If you’re setting up a new community organisation, whether social, charitable, sporting, political or something else, you’ll need to consider which legal structure will be most appropriate for the group and its activities.
For example, will an informal unincorporated group be sufficient? Or will you need something more formal, such as an unincorporated group with detailed written rules, or an incorporated society, or a trust?
There are a number of different legal structures that may be open to your group, each with different advantages and disadvantages. This section discusses each of those forms:
This section also explains the different arrangements for combining local organisations with larger national parent bodies (see “National bodies and local organisations”).
With some of the legal forms discussed in this section, the decision-makers are accountable to a wider membership (for example, an incorporated society). With others, control can be limited to a very small number of people (a trust or company for example).
Another way of categorising the different legal structures is to consider whether it means the group will be an incorporated body – that is, have a separate legal identity.
Those two distinctions are discussed in more detail below.
In many organisations the key decision-makers are accountable to a larger membership. These membership-based organisations are usually democratically structured and governed, and the governing body has an overriding obligation to serve the organisation’s purposes and objectives. The board or decision makers are elected and can be removed by the membership.
Examples are an incorporated society, which must have a minimum of 15 members, or an unincorporated group with a formal membership.
By contrast, some groups involve just a few individuals, who have decision-making power and are not accountable to any larger membership. For example, in the case of a trust, the decision-makers are the trustees, and strictly speaking there can be just a single trustee (although there are usually at least two). Trustees are not accountable to any membership, although when they deal with the trust property they’re accountable to the people for whose benefit the trust was set up. Trustees are appointed by themselves in the case of initial trustees and by each other as time goes on.
A company is another structure where decision-making power and ownership of the group’s property can be kept in the hands of only a small number of people. A company can be set up with just one shareholder and one director.
Incorporated societies, charitable trust boards, companies, charitable trusts and industrial and provident societies can all be incorporated groups, in contrast with unincorporated membership groups and trusts.
Incorporation gives an organisation the following key features:
The corresponding limitations of remaining unincorporated are discussed later in this chapter (see “Unincorporated groups” below).
To help your group work out what its needs are and what type of legal structure would best suit it, consider the following questions (and consult the following table):
Charitable societies that have nominated several of their members to be trustees are not greatly affected by turnover in membership because the trustees continue to run the organisation. However, it may not be easy to change trustees. The trust deed for any charitable trust or charitable trust board can set up whatever rules a group wants for appointing trustees, but these must be specific.
Many community groups will not need to incorporate – for example, if your group is intended to exist for only a short period (perhaps because it’s been formed to organise a particular event, or to respond to a particular time-limited issue), or if you don’t intend to seek funding from funding agencies (who often require applicants for funding to be incorporated). In those cases, it may not be worthwhile to incur the cost of becoming formally incorporated and to take on the ongoing obligations – reporting requirements for example.
However, it’s important to understand the limitations of remaining unincorporated – for example, the risk for individual members that they will be held personally responsible for obligations the group takes on.
Committee members are likely to be personally responsible for the group’s debts and for debts incurred by an employee of the group, particularly if the committee members knew the debt was being incurred or they agreed in some way to the transaction. They are also likely to be personally responsible to a person who suffers damage as a result of the negligence of an employee or other person involved in the group – for example, failing to organise an event properly.
Individuals who are liable (either the person who committed the wrong or the committee) may have the right to be indemnified (paid back) out of any property the group members hold individually, if the group’s rules provide for this.
The rules of unincorporated groups will derive from an agreement between the members, or an implied agreement based on past practice, or both.
To operate smoothly, an unincorporated group should record its rules and processes for managing the group’s affairs and making decisions. Having detailed written rules helps to determine what is right and wrong if disputes arise.
It’s good practice to have written rules stating:
The group’s rules should clearly state its decision-making processes, including:
The management of most unincorporated groups is usually delegated to a committee of members.
If the rules require a management committee to be appointed, the committee has no authority to bind ordinary members, unless the rules state otherwise.
