Most charities are corporations. Corporations are legal entities that have been formed under the corporations legislation of the federal government or of one of the provincial or territorial governments.
Every corporation has certain legal requirements imposed on it by its incorporating legislation. Failing to meet these requirements can jeopardize a corporation's existence. The Canada Revenue Agency (CRA) requires that registered charities keep their legal corporate status in good standing in order to retain their charitable registration.
What is a not-for-profit corporation?
Not-for-profit corporations (also called “non-share capital corporations”) are different from for-profit corporations (also called “business corporations”) in three fundamental ways:
- The not-for-profit corporation is composed of members, whereas the for-profit corporation is owned by shareholders.
- The members of a not-for-profit corporation cannot receive any financial (or pecuniary) gain during the life of the corporation, whereas a for-profit corporation may distribute profits to its shareholders in the form of dividends.
- In some cases, the powers of a not-for-profit corporation may be limited to what is written into its objects (purposes), whereas, typically, the for-profit corporation has no such limits.
The process of incorporation is also usually different for not-for-profit corporations, although this varies from jurisdiction to jurisdiction. Incorporating a for-profit entity is a routine matter of submitting the correct forms and payments. Saskatchewan provides for a similar process with respect to not-for-profit corporations, as does the new Canada Not-for-Profit Corporations Act. Incorporating a not-for-profit entity in most other jurisdictions, however, requires government review and approval.
In various jurisdictions, additional approvals are required, or conditions must be met, for the incorporation of certain types of not-for-profit organizations and for those with certain specific words in their name.
A not-for-profit entity can incorporate either federally or provincially, depending on the scope of its stated purpose and proposed activities. Each jurisdiction has its own legislation for the incorporation of not-for-profit organizations, and its own approval process.
Advantages & disadvantages of incorporation
Advantages of incorporation
There are many advantages to incorporation. These include:
- A not-for-profit corporation has a legal status separate and distinct from its members. Members may come and go, but the corporation continues until it is dissolved or wound up.
- The not-for-profit corporation can enter into contracts, buy and sell property, etc.
- Individual members of a corporation have protection from liability for the actions of the corporation.
- The formal corporate structure facilitates ongoing operations and decision-making.
- There may be increased credibility with the government, funders, and the public.
- The not-for-profit corporation has an enhanced ability, through its governing documents, to address membership status issues (e.g., removal for unpaid dues or death, and expulsion for disciplinary reasons).
Disadvantages of incorporation
There are some disadvantages to incorporation. The most commonly encountered is the paperwork and regulation entailed. This includes:
- Most jurisdictions require an annual corporate filing related to the location of the head office as well as director information.
- Federal corporations incorporated under the Canada Corporations Act must get ministerial approval to change certain bylaws (though this will change under the new Canada Not-for-Profit Corporations Act, once the federal corporation is continued under it).
- There are some constraints placed on the type of activity that the group or entity may engage in.
- There is a need to devote time and resources to maintaining corporate structure that would otherwise go to carrying out the desired purposes or activities of the organization.
See : Should a not-for-profit organization incorporate? (Jeffrey Miller, 2015, Hilborn Charity Info)