Area of Law: Business Law
Answer # 237
Not-for-profit organizationsRegion: Ontario Answer # 237
Not-for-profit organizations can be unincorporated associations or incorporated entities. A not-for-profit corporation is similar to a for-profit corporation in the following five ways:
- A corporation has perpetual existence,
- It exists separate and apart from its shareholders or members,
- It may hold real estate in its own name,
- It can sue, be sued and contract in its own name as a separate entity, and
- In most cases, individual shareholders or members of a corporation are exempt from personal liability for the debts and obligations of the corporation.
The three main differences between for-profit and not-for-profit corporations are (1) not-for-profit corporations are without share capital and have members rather than shareholders, (2) in a not-for-profit corporation, the members are prohibited from receiving any pecuniary gain, and (3) not-for-profit corporations are established for purposes other than gain for their members. The purpose for establishing the corporation is set out in the Articles of Incorporation under the section called ‘objects.’ A not-for-profit corporation can have either charitable objects or non-charitable objects.
Structure of Ontario not-for-profit corporations
In Ontario, not-for-profit corporations are incorporated by filing Articles of Incorporation. The Articles of Incorporation may be withheld when incorporation is considered not to be in the public interest.
As with any other type of corporation, a not-for-profit corporation must have by-laws which provide the framework for democratic decision-making and which set out the rules of how the business of the corporation will be conducted. The by-laws also set out the rights and obligations of the members of the corporation.
Structure of federal not-for-profit corporations
If a not-for-profit corporation is incorporated federally, under the Canada Not-for-Profit Corporations Act, it will also be incorporated using Articles of Incorporation. Not-for-profit corporations incorporated under previous federal laws will have to file a “certificate of continuance” to avoid dissolution. The new federal Act adds a new set of modernized and flexible rules for creating, organizing and maintaining a not-for-profit company in Canada.
For more information, visit Corporations Canada, part of Innovation, Science and Economic Development Canada.
Board of directors
The affairs of a not-for-profit corporation are managed by a board of at least three directors. Directors must be or become members of the corporation, must be at least 18 years of age, and cannot be an undischarged bankrupt. The people named as the first directors in the Articles of Incorporation of the corporation remain the directors of the corporation until they are replaced by the same number of other people appointed or elected in their place. The directors of a not-for-profit corporation are elected by its members. In turn, the directors must elect a president from among themselves. The directors must also appoint a secretary and may appoint vice-presidents and other officers, all of whom do not need to be directors. The appointment, remuneration, functions, duties and removal of officers of the corporation are governed by its by-laws.
In addition to directors and officers, every not-for-profit corporation must have members. Each member who signs the application for incorporation becomes a member as of the date of incorporation. Although there is no limit on the number of members of a not-for-profit corporation, there must not be fewer than three. After incorporation, others may be admitted to membership by the directors.
Membership in a not-for-profit corporation is generally not transferable and therefore ceases to exist upon the death or resignation of a member. There may be more than one class of membership and members may be natural persons, corporations or unincorporated associations. However, a not-for-profit corporation is not allowed to pay dividends to its members and no member can receive any profit or gain from the corporation because it must be carried on without the purpose of gain for its members. Any profits must be used in the promotion of the objects of the corporation as set out in its Articles of Incorporation.
Auditor and records
To properly and legally run a not-for-profit corporation, an auditor must be appointed by its members every year, and certain records must be kept. These include proper books of account and accounting records with respect to all financial and other transactions of the corporation, books containing minutes of all meetings of members and directors, and registers of the members and directors. These records must be kept at the head office of the corporation and are to be available during normal business hours for inspection by the directors.
Proposed New Law 2020: Ontario Not-for-Profit Corporations Act, 2010 (ONCA)
Currently, not-for-profit organizations incorporated in Ontario are governed by the Ontario Corporations Act.
However, the Ontario Not-for-Profit Corporations Act, 2010 (ONCA) is proposed legislation specifically governing how non-profits and charities operate in Ontario. The new Act contains the regulations for forming and running a not-for-profit or charity in Ontario, such as the rights and responsibilities of members and directors, and the requirements for meetings and financial statements.
Bill 154, Cutting Unnecessary Red Tape, 2017 was also introduced on November 14, 2017 as an amendment to ONCA that proposes further measures aiming to make it easier for businesses, including non-profits, to grow and create more jobs.
Both ONCA and Bill 154 received Royal Assent on November 14, 2017 and are expected to be proclaimed into law and in full effect in 2020. Once ONCA is proclaimed into force, non-profits will no longer be governed by the Ontario Corporations Act, and organizations will have a three-year implementation period to become compliant with the new requirements.
According to the Government of Ontario, Ministry of Government and Consumer Services, once ONCA and the amendments under Bill 154 come into effect the new rules will do the following:
- make the incorporation process easier and more efficient; for example, applications for Articles of Incorporation will be submitted directly to ServiceOntario
- clarify the rules for governing a corporation, including the director’s responsibilities and increased accountability
- clarify that not-for-profit corporations can earn a “profit” through commercial activities as long as it is reinvested to support the corporation’s not-for-profit purposes (charities still face restrictions)
- allow some corporations to use a “review engagement” in place of an audit
- provide members with actions they can take if they believe directors and officers are not acting in the corporation’s best interests
- make it mandatory for organizations to make proxies or alternate ways of voting available to members
- give members greater access to financial records; specifically, organizations can specify fewer than 21 days for distribution of financial statements before the annual meeting
- make a clear distinction between public benefit corporations and other not-for-profits. A public benefit corporation is a charitable corporation or a non-charitable corporation that receives more than $10,000 per financial year
For more information on ONCA, visit ontario.ca. More information about forming a not-for-profit in Ontario can be found here. For information on the differences between a registered charity and a non-profit organization (NPO) and the tax implications, view Canada Revenue Agency’s tax guide for non-profit organizations.
For legal help and assistance, contact a business lawyer.
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