Getting Your House In Order: Choosing the Right Legal Entity

by Daniela Ellerbeck
6 April 2018

By Adv Nadene Badenhorst, Legal Counsel of FOR SA

By now it is old news that the CRL Rights Commission’s Final Report on the “Commercialisation” of Religion and Abuse of People’s Belief Systems highlighted certain problems in the religious sector including, in some instances, a lack of proper corporate governance or financial management. While we disagree that the answer is (State) regulation of religion, we absolutely agree that churches and religious organisations should get their house in order: if we do not regulate ourselves, the State will no choice but to intervene!

Against this background, Freedom of Religion South Africa (FOR SA) will be producing a series of articles to help educate and inform churches and religious organisations regarding their obligations from a corporate governance, legal compliance and financial management point of view, to assist them in avoiding negative consequences as a result of a lack of understanding of their obligations and options.

Corporate governance is the system of rules, practices, policies and procedures by which a company (or in this case, a church or religious organisation) is directed and controlled. The aim of corporate governance is to increase the accountability of an organisation in an attempt to avoid big (ethical, legal, financial, etc.) problems or risk, and ensure the long-term success of the organisation.

Good corporate governance is required not only by law, but is essentially a Biblical principle. The Bible commands us to conduct ourselves in a manner that is worthy of the Gospel (Phil. 1:27), including having respect for the authorities, obeying the laws of the land, being ethical, transparent and accountable, and also being good stewards of the resources (both people and financial/material) which have been entrusted to us.

In this article, which is the first in the series, we will focus on the various types of legal entities wherein churches and religious organisations can arrange themselves. We point out that the pointers in this article (as in the follow-up articles) are of a general nature, and that it may be necessary and appropriate to obtain specific legal advice to meet the needs and objectives of your particular church or religious organisation.

Operating as a church or religious organisation in South Africa

South African law does not currently oblige churches or religious organisations to register, nor to have a licencing certificate, in order to operate.

As will be explained below however, depending on the type of legal entity within which the church or religious organisation chooses to arrange itself, and depending also on whether it chooses to operate as a non-profit organisation (NPO) or public benefit organisation (PBO), it may have to register with different departments or agencies of State.

Different types of legal entities

The right to freedom of association (s 18 of the Constitution) gives persons the right to associate, and form organisations, in whichever way they choose.

The type of legal entity the church or religious organisation chooses is important because it determines who will be able to conclude contracts on behalf of the organisation, and who will be liable on behalf of the organisation if things go wrong. It also enables the organisation to open a bank account in its own name, and gives the organisation credibility with donors. Finally, it ensures that the work of the organisation can carry on past the lifetime of those who originally founded it or who are currently involved.

In terms of (current) South African law, churches and religious organisations typically associate or organise themselves in one of three ways:

a) A voluntary association (VA) in terms of the common law.

  • No registration is required to form a VA – only an agreement between 3 or more people to achieve a common object primarily other than the making of profit (e.g. to meet and worship together as a church). Note that this does not mean that VAs may not receive or make money. However, the business component may not be the main reason for its existence.
  • The powers of the VA are determined by agreement – normally by way of a signed Constitution – together with the principles of common law.
  • If a party exceeds his/her agreed powers, an interested party can apply for relief to the High Court.

VAs are particularly suitable to churches that are member-driven. The members appoint (annually, or as determined in the Constitution) those who govern the organisation (typically in committees), and who will have the powers set out in the VA’s Constitution.

b) A living trust.

  • Trusts have to be registered with the Master of the Court in terms of the Trust Property Control Act, 1988.
  • Trusts are subject to strict governance to ensure that the trustees act in accordance with the letters of authority and trust deed drawn up by the founder during his/her lifetime. These oblige them to remain focused on achieving the stated public benefit objectives of the Trust.
  • The Act provides for the removal of trustees by the Master or the Court, in the event of a trustee’s failure to perform his/ her duties.

While trusts are not particularly suitable to churches (that are often member-driven), they are well suited to donor organisations that are more vision-/top-driven by a board of trustees, e.g. trusts set up to raise funds for a ministry to the poor.

c) A non-profit company (NPC) (previously known as a “section 21 company”)

  • NPCs have to be registered with the Companies and Intellectual Properties Commission (CIPC) in Pretoria, in terms of the Companies Act, 2008.
  • NPCs, likewise, are subject to strict governance to ensure that members and directors do not benefit from NPC income or surpluses. They must also remain focused on achieving the stated public benefit objective as set out in the NPC’s Memorandum of Incorporation (MOI). Again, this does not mean that NPCs may not make any profit, but simply that any profits made may not be shared out between members/directors/employees. Rather, they must be retained by the NPC and used in pursuit of its main object or invested for the same purpose.
  • The Act also provides for criminal sanctions (and possible personal liability) in the event of non-compliance with the Act.

