Not-for-Profit Organizations and Limited Liability
In everyday terms, not-for-profit or non-profit means an organization whose goal or purpose is something other than profit. It is a common misconception that the term means that the organization can’t generate a profit. Actually, a not-for-profit organization’s revenues can exceed its expenditures, the excess is instead referred to as an operating surplus.
From a legal perspective, when an organization is referred to as a not-for-profit corporation it means that the organization is incorporated under a provincial or federal not-for-profit statute, in Ontario the Corporations Act and federally the Canada Not-for-profit Corporations Act. In Ontario, not-for-profit corporations are actually referred to as non-share capital corporations.
Incorporation provides the organization a legal existence separate and distinct from its directors, officers and members. It is this separate legal existence that provides the organization with limited liability, which means that the liabilities of the organization are limited only to the assets of the organization. Therefore, the personal assets of directors, officers or members of the organization are not at risk if the assets of the organization are not sufficient to satisfy its liabilities, whether that liability is in contract (i.e. breach of contract such as failure to pay to employees, contractors, suppliers, mortgage company, etc.), or tort (i.e. a wrongful act or omission such as personal injury, wrongful dismissal of an employee, sexual or workplace harassment, sexual abuse, assault and battery, defamation, slander and libel, or negligence).
The Benefits and Drawbacks of Official Charitable Status
A charity is an organization that has been granted charitable status by the Charities Directorate of the Canada Revenue Agency. In order to become a charity, an organization will have to apply to the Charities Directorate and be able to demonstrate that the objects/purposes and activities of the organization are considered charitable at law.
The major benefit of charitable registration is that the charity can issue donation receipts to donors. Other benefits include the ability to receive funds from other registered charities and the ability to apply for grants in which charitable status is a requirement.
The disadvantage is that charities are subject to additional filing requirements, more regulation, and monitoring by the Canada Revenue Agency. It is also important to note that once an organization becomes a charity, much of the information provided to the Canada Revenue Agency is made available to the public.
Can an Organization be both a Not-for-Profit and a Charity?
An organization can be both a not-for-profit corporation and a charity if it has been incorporated by statute and has received charitable registration from the Charities Directorate. However, a not-for-profit corporation is not obligated to become a charity.
If the corporation determines that charitable status is of no benefit to the corporation or if the objects/purposes and activities of the corporation are not considered charitable at law, the corporation can simply operate as a not-for-profit. The option to apply for charitable status would be available to the not-for-profit corporation at any time.
Now to complicate matters further, an organization could be a charity and not be a not-for-profit corporation. This is because there are actually three other legal structures that a charity could have: charitable trust, unincorporated association, or special act corporation. These structures are more complex and therefore will need to be explained in future posts.