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Comparison between an NPC and a trust

By Douw Breed 13 Min Read

Difference Between an NPC and a Trust

To determine which structure should be used to conduct a Public Benefit Organisation (PBO) the following comparison between Non-Profit Companies (NPC) and a Trust should be considered.

1. What is a NPC? A NPC is defined as —

  1. a company incorporated for a public benefit object, or an object relating to one or more cultural or social activities, or communal group interests; and
  2. the income and property of a NPC may not be distributable to its members or directors or to its incorporators, officers or related persons.
1. What is a Trust? A Trust is a legal arrangement between persons (the founder, trustees and beneficiaries) intending to form a trust that is governed in terms of a Deed of Trust for the benefit of the beneficiaries. Trusts can be used to conduct business for profit or to promote causes not aimed at profit.
2. How is a NPC administered? A NPC is administered and managed by its Board of Directors that receive their powers from the memorandum of incorporation (hereinafter referred to as the “MOI”) and the Companies Act, No 71 of 2008 (hereinafter referred to as “the Act”) and specifically Schedule 1 of the Act. The MOI forms the constitution of the NPC and the NPC may not act in as far as any action is prohibited by its MOI. The MOI will amongst others determine how the NPC’s business should be conducted, how the Board or Directors of the NPC is appointed, how meetings of directors or members are convened, what constitutes a quorate for meetings of the Board or members, what percentage is required for specific decisions of the directors or the members and what happens in the event of a conflict between directors or members.
2. How is a Trust administered? A trust is administered and managed by its Board of Trustees that receive their powers from the Deed of Trust. The Trust receives all its powers from the Deed of Trust and the Trustees may not perform any functions not allowed in terms of the Deed of Trust. The Deed of Trust will determine amongst others how the Trust’s business should be conducted, how the Board or Trustees of the NPC is appointed, how meetings of Trustees are convened, what constitutes a quorate for a meeting of the Trust, what percentage is required for specific decisions of the Trustees and what happens in the event of a conflict between Trustees.
3. Does a NPC have an independent legal personality? A NPC has legal personality separate from its members and directors. This means that the NPC can sue and be sued in its own name, and can own immovable property in its own name.
3. Does a Trust have an independent legal personality? A Trust does not have its own legal personality and cannot sue or be sued in its own name and must be sued in the name of its Trustee in their capacities as Trustees of the Trust. A Trust cannot hold immovable in its own name and it must be registered in the names of the Trustees that hold the property in their capacities as Trustees of the Trust on behalf of the beneficiaries. A Trust will however be regarded to have a separate legal personality if the Trust should be registered as a non-profit organisation in terms of the Non Profit Organisations Act, No 71 of 1997.
4. How to form a NPC? A NPC must be registered with the Companies Intellectual Properties Commission (hereinafter referred to as “CIPC”) after the necessary CoR documentation and MOI has been completed.
4. How to form a Trust? A Trust must be registered with the Master of the High Court who requires a Deed of Trust and supporting documentation.
5. What formalities forms part of a NPC?
  1. The Company must appoint auditors and inform the Commission of any change in auditors, in certain circumstances;
  2. The Company must appoint a registered address and inform the Commission of any change of address;
  3. The company must keep an updated register of members and directors;
  4. The company must keep accurate and complete accounting records;
  5. The Directors must ensure that proper minutes and attendance registers are kept;
  6. The company must hold an annual general meeting;
  7. The company must prepare annual financial statements within six months of the end of its financial year and must present the statements at the AGM;
  8. The object of a NPC must be contained in its MOI each be either a public benefit object; or an object relating to one or more cultural or social activities, or communal or group interests;
  9. Although income and property of a NPC may not be distributable to directors or members it does not preclude the NPC from paying reasonable remuneration to its Directors including reasonable reimbursement for expenses;
  10. Distribution to members or directors in the event of winding-up of the NPC is prohibited and there must be a directive in a company’s MOI containing such clause.
5. What formalities forms part of a Trust?
  1. The Master of the High Court registers the trust and oversees and controls the appointment of trustees;
  2. You must notify the Master if you change any of your trustees;
  3. The Master exercises a high degree of supervision over the appointment of trustees;
  4. Even though the Master may call trustees to account about the administration of trust property, in practice this supervision is limited and in most cases the Master will only comply with oversight when a complaint is lodged. In these cases however the Master may request the financial statements of the trust or any other information needed from the trustees and may even remove a trustee from the Board;
  5. Trustees must ensure that proper minutes are kept;
  6. The object and the purpose of a Trust must be captured in the Deed of Trust;
  7. A Trust must be administered to the benefit of the beneficiaries; this may also include the Trustees. If a Trust however registers as a PBO the Trust may not include a purpose where the Trustees also receive benefit from the Trust;
  8. On termination of the Trust the trust property must be distributed to the beneficiaries;
  9. Trustees are entitled to reasonable remuneration.

