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Article by David Roberts, an accountant in Morningside, Sandton

As a result of differing interpretations there is some confusion between what constitutes a NPO and what constitutes a NGO.

I’ll start with the generic interpretation: NPO stands for Non-profit Organisation and means exactly what it says. It includes NGO’s (Non-governmental organisations), CBO’s (Community based organisations) and FBO’s (Faith based organisations). In general, to qualify as NPO’s all these organisations must exist for public benefit, and income and property may not be distributed to its members or office bearers except as reasonable compensation for services rendered.

A choice of legal entities

All NPO’s have a choice of legal entities. These are:

  • A NPC (Non-profit company). This is formed in terms of section 21 of the Companies Act and the steps that need to be followed are similar to forming a company in that it is registered with a Memorandum of Incorporation and its founding document. An NPC needs to be registered with CIPC.

  • A Trust (Public benefit trust) It must be registered with the Master of the Supreme Court with a trust deed as is its founding document.

  • A Voluntary Association. An agreement between the parties which normally takes the form of a constitution is required. A Voluntary Association is not regulated by statute. This is the most common form for smaller, regionally based NPO’s.

The Non-Profit Organisations Act

In South Africa, NPO has become closely associated with organisations registered in terms of the Non-Profit Organisations Act 71 of 1997. The main aim of the Act is to create an enabling environment for NPO’s which are not part of government (most of whom want to raise money via donations) by improving their credibility through providing assurance to the world at large that the NPO maintains adequate standards of governance, accountability and transparency. Registration also helps in getting tax and funding benefits.

Any organisation that is not for profit and is not part of government (including any of the three entity types and including NGO’s) can register. However, registration is voluntary and NPC’s, because they are audited and regulated like an ordinary company, do not really need the credibility that comes with registration under the NPO Act.

However, registration under the Act does help (especially Voluntary Associations) gain registration with SARS as a PBO so as to receive preferential tax treatment. NPC’s and Trusts can apply to SARS without being registered under the Act.

Also, Voluntary Associations need to have a NPO registration certificate to qualify for Lotto funding while NPC’s and Public Benefit Trusts do not.

NPO and NGO – the differences

While it is accepted that NPO’s and NGO’s are both Non-Profit Organisations in the generic sense, commentators draw a distinction between them mainly based on the nature and scope of their operations.

NGO (Non-governmental organisation) refers to any non-profit that works independently from government to promote change, mainly in broad-based areas like health, education, human rights, wild life etc. NGO’s usually take on large projects and operate in wide geographic areas (normally nationally or internationally). They often work in areas where government is active and sometimes receive funding from government and International Aid Organisations.

NPO’s on the other hand, are usually community or faith based, are concerned mainly with regional and local matters and receive funding for specific projects. NGO’s often fund NPO’s. There is however some overlap between the two as there is no proper distinctive definition.

Setting up an NPO

First you need to decide on a legal entity type. An NPC or a Trust (if suitable) are most probably better for larger organisations. A Voluntary Association is often favoured by smaller NPO’s.

Those NPO’s who elect to go with a Voluntary Association should contact the Department of Social Services to register as an NPO (NPC’s and Trusts may decide to do this as well but the benefits are not as meaningful). The Act (Section12 (2)) lists the points that must be included in the Voluntary Association’s constitution. Registration is free and takes about two months.

Sections 17 and 18 of the Act details the accounting records that the NPO needs to keep, and the reports that must be submitted. In essence, the NPO must provide the director with a narrative report of its activities for the previous year, together with its financial statements within nine months of its financial year end.

Some useful links:

Registering as an NPO

The NPO Act

Example of set out of NPO Annual Reports