Establishing a Charitable Entity
A charitable entity is an entity which has been established principally for charitable purposes and registered under the Charities Act 2005. Charities Services defines Charitable Purpose:
“Charitable purpose has a special meaning in the law that is more limited than the meaning people generally give to those words.
To have a charitable purpose, the rules or governing document of an organisation must clearly state that its work is for:
- the relief of poverty
- the advancement of education
- the advancement of religion
- any other matters that are beneficial to the community
For an organisation’s purposes to be charitable, its aims must also be for a public purpose. The benefit must be available to a large part of the community and the activities must not result in the private benefit or profit of any individual. Some examples include:
- religious institutions
- aged persons’ homes
- homeless hostels
- organisations relieving the special needs of people with disabilities
- non-profit child care centres
- societies that promote the arts
A non-charitable purpose secondary to an organisation’s charitable purpose does not stop the organisation from qualifying for registration as a charitable entity.
The relevant section of the Charities Act 2005 relating to the meaning of charitable purpose is section 5.”
The following steps are involved in the establishment of a charitable entity:
What type of entity
Determine what entity is to be established – charitable trust; incorporated society or charitable company;
Choose a name for the charitable entity;
Trust deed or constitution
Prepare the trust deed or constitution. The primary matters to be covered in the deed or constitution are:
- (a) the name of the entity;
- (b) the purposes/objects of the entity – this is discussed more in detail below;
- (c) the names and identities of the trustees or directors or initial members. (Although there is no minimum number of trustees or directors, as an indication most charitable trusts or companies have at least three but often five or more officers. The greater the number of trustees or directors the more transparency the trust or company may have. An incorporated society requires fifteen members to be incorporated);
- (d) the names of the shareholders for a charitable company;
- (e) the operational rules of the entity. With a trust it is possible to specify who has the power to appoint and remove trustees.
Purposes/objects of the entity
The proposed activities (i.e. purposes/objects) of the entity need to be expressed in such a way so as to fit within one or more of the above charitable purpose categories. There is a balance to be struck between framing the purposes of the entity sufficiently tightly to clearly only allow activities that meet the charitable purpose test and sufficiently widely to allow some flexibility;
Apply for an IRD number for the entity
A condition of registration under the Charities Act 2005 is that all entities must have an IRD number.
Incorporation of a charitable entity under the Charitable Trusts Act 1957, Companies Act 1995 or the Incorporated Societies Act 1908.
For a trust, once the trust deed is finalised the trust can be incorporated under the Charitable Trusts Act 1957. This gives some protection for the trustees individually as registration creates a Trust Board.
Members of an incorporated society have limited liability. The Incorporated Societies Act 1908 (“Act”) states that “Except when otherwise expressly provided in this Act, membership of a society shall not of itself impose on the members any liability in respect of any contract, debt, or other obligation made or incurred by the society”;
Registration under the Charities Act 2005
Registration under the Charities Act 2005 is voluntary however, a charitable entity that chooses not to register with Charities Services will no longer qualify for tax exempt status or be able to call itself a “registered charitable entity”. An officer certification form needs to be completed for each officer of the charitable entity.