Why Incorporate?

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The issue

In the first of this series of articles (originally published in 2010) I outlined the disadvantages of unincorporated societies, noting that a 2007 Statistics New Zealand report stated that there were then some 97,000 Not-For-Profit entities in New Zealand.  Given that statistic I suggested that less than half were incorporated, which I believed to be a dangerous state of affairs.  To illustrate that point, in 2010 I was asked to advise on the potential liability of an individual who organised social events for a group of 40-50 people who share his recreational, travel passion.  I pointed out that if anything went wrong (for instance, if inclement weather closed an essential road) he could be personally liable for the resulting loss to the destination accommodation and service provider, which could run into thousands of dollars.  As a result his group clearly should have incorporated.

The practical benefits of incorporation

I have no doubt that for any society or charitable trust, other than the most basic, incorporation is highly desirable because of the clear practical benefits:

  • An incorporated entity is recognised in law as a separate legal “person” from its members, in the same way a company is a separate legal entity from its shareholders.  From this recognition flow the other consequences and benefits of incorporation.  An unincorporated society or charitable trust is generally not recognised as a separate legal entity, and the High Court stated in Campbell v Scott  [1995] 2 NZLR 345 at 348 that “Speaking generally, corporate bodies are persons in law distinct and separate from their members; unincorporate bodies are not.” However, this statement is somewhat at odds with the definition of a “person” in the Legislation Act 2019; “person includes a corporation sole, a body corporate, and an unincorporated body,” this being matched by the definition of “person” in the Resource Management Act 1991 as including “the Crown, a corporation sole, and also a body of persons, whether corporate or unincorporated.”
  • An incorporated society or charitable trust has “perpetual succession,” and thus it continues in existence as long as it complies with the law and is not wound up or otherwise removed from the incorporated societies or charitable trusts Register.  Therefore, if an incorporated entity owns property it is owned in the name of the entity rather than in the names of either the individual members, or a trustee or trustees for its members, or individual charitable trustees.  The need to record changes of property ownership as members change (usually at some cost) is, therefore, avoided.
  • An incorporated society or charitable trust executes documents as a separate legal person under common seal and can, subject to its rules, enter into contracts in its own name, buy, sell, own, lease, and rent property, borrow money and give securities, and can also sue and be sued in its own name.
  • The members of an incorporated society enjoy “limited liability,” and the trustees of an incorporated charitable trust obtain the similar exclusions from personal liability to those of the directors of a company.  Thus when an incorporated society or charitable trust incurs any debts or other legal liability it is sued in its own name, and its members cannot normally be held personally responsible (hence my recommendation that the group enjoying organised social events be incorporated).  There are exceptions to this – for instance, members may be liable where they do not make it clear that any liability they incur is for their society or charitable trust, or where the liability is incurred in the course of a society activity intended to make a financial gain.  Trustees may also face potential liability if they act in breach of trust.
  • The mere fact of incorporation also gives a society or charitable trust a quality of permanence that gives confidence to those dealing with it, particularly a charitable society or trust seeking public support, donations, or grants.
  • Now that the new Incorporated Societies Act 2022 became law, running an incorporated society has become more complex – and, regrettably, that may result in fewer incorporated societies (with increased risks for those governing and belonging to unincorporated societies).

The possible disadvantages of incorporation

Despite being a firm believer in the value of incorporation of a community society, I recognise that, for many, the complexities associated with running an incorporated society properly are simply too daunting, especially since the new Incorporated Societies Act was enacted.

While the benefits of incorporation are clear and real, as an incorporated society or charitable trust is a creature of the statute under which it is incorporated, the society or trust only has such powers as may be conferred, expressly or by implication, by that statute or by its constitution.  The members of an incorporated society have no right to claim the assets of the society, on dissolution, as s216(1) requires that on dissolution“ the surplus assets of the society after the payment of all costs, debts, and liabilities are disposed of to 1 or more not-for-profit entities,” and to members.  If a society or trust is registered under the Charitable Trusts Act, on dissolution the assets cannot under any circumstances be distributed to a charitable society’s members or to the trustees of the charitable trust, but must be held for charitable purposes, and the Charities Board is vigilant in ensuring that those entities accepted as charities by the Board have specific rules prohibiting distribution to members.

Finally, charitable entities should consider registration under the Charities Act 2005. While registration under the Charities Act is voluntary, if an organisation wishes to have exemptions from income tax and estate and gift duty and become recognised as a “registered charitable entity” it needs to register with Charities Services.

Summary

In summary, the State makes legislative provision for the incorporation of societies under the Incorporated Societies Act 2022 and the Charitable Trusts Act 1957 (and, also, charitable trusts under the latter), and has an interest in regulating their affairs under those statutes.  The purposes of these Acts and of the Charities Act 2005 are to establish a state-controlled system of registering and controlling non-profit making entities and providing for the dissolution and winding up of those entities.  The challenge for those leading and managing those non-profit making entities is to meet minimum the standards of governance required of voluntary sector entities.

For specific advice about the possible incorporation of a society or charity, please contact Mark at mark@nfplaw.co.nz.

This is one of a series of articles on societies and charitable trusts by Mark von Dadelszen, a lawyer and author of Members’ Meetings, 3nd Edition, 2012, and Law of Societies, 3nd Edition, 2013 (both texts being in the course of editing for 4th editions to be published after the new Incorporated Societies Act is enacted).