A not-for-profit organization (NPO) has no legal requirement to incorporate; however, as an unincorporated entity, the organization would have no legal status. An unincorporated NPO is simply a group of people (members) who get together for a common purpose. What does this mean? It means the members of the organization may be personally liable for the full amount of any debts incurred by the organization. An unincorporated entity cannot sue or be sued. The members may initiate lawsuits and, likewise they may be sued for the actions of the NPO.
Incorporation gives an NPO legal status. As an incorporated entity, the NPO can enter into contracts, purchase assets, own property, borrow money, and generally conduct business. The incorporation limits the liability of the members and they are not personally liable for the debts of the corporation.
Other advantages of incorporation include:
An NPO is generally formed for purposes other than generating a profit. This does not mean that the corporation cannot earn a profit, however profit cannot be intentional and the profit must be used to further the organizational goal
The corporation may be created at either the federal level under the Not-For-Profits Corporation Act or provincially under the Corporations Act. Once incorporated, the NPO would have to comply with the Act. This includes the need to hold meetings of directors and members, and having formal by-laws that comply with the Act.
As in for-profit corporations, directors may still have certain exposure to liabilities under the law, but that exposure can be managed with proper due diligence and conduct by the director. In addition, a corporation could purchase officer’s and director’s liability insurance whereas, it would not likely be available for an unincorporated entity.
This is an important decision for those in charge of the NPO’s governance. As always, it is recommended you speak with your advisors when making a decision of this magnitude.
Jeffrey Miller, CPA, CA, LPA, CFE, TEP is a partner, assurance & advisory services at GGFL, Chartered Accountants, in Ottawa. Contact him at firstname.lastname@example.org, visit the firm at www.GGFL.ca, and follow on Twitter @GGFLCA for the latest accounting news and information.