Why Incorporate?

2010 Article, updated October 2017

In the first of this series of articles (“As common as dirt”) I outlined the disadvantages of unincorporated societies.  A 2007 Statistics New Zealand report stated that there were then some 97,000 Not-For-Profit entities in New Zealand.  It appears that less than half are incorporated, which I believe is a dangerous state of affairs.  To illustrate that point, in 2010 I was asked to advise on the potential liability of an individual who organises 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 incorporate.

I have no doubt that for any society, 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 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 Interpretation Act as “a body of persons, whether corporate or unincorporated,” 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 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 Register.  Therefore, if an incorporated society owns property it is owned in the name of the society 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 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 the directors of a company.  Thus when an incorporated society or 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 – members may be liable where they do not make it clear that any liability they incur is for their society, and 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 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.
  • Once the new Incorporated Societies Act becomes law, running an incorporated society will become more complex – and, regrettably, that may result in fewer Incorporated Societies (with increased risks for those governing and belonging to unincorporated societies).

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, and will become even more demanding once the new Incorporated Societies Act is enacted.

While the benefits of incorporation are clear and real, as an incorporated society or 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, other than (under the Incorporated Societies Act 1908) on dissolution if the rules provide for distribution to members.  If a society or trust is registered under the Charitable Trusts Act the assets cannot under any circumstances be distributed to the society’s members or to trustees, 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” needs to register with Charities Services.

In summary, the State makes legislative provision for the incorporation of societies under the Incorporated Societies Act 1908 and the Charitable Trusts Act 1957 (and, also, at present, 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 associations and providing for the dissolution and winding up of those associations.  As already observed in my earlier article “Lessons from a Polytechnic”, the vintage of the Incorporated Societies Act and the Charitable Trusts Act is such that it is time Parliament gave some attention to enacting minimum standards of governance required of voluntary sector entities.

 

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.