Not-for-profit Issues
June-September 2019
By NFP, for NFP
by Harald Breiding-Buss
When asked what a not-for-profit is, many people would instinctively think of a ‘community organisation’, and examples come to hand easily: sports, health groups, food banks, community centres and so on.
But the definition of a not-for-profit is not one of community benefit. It is simply that the venture exists for a purpose other than profit-making, although helping people generate income can actually be a part of that purpose. Professional organisations like Master Builders, Professional Accounting Bodies or similar, for example, exist for the purpose of maintaining quality in services to the public – however, as the many emails I receive from a professional accounting body testify, they are very much into maximising their members’ incomes as well! Social not-for-profits are involved in helping people that are disadvantaged in the job market find work – and income.
Any activity where money is involved can be structured as a not-for-profit. Because a not-for-profit cannot be run by a single individual (or group of individuals) for their own monetary benefit, any earnings from a not-for-profit will have to be through salary or wages, or contract payments. This restricts earnings from not-for-profits to market rates, or at least a rate that is agreed on by a group of people. You can make a living from being in charge of a not-for-profit, but you can’t get ‘filthy rich’, even if that not-for-profit engages in a highly profitable business activity.
Sanitarium is often criticised for being a registered Charity, and the argument is about tax avoidance. Even though Sanitarium sells food profitably, it is subject to the same restrictions as all other Charities – no individual can take money out of it other than through arms-length payments for services or goods, and all surpluses have to go to charitable purposes, either now or in future.
If a ‘normal’ company would donate all its profits to charitable purposes, they would also pay no tax, as such donations are fully tax deductible. Some businesses do this, and are called ‘Social Enterprise’ for it, but the model is essentially the same.
If tax avoidance was as easy as setting up a not-for-profit, every business would do it.
A key disadvantage for setting up a business activity as a not-for-profit is that NFPs do not have access to one of the most important financing tools of a business: selling shares (or other equity-based ‘securities’). This makes it difficult for not-for-profits to expand rapidly, as any investments needed for such an expansion would have to be paid out of past surpluses, or bank loans. Banks are reluctant to provide loans (other than mortgages) to not-for-profits for a number of reasons – one of them being that there are no shareholders.
There are small not-for-profits that essentially run a business activity, such as pre-schools, after-school care, plant nurseries and others. They compete with private businesses directly in the same market – but, unlike their business counterparts, they have no incentive to maximise profits by overcharging you, or underpaying staff.
Societies Act Under Review
The Incorporated Societies Act, hailing back to 1908, is being radically revamped, and in the process will add new compliance on Societies.
Under the draft, Societies will now have to be not-for-profits, i.e. they will not be allowed to distribute any surplus assets to their members on winding up, which is possible under current legislation. This represents a departure from a Society simply being a co-operative venture of any kind. So far it has been the vehicle of choice for people who wanted to do things co-operatively, even with the aim of generating sales or financial benefits for members. Examples would be fruit & vege co-ops, business associations or professional bodies, as well as the ‘true’ not-for-profits such as sports clubs. Societies are not, by default, exempt from Income Tax, so there is no tax avoidance here. However, such organisations may in future no longer be able to be Societies, and may have to incorporate under the much less known and rarely used Co-operative Companies Act.
The biggest new compliance costs will come from the requirement to comply with Generally Accepted Accounting Practice (GAAP), as defined in the Financial Reporting Act. This will put Societies on the same compliance footing as registered Charities, including the requirement to report on ‘outputs’ and ‘outcomes’.
Companies and Charitable Trusts are not required to comply with GAAP, and this is unlikely to ever be a requirement of the Companies Act, because of the compliance costs this would put on small businesses.
Submissions are expected to be called for later this year or next year.
Helping NFPs to keep it together – and grow.
by Harald Breiding-Buss
‘Capacity-building’ is a bit of a buzzword in the sector at the moment. It means making sure an organisation and its people have the skills and resources to do what they are meant to do, possibly (but not necessarily) with an eye to growth.
Christchurch has a group of people that do some thinking about how community organisations can be helped in this way, [more…]
called OPSCO (Otautahi Partnership for Strengthening Community Organisations). This network includes people and organisations with an interest in capacity building, such as funders and groups and individuals already doing some work in this area. Similar groups also exist in Nelson and Blenheim, and possibly elsewhere.
OPSCO ran an open meeting late last month, attended by about 80 people, to gather some information about where organisations see their needs in this respect. One theme that emerged quite strongly was mentoring or coaching.
An organisation is, of course, made up of people, and more often than not there seems to be a main driver, perhaps the person who had the idea in the first place. However, in a not-for-profit you cannot have a single person running it, even with support from others – there has to be some kind of committee or board in charge, and I often wonder whether this model of management and governance is a systemic obstacle to innovation and growth. Committees are by nature risk-averse, and great ideas may become watered down through compromise or simply having too many opinions, or they never see the light of day because a whole heap of paperwork and red tape is put in the way internally by overly cautious people. Community organisations have a tendency to look inwards, and they are much warier of compliance legislation than a business enterprise. For a ‘do-er’, this is a big turn-off.
On the other hand, it is well-researched that entrepreneurs are generally not the best people to grow an idea past the initial stage, because then you need people who can think in more structural and somewhat conservative ways. There was some talk about the life cycle of an organisation during the meeting, which determines the organisation’s needs at different times. The right tools at the wrong time may be sinking a good idea rather then move the organisation forward at that point in its cycle.
To me, finding this balance between supporting the visionaries and key people, while creating the structural foundation for the organisation to grow when and as needed only, is the key to capacity building.
Using the Internet the NFP Way
It is a well-known fact that Google and other companies make their money by collecting consumer information and selling it for targeted advertising – that’s why we can use it for free. Other web sites install trackers on your computer for the same reason, and without you knowing. Not everyone is comfortable with that.
US-based charity Mozilla is actively trying to educate consumers about this, and its own web browser, Firefox, is designed to stop any trackers and keep your browsing private. If you generate a Firefox account you get other benefits, such as being notified when your email address has been involved in a company’s security breach (i.e. it has been gathered as part of a hack, possibly together with other private information).
Check out the not-for-profit way of using the internet here: https://www.mozilla.org/en-US/firefox/new/?redirect_source=firefox-com