’ PRESCRIBED SECTION 18A RECEIPT FORMAT, INCLUDING YOUR PBO REFERENCE NUMBER AND A STATEMENT THAT THE DONATION WILL BE USED FOR APPROVED PUBLIC BENEFIT ACTIVITIES.
6. FILINGS & OBLIGATIONS OFTEN OVERLOOKED
MANY NONPROFITS LOSE CREDIBILITY (OR FUNDING) BECAUSE THEY FORGET SIMPLE BUT CRUCIAL FILINGS:
- NPOS –ANNUAL NARRATIVE & FINANCIAL REPORTS TO DSD WITHIN 9 MONTHS.
- NPCS –ANNUAL RETURNS AND FINANCIAL STATEMENTS TO CIPC.
- PBOS –ANNUAL RETURNS AND DONOR RECORDS TO SARS TEI UNIT.
- ALL –MAINTAIN UPDATED GOVERNANCE DOCUMENTS AND BANK ACCOUNTS IN THE ORGANISATION’S NAME.
- A LAPSE IN DSD OR SARS COMPLIANCE CAN DELAY GRANT FUNDING, PREVENT RENEWAL OF DONOR CONTRACTS, OR CAUSE TAX BENEFITS TO BE REVOKED.
7. AUDIT & REVIEW REQUIREMENTS
NPCS: MAY REQUIRE AUDITS BASED ON THEIR PUBLIC INTEREST SCORE (PIS) OR MOI. SMALLER ENTITIES MAY ONLY NEED AN INDEPENDENT REVIEW.
NPOS: AUDIT ONLY IF REQUIRED BY THEIR CONSTITUTION, FUNDERS, OR AGREEMENTS.
PBOS: SARS MAY REQUEST AUDITED STATEMENTS, AND NPC AUDIT RULES STILL APPLY.
QUICK TAKEAWAY:
NOT EVERY NONPROFIT NEEDS AN AUDIT, BUT EVERY NONPROFIT NEEDS PROPER FINANCIAL MANAGEMENT AND DOCUMENTATION.
8. COMPLIANCE CHECKLIST
- CLEAR CONSTITUTION OR MEMORANDUM OF INCORPORATION (MOI)
- BOOKKEEPING AND DONOR LEDGERS
- BANK ACCOUNT IN THE ORGANISATION’S NAME
- GOVERNANCE AND CONFLICT-OF-INTEREST POLICY
- ANNUAL FILING CALENDAR
- SECTION 18A DONOR RECORDS (IF APPLICABLE)
- ANNUAL NARRATIVE AND FINANCIAL REPORTS
DID YOU KNOW?
MANY FUNDING AGENCIES REQUIRE PROOF OF GOOD STANDING WITH BOTH CIPC AND DSD BEFORE RELEASING FUNDS.
9. COMMON SCENARIOS
SMALL VOLUNTEER INITIATIVES – SIMPLE NPO REGISTRATION OFTEN SUFFICIENT.
MEDIUM OR LARGE CHARITIES – PREFER NPC STRUCTURE FOR LIABILITY PROTECTION AND GOVERNANCE.
FAITH-BASED OR EDUCATIONAL BODIES – USUALLY SEEK PBO + 18A APPROVAL TO ATTRACT DONORS.
PROPERTY-HOLDING TRUSTS – STILL COMMON BUT DIFFER IN HOW THEY’RE GOVERNED AND TAXED.
10. PRACTICAL TIPS & RED FLAGS
- DRAFT YOUR MOI OR CONSTITUTION WITH FUTURE AUDITS AND COMPLIANCE IN MIND.
- KEEP RESTRICTED FUND LEDGERS TO TRACK DONOR-SPECIFIC FUNDS.
- NEVER MIX PERSONAL AND ORGANISATIONAL FUNDS.
- ENSURE YOUR BOARD OR COMMITTEE UNDERSTANDS THEIR FIDUCIARY DUTIES.
- ISSUE ONLY VALID SECTION 18A RECEIPTS; MISUSE CAN TRIGGER PENALTIES.
TAKEAWAY NUGGET:
TREAT YOUR NONPROFIT LIKE A BUSINESS, WITH STRUCTURE, POLICIES, AND ACCOUNTABILITY, EVEN IF YOUR GOAL ISN’T PROFIT. THAT’S WHAT KEEPS YOUR CAUSE SUSTAINABLE AND CREDIBLE.
FINAL THOUGHTS
CHOOSING BETWEEN AN NPO, NPC, OR PBO ISN’T ABOUT WHICH IS “BEST,” BUT WHICH COMBINATION FITS YOUR MISSION, SIZE, AND FUNDING MODEL.
FOR MANY SOUTH AFRICAN ORGANISATIONS, THE IDEAL SETUP IS A REGISTERED NPC (FOR LEGAL PROTECTION), ALSO REGISTERED AS AN NPO (FOR CREDIBILITY), AND APPROVED AS A PBO (FOR TAX EFFICIENCY).
DID YOU KNOW?
WHEN MANAGED CORRECTLY, YOUR NONPROFIT CAN QUALIFY FOR GOVERNMENT GRANTS, TAX EXEMPTIONS, AND INTERNATIONAL FUNDING, ALL WHILE BUILDING A TRANSPARENT, CREDIBLE LEGACY OF SERVICE.
.While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writer nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.