 

6. Advantages and disadvantages of a NPC? 6. Advantages and disadvantages of a Trust?
  1. The provisions of the Act are complex and detailed and are subject to public disclosure obligations and statutory control.
  2. There is freedom in the management of the day to day affairs of the company subject to the MOI and the Act.
  3. The company has a separate legal personality from its members.
  4. The reporting requirements for a company are complex and extensive and not always suitable for smaller organisations.
  5. A NPC continues to exist if the members or directors pass away.
  6. The provisions of section 77(3) of the Act apply to NPCs. A Director will be liable for any loss, damage or costs sustained by the company if he/she:
    1. Was acting in the name of the company knowing that he/she lacked the authority to do so;
    2. Agreed to carry on the company’s business knowing that it is being conducted in a reckless manner;
    3. Is a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or member of the company, or, had another fraudulent purpose;
    4. Signed, consented to, or authorized the publication of any financial statements that were false or misleading in a material respect.
    5. Where more than one director was party to any of the above, all such persons will be held liable provided it is for the same contravention.
    6. Provided there was no wilful misconduct, or, a wilful breach of trust, a court may on any terms relieve a director from these liabilities if he/she:
      1. Acted honest and reasonably; or
      2. It would be fair to excuse the director given the circumstances.
  7. A further advantage of a NPC is that it may register as a ring fenced company that will have the letters ‘RF’ appear after its name. The effect hereof would be that the public would be aware of inherent limitation of directors that will allow the NPC to legally repudiate actions performed by Directors without the necessary authority.
  1. The requirements for disclosure of Trusts are very limited and there need not be an auditor or audited financial statements unless otherwise required by the Deed of Trust.
  2. A Trust is very flexible and can suit many forms of NPOs.
  3. A Trust does not have its own legal personality and cannot sue or be sued in its own name and must be sued in the name of its Trustee in their capacities as Trustees of the Trust. A Trust cannot hold immovable in its own name and it must be registered in the names of the Trustees that hold the property in their capacities as Trustees of the Trust on behalf of the beneficiaries. A Trust will however be regarded to have a separate legal personality if the Trust should be registered as a non-profit organisation in terms of the Non Profit Organisations Act, No 71 of 1997.
  4. The reporting structure for Trusts can be as formal or as informal as the founder of the Trust wishes when a Deed of Trust is drafted.
  5. A Trust continues to exist if the Trustees pass away.
    1. Trustees can be personally held liable if it is found that the Trustees did not act with skill, diligence and skill according to Section 9 of the Trust Property Control Act. The term “skill” is more than just acting in good faith. Trustees may be proven negligent not only if they invested in risky investments, but also if they invested capital too conservatively causing the capital not to grow sufficiently.
    2. Trustees can be held personally liable in the event of gross negligence.

 

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By Douw Breed
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Managing Director, Douw, heads up a dynamic team of directors, associates, and support staff at Barnard Inc in the firm’s quest to be the go-to legal services provider in South Africa.

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