Jeffrey Miller, FCPA, FCA, LPA, CFE, TEP, Partner
A non-profit organization (NPO) has no legal requirement to incorporate; however, as an unincorporated entity, the organization would have no legal status. An unincorporated NPO is simply a group of people (members) who get together for a common purpose. What does this mean? It means the members of the organization may be personally liable for the full amount of any debts incurred by the organization. An unincorporated entity cannot sue or be sued. The members may initiate lawsuits and, likewise they may be sued for the actions of the NPO.
Incorporation gives an NPO legal status. As an incorporated entity, the NPO can enter into contracts, purchase assets, own property, borrow money, and generally conduct business. The incorporation limits the liability of the members and they are not personally liable for the debts of the corporation.
Other advantages of incorporation include:
- The continuity of the organization is assured, even if there is a change in membership;
- The organization has the ability to initiate legal action in its own name; and
- The chances of receiving grants are greatly enhanced due to the perceived stability and structure as a corporation.
An NPO is formed for purposes other than generating a profit. This does not mean that the corporation cannot earn a profit in a given year, however there needs to be a reason for retaining that profit such as generating a reasonable reserve for the operations of the NPO or accumulating a surplus to be must be used to future operations to further the organizations’ goals.
The corporation may be created at either the federal level under the Not-For-Profits Corporation Act or provincially under the Corporations Act. Once incorporated, the NPO would have to comply with the Act. This includes the need to hold meetings of directors and members, and having formal by-laws that comply with the Act.
As in for-profit corporations, directors may still have certain exposure to liabilities under the law, but that exposure can be managed with proper due diligence and conduct by the director. In addition, a corporation could purchase officer’s and director’s liability insurance whereas, it would not likely be available for an unincorporated entity.
This is an important decision for those in charge of the NPO’s governance. As always, it is recommended you speak with your advisors when making a decision of this magnitude.
