[Question] Setting up a Section 21 Company

[Visa]

A number of years ago, a friend and I created an online website and membership club (much like a sports club) which has grown profoundly over the past two years.

We often run events (such as fun runs, volunteer rallies and the likes) which have product sponsors ("donors" if you will) of prizes and infrastructure. A number of them have expressed the desire for us to register as a legal entity and register for VAT as a non-profit/public benefit organisation.

Having practically no business experience, I've had to do quite a bit research on the topic and have got some advice from family friends etc.

Suggestions I've gotten so far:
-- Register a Section 21 Company (Companies Act)
-- Register that as an NPO (Nonprofit Organisations Act, 1997)
-- Register with SARS as a Public Benefit Organisation

I also found this article very informative (although its not based in South African law).

Now, a few questions:

-- What is the most cost effective way to get a company of this kind setup? Commercial Law attorney? CA? We generally try to invest any funds available back into the organisation, so there isn't exactly a huge fund available for us to get this off the ground. Some people have indicated that attorney costs can fly as high as R1000/hour whilst others say you can setup the company for a fraction of that cost if you do some of the work yourself? I've read through the CIPRO forms and I suppose some of them I can do myself, but others I would need someone to review post draft, to make sure I have all avenues covered.

-- Can a Section 21 company have "token members"? As a public company, we are required to have a minimum of 7 members when incorporating. As there are only 2 of use really involved in the organisation, is it possible to "override" this rule in the articles of association by 2 allocating 2 director positions which have significantly higher voting power than the non-executive members? Then only if there was a disagreement between Directors, the non-exec members would have the "swing vote"...basically allowing the company directors to nullify any votes by the members? Is this possible? Legal?

-- What are the tax implications for the sponsors/donors? Where does SARS draw the line between a sponsor who sponsors equipment in exchange for advertising and a donor who donates for the feel-good? Would we be able to "sell" the donation of prizes as some form of tax deduction for the donor company?

-- Is a Section 21 company better suited to a "club" of this kind? Or should we be looking at a Association incorporated under Common Law (universitas)? What are the benefits either side?

Any advice or direction is greatly appreciated

[duncan drennan]

I don't know much about this, but just a thought: church's work on pretty much the same principal (I think they are typically Sec 21's). If no one here can help, how about chatting to your local pastor/priest/etc.

[Dave A]

Hi Visa and welcome to TFSA

That link does indeed set out the advantages and disadvantages of the various structure options quite well, even if we tend to name them slightly differently locally. Possibly the one option missed is a trust, but it is not commonly used.

As pointed out, the main problem with an unincorporated organisation is that it is not recognised as a seperate juristic person in many instances.

The issue of being defined a non-profit organisation is something seperate as on this issue what you need to satisfy is SARS, which has its own requirements quite seperate from the Registrar of Companies requirements i.r.o. a section 21 company.

To be considered an NGO/PBO I believe you need to register as such with the department of trade and industry (not something I've ever had to deal with personally, so please check) - again, something that should be considered a seperate issue with its own requirements.

Quite a preamble to say that registering a section 21 company is the most formal (and expensive) route. If you are dealing with big money where you can live with the audit fee that goes with the territory, probably a good idea.

For organisations involving smaller monies, I'd go with an organisation defined by its consitution or articles of association. An example of this is the South African Pest Control Association. You can view the SAPCA articles of association here to get some sort of idea. It was drafted very recently by a legal expert specialising in constitutions and apparently is in line with "current practices." I can report that whilst this structure presents no difficulty in dealing with SARS, it cannot even open a telephone account in its own name without some individual providing their ID number and standing in the line of fire if something goes wrong.

If such an association were to acquire or deal with a significant asset (such as land), it would be prudent to place the asset in a trust structured that the trustees are appointed (and returned from time to time) by the association or club.

I hope that helps with the overall picture.

[Visa]

Thank-you both for your valuable time and suggestion.

Dave, I think at this time the section 21 route may indeed be an expensive and unnecessary financial burden. Currently we absolve all risk ourselves and the objective of this process was not to change that fact, but rather to establish a formal association structure (whether it be section 21 or otherwise).

Would the SAPCA be an example of a Voluntary Association? What law governs this style of association?

As per my question regarding "token members", would a Voluntary Association be entitled to tailor its constitution however it wanted (for example, requiring that a quorum include at least 1 director and that director has near-infinite voting power (i.e. could only be challenged by the second director)...etc?).

Thanks again for your input.

[Dave A]

Would the SAPCA be an example of a Voluntary Association? What law governs this style of association?

SAPCA fits that definition rather well. As stated in your link, Voluntary Associations operate under Common Law. There are no statutes, just a history of legal precedent.

As per my question regarding "token members", would a Voluntary Association be entitled to tailor its constitution however it wanted (for example, requiring that a quorum include at least 1 director and that director has near-infinite voting power (i.e. could only be challenged by the second director)...etc?).

The members may structure that sort of thing however they wish. Membership is, after all, voluntary and if you don't like it, you can always leave.

However, I'd advise caution in making anything too draconian. Every rule is a rod for your own back too. One day you could find yourself as one of the members/minions being dictated to by the notions of one director.

Think about the origins of COPE for a moment before you go that route

You need to have an understanding and faith in the principles of permission leadership when it comes to voluntary organisations.

[Visa]

Thanks for all the advice!

Will reply to let you know what we ultimately decide, but again, thank-you for your valuable time and input.

[Sandy Simons]

Section 21

Hi there, I seem to be in the same boat. I was just wondering whether any one has responded to your questions, If so this would certainly help me. Please can you forward what you have to me health2day@iburst.co.za. Apologies that you had to do all the work! Thanks Sandy