It’s useful for the group’s rules to deal with financial controls and investment of the group’s funds. It will help the group operate smoothly for the rules to clearly state who is responsible for keeping proper accounts and the procedures for receiving and withdrawing funds (for example, a requirement for the signatures of two committee members).
If your group does not want to incorporate, it could instead become part of an existing umbrella organisation that is incorporated. This would allow your group to get on with its work without the costs and responsibilities of being incorporated itself. (See “Choosing the right legal structure for your group / National bodies and local organisations” in this chapter.)
There should be a written agreement between the group and the umbrella organisation to make sure the relationship is clear. Both sides should get legal advice before signing any agreement.
An umbrella organisation can receive and pass on any money to groups that are within its structure, and can charge a handling or administration fee for its services.
An “incorporated society” is a membership-based organisation that has registered under the Incorporated Societies Act 1908. To be able to register, your group must exist for some lawful purpose other than making a profit.
By registering under the Act, the society becomes an incorporated body with a legal identity of its own, separate from the identity of its members. This means the society continues to exist as a legal entity (called “perpetual succession”) even though its membership may change. It also means the society’s members are not personally responsible for debts and other obligations that the society takes on.
The society’s activities are limited by the Incorporated Societies Act and the rules the society adopts for itself.
Usually an incorporated society’s management committee and officers deal with the administration, management and control of the society.
Note: Registrars’ powers and the ability of the courts to intervene will likely become stronger when new legislation replaces the current Incorporated Societies Act 1908 (a new bill is expected to be introduced into Parliament later in 2016).
To become an incorporated society, your organisation must register with the Registrar of Incorporated Societies (part of the Companies Office). You’ll need to submit an application for incorporation signed by at least 15 members, and a copy of your organisation’s rules.
(For more information about how to register, and other information about incorporated societies, go to: www.societies.govt.nz/cms/incorporated-societies)
An incorporated society must have a set of rules covering, among other things:
As well as covering the matters required by the Act, the rules can also include any other provisions, so long as they’re not inconsistent with the Act and other laws.
The society’s rules must state how general meetings are to be called and held. To comply with this requirement, it’s a good idea for the rules to provide for:
The rules must also set out the procedure for making decisions at society meetings. This will usually include:
The rules must state how the society’s officers are appointed. Often rules state that they will be elected by the members at the annual general meeting. At a minimum, a chairperson, treasurer and secretary (the principal officers) should be elected at the AGM. Groups can decide to specify the minimum and maximum number of people on their board and rather than elect officers for specific tasks such as the secretary, the rules can specify that the officers will be elected by the board at the first board meeting after the AGM.
The rules must specify how the society’s funds will be managed – for example, who can sign cheques and who will collect money owed to the society. The control and investment of a society’s funds are usually entrusted to the management committee.
The rules must also specify the types of investments that are allowed when the society has surplus funds.
If there is a possibility that the society will borrow money, a rule should state how this may be done. The power of a society’s management committee to borrow is usually limited, and usually requires a general meeting of members.
The rules should also require that income and property can be applied only to further the society’s objects (aims), and that members aren’t allowed to gain financially.
Although it’s not required, it’s good practice for the rules to deal with accounting processes and statements, including who’s responsible for keeping proper accounts. This is important, because the Act requires a society to keep proper accounts and provide financial statements.
The rules must state how they can be changed. Usually all members will be given an opportunity to meet and debate any proposed changes. The threshold for approving a rule change is often higher (two thirds of the membership, for example) than for other decisions (where a consensus of those present or a simple majority is usually enough).
An incorporated society’s rules must state how people become and stop being members. Membership that isn’t authorised by the rules is invalid. The rules should specify:
For how a person stops being a member, the rules should specify:
The functions and powers of members usually relate to important decisions involving the society’s direction, purpose or structure, or large amounts of money. The rules should require decisions such as these to be approved by members at general meetings.
The rules should also clarify the functions and powers of different classes of membership – for example, financial members may be given the right to attend meetings, speak and vote.
Usually an incorporated society’s management committee and other officers deal with the administration, management and control of the society.
