A Comparative Study Of Legislation For NotforProfit Organizations

1
A Comparative Study Of Legislation For
Not-for-Profit Organizations

• Catherine Shea
• International Center for
• Not-for-Profit Law

2
Benefits of a Strong Not-for-profit Sector

• Promotes full implementation of freedoms of
  association, assembly, and speech
• Allows expression of diverse interests and
  promotes tolerance
• Promotes stability and the rule of law
• Establishes stronger support for democracy

3
Framework Regulation for NGOs

• Separate NGO Law

• Civil Code Provisions

4
Issues Generally Addressed by Framework Laws
Governing NGOs

• Types of Organizations that may be established
• Prohibition on Private Benefit
• Public benefit and mutual benefit status
• Registration Requirements
• Governance Rules

• Dissolution and Termination
• Transparency and Accountability Rules
• Political Activities of NGOs
• Economic Activities of NGOs

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Issues Generally Addressed by Framework Laws
Governing NGOs

• Types of Organizations that may be established
  under the civil law
• Foundations
• Associations
• Other forms
• Common law trusts and not-for-profit
  corporations

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Issues Generally Addressed by Framework Laws
Governing NGOs

• Mutual Benefit and Public Benefit NGOs
• Mutual Benefit Organizations organized for the
  benefit of members
• Generally may serve any lawful not-for-profit
  purpose
• Public Benefit Organizations organized to serve
  a public benefit purpose
• Such organizations are frequently entitled by law
  to greater tax, fiscal, and other benefits
  because of the public services they provide

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Public Benefit Organizations

• Legal Provisions Governing Public Benefit Status
• Criteria for organizations eligible to be
  considered PBOs (lists of eligible types of
  organizations)
• How PBO status is determined
• What benefits PBOs may receive

8
Legal Provisions Regarding Registration of NGOs

• Clear provision that citizens may exercise right
  to free association without registration
• Identification of the documents required to
  register
• Identification of the registering authority
• Identification of the number of founders
  necessary to form each type of organization
• Registration fees
• Provision for Central Registry

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Example Informal Associations

• (2) According to the constitutional right to
  free association, natural persons may associate
  without establishing a legal person when the
  proposed pursued/envisaged goal permits it.
• Romania, Ordinance 26 of 30 January 2000 on
  associations and foundations

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Documents Required for Registration

• Application/Petition
• Founding Act
• Statutes
• Evidence of payment of registration fee

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Registration Authority

• Court
• Ministry
• Central office
• Local or regional offices
• Specialized Agency
• England Wales

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Central Registries

• Benefits of a Central Registry
• Provides public access to information about
  registered NGOs
• Administrative convenience
• Practical Questions
• How to provide access throughout country?
• How to compile registry where registration is
  decentralized?

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Legal Provisions Regarding Registration of NGOs

• Clear specification of the grounds on which an
  application to register may be denied
• Clear specification of the time in which the
  registering authority must decide an application
  to register
• Default registration
• Provision for written notice of decision on an
  application to register
• Appeals procedure for adverse decisions on
  applications to register

14
Registration of Foreign and International
Organizations

• Laws should permit foreign as well as domestic
  natural and legal persons to register
  organizations
• Branch Registration
• Permitted if organizations demonstrates that it
  is registered under domestic law
• Registration of New Organization

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The Nondistribution Constraint

• Laws governing NGOs should contain a clear
  statement of the nondistribution constraint, a
  defining characteristic of NGOs
• The nondistribution constraint generally requires
  
• No distribution of net earnings, assets, etc. in
  the form of profits to anyone
• No private benefit to certain insiders
• Does not prohibit the payment of reasonable
  compensation for work performed

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The Nondistribution Constraint

• What is a private benefit?
• A special benefit obtained by an insider by
  virtue of his or her position
• Includes monetary and nonmonetary benefits
• Excessive salary
• Benefits for individual, e.g., travel, personal
  loans, lavish office space, vehicles

17
Internal Governance

• General Rule Laws should provide minimum
  standards for organizational structure and good
  governance, leaving substantial discretion to the
  organization to structure its internal governance
  in the most suitable manner

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Legal Rules for Internal Governance

• Designation of the Highest Governing Body for
  each organizational form
• Designation of minimum number of members for
  highest governing body
• Rules for organizational decision-making
• Rules relating to contents of organizations
  statutes

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Internal Governance Rules

• Legal provisions regarding content of statutes
• Name, address, purposes and activities
• Identification of highest governing body and
  rules for its selection and perpetuation
• Powers the highest governing body may delegate
• Identification and responsibilities of executive
  officers
• Quorum and voting rules
• Rules for amending statutes
• Rules for dissolution, merger, change of
  organizational form
• Membership rules

20
Legal Rules for Internal Governance

• Rules governing conflicts of interest and
  self-dealing
• Conflict of interest
• Requirement that individual with a conflict
  recuse him or herself from decision-making
• Requirement that organization have procedures for
  dealing with conflicts of interest
• Requirement that organization get the benefit of
  the bargain in any transaction involving a
  conflict
• Prohibition on Self-dealing

21
Termination and Dissolution

• Legal Provisions permitting
• Voluntary termination
• Involuntary termination
• Reversion of Assets
• Public Benefit Organizations and other NGOs that
  receive public benefits or funding should be
  prohibited from allowing assets to revert to
  members or insiders upon dissolution
• Assets should be distributed to another
  organization with similar purpose

22
Regulation of Economic Activities

• What are Economic Activities? Problems of
  Definition which income-generating activities
  can fairly be characterized as economic
  activities subject to tax?
• The importance of permitting NGOs to engage in at
  least some economic activities

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Definitions of Economic Activities

• Regularly pursued trade or business involving the
  sale of goods or services not involving
  activities excluded under some distinct tradition
• Definition excludes
• Receipt of gifts and donations
• Passive investment income
• Occasional activities
• Activities using volunteer labor
• Fees intrinsically connected with organizations
  public benefit purpose

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Legal Provisions Governing NGO Economic Activities

• Organization must be an NGO, i.e., it is
  established for a proper not-for-profit purpose
• Economic Activities are in furtherance of a
  statutory purpose or
• Are related or closely connected to the
  organizations main statutory activity

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Legal Provisions Governing Taxation of Income
From Economic Activities

• Tax all income from economic activities
• The destination of income test income that is
  used to support statutory purposes is exempt from
  tax
• The relatedness test all income from economic
  activities that are related to a not-for-profit
  purpose are exempt
• Threshold tests all income from economic
  activities above a specified minimum amount is
  tax
• Complex or combination tests

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Tax and Fiscal Issues

• Exemption from Tax
• Income or profits taxes
• VAT
• Real estate, inheritance, other taxes
• Tax benefits for donors to NGOs
• Corporate donations
• Individual donations

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Tax and Fiscal Issues Tax Exemptions

• Which organizations are entitled to claim
  exemption from tax most NGOs, or Public Benefit
  Organizations only?
• On what sources of income is the exemption
  available?