Which Legal Structure for Which Group: Examples

A look at some different sorts of groups and the legal structures that might best suit them.

Here are six examples of different community groups and a discussion of which legal structure is the most appropriate for each:

Environmental Group
A group of four people involved in environmental education for schools and the community has been meeting and operating informally. They want to extend their activities and apply for funding from the Ministry for the Environment.

This group's requirements can be easily met by either an incorporated society structure or an incorporated charitable trust structure as its aims are likely to be charitable. To form an incorporated society the four members have to find an additional 11 supporters to meet the minimum requirement of 15. While this may not be too difficult, the small size of the group and the fact that they have already worked together well for a year suggests that an incorporated charitable trust might be more suitable.

The four can form an incorporated charitable trust with themselves as the initial trustees, allowing for additional trustees to be appointed in the future if needed. The group can apply for funds to employ people including themselves without affecting their charitable status.

Work Group
A group of 20 unemployed people and their whānau want to try and create employment opportunities for themselves through contract work with the local council. They want to apply for funding for wages through Task Force Green.  The money they earn from their work contracts will be divided amongst members of the group. The group's aims are to provide work, financial support, and training opportunities for themselves and their whānau.

While the group intends to make money from its work, this money will first go to paying expenses such as fuel and equipment costs; any surplus will be distributed to members in the form of wages.

Because one of the group's main aims appears to be to provide ongoing employment for its members, it will probably not be considered charitable by Inland Revenue and therefore cannot set up as a charitable trust.  It may be able to set up as an incorporated society with 'non-profit' tax status or set up as a commercial business.

While getting non-profit tax status may have some tax advantages and may make the group eligible for more grants and donations, it may limit their ability to determine their level of pay because of conflict of interest rules applied by IRD to charitable and non-profit groups. If this is important the group may need to consider setting up as a commercial entity rather than a non profit/charitable one. In that case a company or cooperative company would probably be most appropriate.

Youth Work Group
A group of five youth workers wish to provide assistance for young people in their city. They want to provide housing, employment, and social and cultural activities. The groups want to seek funds for its various projects and also to provide salaries for youth workers.

An incorporated charitable trust might be the best legal structure, because there is a small stable group of people providing charitable services for the general community. The youth workers could become the initial trustees although if they are seeking funds for wages they may need to find other trustees to avoid conflicts of interest.  Other young people themselves can be invited to be involved, either in the group's various projects or as trustees in their own right.

An incorporated society could also be used, particularly if a more democratic structure was was seen as useful.  This could enable some of the young people and/or others in the local community to be involved in the group's decision-making by becoming members of the incorporated society.

Māori Carving Group
There are two Māori carvers who are known and respected for their art in Māori carving. They wish to carry out their art in a way that exposes it to others - particularly young Māori who want to learn the art of carving. Some of their work will be commissioned, for which they will receive payment, and some will be sold in a retail outlet attached to the carving workshop. The two carvers want advice on what legal structure would be the most appropriate for them.

The first consideration is the extent to which they want to profit financially from their work. If personal profits are important, a company, cooperative company or  partnership would be appropriate. If, however, the two carvers see the fostering of their art and culture and the education of young people as their prime motives, an incorporated charitable trust or incorporated society could be appropriate.

The objectives of fostering the art of carving and the education of young people are charitable. The group can sell its work to fund the members’ wages, equipment and the costs associated with training, provided that any profits over and above these items do not go to any individual member of the group.

The size of the group suggests that an incorporated charitable trust would be more suitable than an incorporated society. The two carvers could be the original trustees however to ensure the group can effectively manage potential conflicts of interest others should also be brought in as trustees.

It might also be possible for them to establish a business separately from the charitable trust to clearly separate their desire to make a living from the charitable activities of teaching people to carve.

(See also Types of Māori organisations on  Te Puni Kōkiri’s website for effective governance education http://governance.tpk.govt.nz/)

Design and Print Collective
A group of six people with design and publishing skills wish to set up a collective for the pooling of their skills. The group intends to work in a co-operative way.

The group wants to focus on work for community and performing arts groups. They also hope to make some of their facilities available to young unemployed people to develop screen-printing and design skills. They want to take on a lease and to purchase equipment, and want to know which legal structure would be the most appropriate.

Since the group will be acquiring equipment, possibly with the assistance of a bank loan, and they will have the responsibilities of a lease, an incorporated legal entity would give them some protection from personal liability. However, the bank would most likely require personal guarantees from each member of the collective.

Which structure would be most suitable requires first an examination of the aims of the group. They appear to be business oriented, though the type of work they intend to do has an artistic and community focus. Educating young people appears to be a secondary goal and unless the group has a clear education and training focus their aims might not be sufficiently charitable.

The group could therefore form an incorporated society with non profit tax status, but given the size of the group, and the fact that they appear to want to make a profit from their work, a cooperative company would be the most appropriate structure. This would enable decision making, assets ownership and profit sharing to be made on a co-operative basis.

Māori Health Group
A number of iwi authorities and Mäori trust boards wish to pool their resources to provide co-ordinated Mäori health initiatives for their region. Most of the groups are already legal entities in their own right.

They could set up an incorporated society, or an incorporated charitable trust. This group will have its own objects, separate from but compatible with those of the individual groups. The constitution or trust deed will have to be very carefully written to ensure it clearly reflects how power is to be shared between the participating groups.

If it was to be set up as an incorporated charitable trust each group would have the right to nominate one or more people as trustees and their rights to appoint trustees would be clearly stated in the trust deed. If it was to be set up as an incorporated society, each of the various groups involved could be members of the society. Kaumātua may also be appointed to the board or management committee as full members or trustees or in an advisory capacity.

(See also Types of Māori organisations on  Te Puni Kōkiri’s website for effective governance education http://governance.tpk.govt.nz/)