A society’s principal officers are its chairperson/co-chairs, treasurer and secretary:
Officers are directly accountable to the society’s members, mainly through general meetings.
Officers must act consistently with the functions and powers given to them by the society’s rules. Officers have no powers other than those set out in the rules, and they cannot do anything that the society itself cannot do.
The management committee or board is appointed by the society’s members at the annual general meeting. The committee’s functions are to:
The Incorporated Societies Act doesn’t specify any general duties for a society’s officers.
In general, all officers of a society have a duty to:
The society’s rules can provide for officers to be indemnified for costs and liabilities that they incur through committing wrongful acts in good faith while properly serving the society. The society can also take out “Directors and Officers” insurance to protect their officers and in some cases entire committees.
A society’s officers can potentially face financial penalties under the Incorporated Societies Act if the Act is breached. For example, each officer can be fined up to $1,000 for failing to provide documents that the Registrar of Incorporated Societies has asked to inspect.
Apart from potential criminal liability (for theft for example), an officer may also be personally responsible to third parties under civil law for breaches of trust or fiduciary duty if they act outside the society’s rules and objects, or for “conversion” of property.
Members may be paid as officers of a society and may be eligible for prizes. If the society has tax-exempt status as a charity, members can be paid for services only if the payment is reasonable and is no more than would be paid to a non-member.
The rules should be very clear about any right of management committee members and officers to receive an honorarium or to be reimbursed for out-of-pocket expenses.
Officers who become paid employees of the society should resign from their position as officer, to avoid any conflict of interest (a conflict between their personal interests and those of the society).
Liquidation is the process that brings an incorporated society’s existence and activities to an end. Its purpose is to collect the proceeds of the society’s assets and distribute them to the members, unless the rules require otherwise.
If the society has charitable status, any surplus assets must be distributed to other charitable organisations within New Zealand that have similar aims. If a charity is deregistered, there will be a tax on its net assets (see “Charities and charitable status / Removal from the Charities Register” in this chapter).
The members of an incorporated society may voluntarily put it into liquidation by passing a resolution to this effect (by either a simple majority or a three-quarter majority according to their rules) and appointing a liquidator (if there are any assets to liquidate) at a general meeting.
This decision must be confirmed by another resolution (again, passed by a simple or three-quarter majority, according to their rules) at a second general meeting held no earlier than 30 days after the initial meeting.
The High Court can put an incorporated society into liquidation in various situations – for example, if the society is unable to pay its debts, or its membership falls below 15.
An application to the court to have a society put into liquidation may be made by the society itself, a member, a creditor of the society, or the Registrar of Incorporated Societies.
A trust may be an appropriate form for your group if it has, or could potentially have significant money or property and you want to keep decision-making in relatively few hands.
The key feature of any trust – whether a private “family” trust, or a trust with charitable status or some other community-based trust – is that the people appointed to be the legal owners of the trust’s property (the “trustees”) have a special duty to hold and manage that property for the benefit of others – either the people or classes of people (the “beneficiaries”) who are named in the trust deed, or the sections of the community who will benefit from a specific charitable purpose stated in the deed.
Although the trustees are the legal owners of the property, their duty to the beneficiaries means the beneficiaries still have a legally recognised interest in the property, which is called a “beneficial” (or “equitable”) interest.
Note: This chapter isn’t concerned with trusts for private purposes, such as “family trusts”, or with Māori land trusts (which are covered in the chapter “Māori land”). It deals only with trusts that have charitable status and other community-based trusts.
A trust is not an incorporated body and therefore does not have a separate legal identity.
However, the trustees of a charitable trust can choose to register as a “charitable trust board” under the Charitable Trusts Act 1957, and they thereby become an incorporated body with a separate legal identity in the same way as groups that incorporate by registering under the Incorporated Societies Act. Charitable trust boards are explained in the next section (see “Charitable trust boards”).
The person who creates the trust – the “settlor” – does so by transferring property (a fund of money for example) on trust to one or more people – called “trustees” – or by declaring that the settlor now holds the property on trust (in which case the settlor is also a trustee).
