Choosing a legal structure
An overview of advantages and disadvantages of becoming a legal entity and a comparison of the distinctions between the most common structures.
This section covers:
- Formalising your legal status
- Collaborating with other groups
- Choosing a legal structure
- Comparison of more common legal structures
Formalising your legal status
Many small groups can operate for months or even years without having to consider having a formal legal structure. If however, your group is carrying out activities that might involve some risk or require significant levels of funding you will need to consider adopting a formal structure.
Some of the benefits of obtaining formal legal status for your organisation are:
- Has its own name
- Will continue, even if members change, until it is wound up
- Can reduce risk of personal liability
- Can hold assets and take out loans in its own name
- Creates some reporting obligations
- Can enter into contracts in its own name
Before doing this you should have completed your planning process and be clear about your role in the community, the nature of your project and how you intend to operate. It is better to fit the legal structure around the group's activities than to fit the group's activities around the legal structure.
Relationships with other groups
For some groups where the project is relatively small or short term, or where there is little time to set up a separate legal structure, forming working relationships with existing groups allows you to get on with projects without additional costs and responsibilities..
Ideally the group you work with will have an existing legal structure and will be able to provide the sort of support your group needs. This support might include:
- Assistance with planning and evaluating the project
- Handling of all monies and administration
- Employing staff or given guidance and support for their employment
- Helping create working relationships with others in the community interested in the project including funders
It is important to ensure both groups are clear about what each is committing to. You therefore need to have a written agreement between the groups clarifying who is responsible for what. This needs to cover:
- An outline of what the project is to achieve and how
- Finances and administration
- Employment responsibilities
- Ownership of any assets
- Liability for any losses and whether anyone is expected to provide a personal guarantee
Choosing a legal structure
Your choice of legal structure will be influenced by the type of project and the role played in the community, e.g. the group may want to act as a facilitator and develop local projects; it may support other groups and projects; it may undertake trading activities, either for itself or for the community; it may exists to hold assets - for example a Trust established under the .
A group considering becoming a legal entity group should be clear about:
- flexibility - how much flexibility it will need as its project or role develops
- size - whether limits should be imposed on the size
- what structure and culture of operation are desired
- membership - who will be members and what involvement in the running of the group they will have
- what activities the group proposes to undertake (different kinds of legal entity have different restrictions on their activities)
- control - whether management, ownership and control should be separated. Whether there should be "outside" controls
- funding - how much is needed (and what for)
- accountability - how the group’s financial performance will be monitored
- liability - who will be liable if things go wrong
- responsibilities - e.g. staff, operating a bank account.
Comparison of more common legal structures
The table below compares some of the features of incorporated societies, companies, and charitable trusts.
There is a good section on Types of Māori organisations on the Te Puni Kōkiri’s website for effective governance (governance.tpk.govt.nz).
Feature
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Incorporated Society
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Charitable Trust
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Company
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Minimum number of people required
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15 individual members or 5 corporate bodies
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2 or more trustees
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1 or more shareholders/ directors
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Tax Status
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Charitable status possible – dependent on objects. Can also operate under a range of other exemptions.
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Must be charitable.
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Charitable status possible – dependent on objects. Can also operate under a range of other exemptions.
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Major decision- making
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By members at general meetings and/or by committees.
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By trustees although trust deed can allow for appointment and removal of trustees by membership.
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By directors generally. Shareholders power normally limited.
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Members
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Made up of members whose role is defined by constitution.
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May have members of trusts with some power such as election of trustees. Ultimately power in hands of trustees.
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Shareholders can have similar rights to members. Powers set out in Companies Act and group’s constitution.
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Liability of committee members/ trustees
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Limited liability provided decision makers act prudently, within objects, legally, and not for personal gain.
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Likely to be limited liability provided decision makers act prudently, within objects, legally, and not for personal gain.
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Limited liability provided decision makers act prudently, within objects, legally, and not for personal gain – specific legislative provisions for company directors.
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Reporting requirements for Ministry of Economic Development.
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Annual accounts, change of rules, name and office.
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Change of rules, name and office. Also change of trustees (where land owned by trust).
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Annual accounts, change of rules, name and office, list of directors.
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Winding up/ liquidation.
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Assets to be passed on to organisation(s) with similar tax status.
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Assets to be passed on to organisation(s) with similar tax status.
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Assets to be passed on to organisation(s) with similar tax status.
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