Churches or religious organisations sometimes choose to register as NPCs which, because of the processes and requirements set out in the Companies Act, offer donors and other stakeholders a greater degree of comfort than VAs and trusts.

Voluntary registration as a non-profit organisation (NPO)

All of the above legal entities can (but are not obliged to) register as a non-profit organisation (NPO) with the Department of Social Development (DSD) in terms of the Non-Profit Organisation Act, 1997.

(*Note that there is a difference between a non-governmental organisation (NGO) and a non-profit organisation (NPO). “NGOs” commonly refer to organisations that are not part of government, whether or not they have been formally registered, whereas as a NPO is a NGO that is registered with DSD in terms of the NPO Act).

The reason why many religious institutions choose to register as NPOs, is because NPO registration is a requirement for most donor and funding agencies, and association with a government agency does lend credibility to an organisation.

The NPO Act already has very specific requirements for religious organisations who want to register as NPOs, including the submission of a constitution; keeping accounting records; regular submission of financial statements, and narrative reports of the organisation’s activities and office bearers (as well as any changes thereto).  These reporting requirements ensure a level of accountability as well as giving a sense of comfort to donors that the NPO is operating within the bounds of the law and that it maintains certain minimum standards of good governance.

In the event of non-compliance, DSD may cancel the NPO’s registration as such and, in certain circumstances, refer the NPO to the Police for criminal investigation.  The NPO register is open to the public, and all documentation lodged available for public inspection.

Finally, it is important to note that NPO registration is completely separate to registration as a PBO (which will be explained below). In other words, NPO status does not also give you PBO (or tax-exempt) status. To have tax exemption, you need to apply separately to SARS (as explained below).

It is also no longer a requirement that an organisation register under the NPO Act in order to qualify for PBO approval. However, if an organisation commits an offence under the NPO Act, SARS may withdraw the organisation’s PBO approval.

Voluntary registration as a public benefit organisation (PBO)

A VA, trust or NPC can (but is not legally obliged to) register as a public benefit organisation (PBO) with SARS in terms of the Income Tax Act, 1962. It is important to note that tax exemption for churches and religious organisations is therefore not automatic. It has to be applied for through SARS’ tax exemption unit.

According to the SARS website, NGOs “play a significant role in society as they take a shared responsibility with government for the social and development needs of the country.  Preferential tax treatment is designed to assist non-profit organisations by augmenting their financial resources”.

The most important reason for NGOs to be tax exempt, is that donors require it – either because the donor itself is a tax-exempt entity, or the donor’s policy (from an accountability point of view, and to ensure that funds are only used for the purpose outlined in the recipient organisation’s founding document) is exclusively to give money to tax-exempt entities.

However, more practically, if an organisation is not registered as a PBO, the donor will need to pay a donation tax on any donated funds over and above R100,000 a year and the recipient organisation will need to pay income tax on funds received (or the individual receiving the funds if it is indeed a fake organisation).  However, if the organisation is a (registered, tax-exempt) PBO, no donations tax will be payable.

Further, it is often assumed that because an organisation is tax-exempt, it also has the power to issue tax-deduction certificates to their donors under s 18A of the Income Tax Act. This is incorrect: tax exemption and s 18A are not the same. Without going into great detail here, in order to qualify for s 18A tax-exempt status, an organisation’s founding document needs to include a clear objective that is aligned with the approved public benefit activities that are outlined in the Ninth Schedule of the Income Tax Act. There are a range of conditions to receiving this status, including a requirement that PBOs cannot (directly or indirectly) use their resources to support a political party.

It is important to note that it is not correct that PBOs are not allowed to make any profit at all. The Income Tax Act does allow a certain threshold profit for PBOs. Where a PBO operates as a business and makes profit over and above the allowable threshold (and/or does not pay tax on this income), SARS has both the power and the responsibility to take action.

Finally, it is important to note that the law requires that both the NPO registration number and the PBO number appear on any public documentation or information of the religious institution, e.g. letterheads and websites.


  • Nicole Copley, NGO Matters: A practical legal guide to starting up, Juta (1st edition, 2017)
  • Shelagh Gastrow, Donating to a public benefit organisation: what it means, in Daily Maverick, 27 March 2018
Nadene is an Advocate, and practised as a member of the Cape Bar for a number of years. She holds both a BA LLB degree from the University of Stellenbosch and a LLM degree in International Human Rights Law (cum laude) from the University of Essex. She currently serves as a Next Generation Board Member on the Advocates Africa Board, representing Southern Africa.

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