A special document – the trust deed – is needed to create the trust. This records the key information about the trust: it identifies the trust property, appoints the trustees, and identifies the beneficiaries or the relevant charitable purpose.
Under the common law (law made by the courts), a trust must meet the following requirements in order to be valid:
A trust can be created with just one trustee, although it’s usual for there to be at least two. The law does not specify a minimum number of trustees, and leaves this instead to the particular trust deed.
The Charitable Trusts Act specifies that, if a trust has a charitable purpose, it’s not strictly necessary each time that replacement trustees are appointed for there to be new documentation recording that the new trustees are the legal owners of the trust property. Instead the Act states that at any given time the owners of the trust’s property will be whoever are the trustees at that time.
However, despite those provisions in the Act, most trust deeds will require some form of documentation of the new trustees’ legal ownership of the trust property.
Trustees have the following powers under the Trustee Act 1956:
Other powers that are often granted by trust deeds include:
If there’s a conflict between the Trustee Act and what’s stated in the trust deed, the Act overrides the deed.
The Trustee Act and the common law (law made by the courts) require trustees to:
Trustees must also:
The Charitable Trusts Act 1957 allows the trustees of a trust, or the members of an unincorporated society, to become an incorporated body – a “charitable trust board” – by registering under that Act. As a charitable trust board, these people agree to hold money or assets and carry out activities for charitable purposes.
What qualifies as a “charitable purpose” is explained elsewhere in this chapter (see “Charities and charitable status / Who can register as a charity” in this chapter). However, in the case of charitable trust boards, a “charitable purpose” also includes any religious or educational purpose, even if it wouldn’t otherwise qualify as “charitable” under New Zealand law.
By registering, the trustees or the society’s members become the members of the charitable trust board.
Sometimes a charitable society will take an additional, intermediate step and establish a trust, so that the trustees appointed can then be incorporated as a charitable trust board. In those cases, the membership of the charitable trust board consists of the trustees, rather than all the members of the society that set up the trust.
To be able to register as a charitable trust board, the trustees or the society must not be registered under any other Act.
The Charitable Trusts Act is administered by the Registrar of Incorporated Societies.
To register and incorporate as a charitable trust board, your trust or group must apply to the Registrar of Incorporated Societies (part of the Companies Office). The application must be in the form shown in the Charitable Trusts Act 1957 (Schedule 2).
Once they are registered and incorporated, the trustees or society members become a body corporate under the name of the charitable trust board. This means the board takes on a separate legal identity distinct from those individuals. The board also enjoys “perpetual succession”, which means it continues to exist despite changes to its membership (until it’s wound up), and it also has its own “common seal” (official stamp).
When a board is registered, all property held by the trustees or society members is vested in the board for the same purposes as before. The board’s liability is limited to the assets of the trust or society (although board members can be personally liable in some cases – for example, if they’ve been negligent or acted illegally). The board is liable for any transactions that are entered into in the board’s name and that the board is authorised to enter into by the trust deed or constitution.
The powers of a charitable trust board will be the powers set out in the constitution of the society or the trust deed of the trust.
Board members must comply with the requirements of the Charitable Trusts Act. If they’re also trustees, they’re also bound by the general duties applying to trustees under the common law and the Trustee Act 1956 (see above, “Trusts / Trustees: Their powers, duties and liabilities”).
What management structure is appropriate will depend on whether a charitable trust board is based on a society or a trust:
The Charitable Trusts Act does not impose any general duties on the trustees or officers of a charitable trust board. The trustees or officers are in a similar position to company directors, and owe duties to the charitable trust board in the same way as directors owe duties to the company (see “Companies” below). These duties are to:
There’s no requirement for charitable trust boards to file annual financial statements with the Registrar of Incorporated Societies. However, a number of reporting requirements will apply if the board is also registered on the Charities Register, which is a precondition for having charitable status for tax purposes (see “Charities and charitable status / Administrative responsibilities of registered charities” in this chapter).
In some cases a charitable trust board may be wound up (liquidated) by the courts – if it can’t pay its debts for example.
When a board is based on a charitable society, rather than on a trust, the board can also be wound up voluntarily by the board itself. For most trust-based boards, the trust deed will also give the trustees (that is, the board) the power to wind up the trust.
The liquidation provisions in the Companies Act 1993 (Parts 16 and 17) apply to a liquidation of the board as if the board were a company.
The board’s debts must be paid from its funds or assets. If there’s any surplus, this must be distributed to another charitable organisation in New Zealand. A charitable trust board must specify in its trust deed or constitution that any surplus assets will go to a charity with similar aims to its own. If a charity is deregistered, there will be a tax on its net assets (see “Charities and charitable status / Removal from the Charities Register” in this chapter).
Under the Companies Act, officers of a charitable trust board may be personally responsible (liable):
This section explains the key features of companies and why a community group might want to adopt this particular legal form.
Although most community groups don’t choose the company form, it may be appropriate if you want:
To register and incorporate as a company you’ll need to apply to the Registrar of Companies at the Companies Office. Your company will need to have:
(For information about how to apply, visit the Companies Office website at: www.business.govt.nz/companies/learn-about/starting-a-company)
Although it’s not a requirement, it’s always a good idea for a company to have a specially drafted constitution that meets the company’s particular needs.
In general a company’s constitution can’t contradict the rules contained in the Companies Act 1993 and a provision in a constitution that tries to do this will be legally invalid. Some provisions in the Companies Act, however, state explicitly that they can be varied by the constitution.
A company can adopt a new constitution, or change or revoke its current one, only by a special resolution passed by 75 percent of the shareholders.
A company must hold an annual meeting of shareholders within 18 months after it’s incorporated. Annual meetings must be held within six months after the company’s balance date and within 15 months after the last annual meeting.
A special meeting of shareholders can be called at any time by the board of directors or by someone authorised by the constitution.
The board of directors is responsible for the day-to-day management of the company. The directors must comply with the Companies Act and the company’s constitution.
Directors can delegate their powers to individuals or committees, but they continue to be responsible for their duties and must make sure there’s a monitoring system for those delegated duties.
Directors must not:
Directors can be paid a fair amount for their role.
Directors who breach their statutory duties can be removed from office by the company’s shareholders. The company, or any other director or shareholder, can also apply to the courts for an injunction to stop a director breaching his or her duties. There are also heavy criminal penalties if a director acts in bad faith, knowing that their conduct isn’t in the company’s best interests and that it will cause the company serious loss. In those cases the director can be jailed for up to five years or fined up to $200,000.
A dividend is a payment made by the company to a shareholder in proportion to his or her particular shareholding. The board of directors can authorise the payment of dividends only once the company has satisfied the “solvency test” set out in the Companies Act. Alternatively, the shareholders can unanimously authorise a dividend.
A company can enter into a contract with another person or entity. The appropriate way of doing this will depend on the particular kind of contract (see “Laws you may need to know about / Contracts” in this chapter).
A special shareholders’ resolution is required before a company can enter into a “major transaction”, which is where the value of the assets or obligations involved is more than half of the value of the company’s assets.
“Liquidation” (or “winding up”) of a company is when it stops trading or becomes “insolvent” (this means when it’s unable to pay its debts or when it doesn’t have enough assets to meet its liabilities). The company’s assets are sold and the proceeds are paid to the company’s creditors according to what the company owes them and the priorities between those creditors themselves. Any surplus money will be distributed proportionately among the shareholders.
A company can be put into liquidation voluntarily or by the courts. Liquidation begins when a liquidator is appointed.
“Receivership” is when a creditor of the company or the courts appoint a “receiver” to take control of and manage the assets of a company that’s in financial difficulty. A receiver can be appointed by or on behalf of a secured creditor to protect and take control of the assets over which the security has been granted. Debentures creating a security over the company’s property often give the debenture holder the right to appoint a receiver.
A society that’s been formed to carry on an industry, business or trade (except banking) can register and incorporate under the Industrial and Provident Societies Act 1908.
Although there are relatively few of them today, the industrial and provident society remains a sound and workable structure, suitable for groups wanting to work together co-operatively and make a profit that may be paid out to members. Typically an industrial and provident society will consist of the owners of small businesses who, while continuing to operate independently, become part of this larger entity for mutual benefit – a co-operative taxi society for example.
An industrial and provident society must be a genuine co-operative, or must provide a benefit to the community in some way. It must have at least seven members and have a formal set of rules. Annual audited accounts and an annual return are required by the Companies Office.
Local or regional organisations in the New Zealand community sector are often part of a larger national parent organisation, which is usually an incorporated body.
The relationships between the national and local components, and the rights and powers of each component, will depend on the rules of the national body and of each local group, and on whether the local organisations are separately incorporated.
The rules of the different bodies will determine how much control the national body has over its local components and how much autonomy the local organisations will have.
The rules will also determine the extent to which the local groups can control the national body. If the local organisations are members or shareholders of the national body, the local organisations will have an inherent right to participate in managing the national body.
In some national structures each local organisation is separately incorporated, giving it a different legal status and some additional rights and powers, such as the power to own property and enter into contracts in its own name. In other structures, there is an incorporated parent body with one or more unincorporated groups or committees operating locally.
There is a specific procedure under the incorporated societies legislation for incorporating a local component (“branch”) of a parent incorporated society.
There is no provision under the Charitable Trusts Act 1957 for incorporating the local societies or groups of a charitable trust board.
Note: For a clear understanding of the relationships between the different components of particular bodies, you should read the rules or constitutions of each body. The website Societies and Trusts Online, at www.societies.govt.nz, provides access to the rules or constitutions of all incorporated bodies.
Unincorporated local organisations are usually constituted under the rules of their national body. The extent to which the rules of national bodies govern the management and procedures of the local groups will vary:
An incorporated local organisation is not legally responsible (“liable”) for any civil or criminal penalties that the courts award against the national body unless:
The same rule applies to the national body’s liability for civil or criminal penalties awarded against a local group.
A parent body will generally be liable (usually jointly with the members of the local group) for any wrongful acts that the local group does on the national body’s behalf.
A parent body may be able to exclude or limit its liability for civil penalties (such as damages for negligence) resulting from a local group’s actions, by including an exclusion or limitation of liability clause in the national body’s rules. However, these clauses may not always be legally valid, particularly when the person committing the wrong and the person claiming the protection of these clauses are part of the same organisational structure.
A national body should make sure it properly monitors the actions of its local groups, to reduce the risk of it incurring civil or criminal liability.
National bodies are usually incorporated and are therefore able to enter into contracts in their own right.
A local organisation that is separately incorporated will also be able to enter into contracts in its own name. Unincorporated groups cannot do this and must instead enter into contracts in the names of their members.
A national body is usually incorporated and can therefore hold property in its own right. Any property that is transferred or left to the national body in a will can be dealt with as the body chooses, according to its rules and any relevant legislation.
Each local organisation will have influence over property owned by the national body only to the extent that it can exercise management rights over the parent body. Unless the national body holds the property on trust, the property will be available to be distributed to creditors if the national body is liquidated.
If a local organisation is incorporated it can hold property in its own right. Any property that’s transferred to the group, or left to it in a will, can be dealt with as the group decides, so long as it complies with the rules of the group, the Incorporated Societies Act, and the terms on which the property was transferred or gifted to the group.
The national body has influence over the property only to the extent that it has management rights over the local group. Unless the local group holds the property on trust, the property will be available to be distributed to creditors if the local group is liquidated.
When a local group is not incorporated, any property transferred or left to it in a will, will be owned by the people who are the members of the group at the time. The property will then be dealt with according to the group’s rules.
This poses a risk for the national body if the local group isn’t subject to any formal rules, or if the group’s rules can be changed without the national body’s agreement. The local group members could potentially deal with the property for their own benefit and neglect the purposes of the larger organisation. To prevent this happening: