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SECTION B2: Setting Up A Community Group - Legal Structures
Types of Legal Structure
There are a range of legal structures available to groups wanting to become formally established. Coosing what type of structure to use should be determined by the activities your group wants to undertake, and the decision-making processes you want to use.
Some common types of legal structure are:
An incorporated society is a group, usually of people with a common interest (sports club, social club, cultural group, service or activist group) registered under the Incorporated Socities Act 1908.
A trust is an agreement between people (called trustees) to manage property over which they have control either to benefit other people (called beneficiaries) or for charitable purposes. A group of trustees may be incorporated as a board under the Charitable Trusts Act 1957 if the objects are charitable.
Five Types of Maori Land Trust
There are five Trusts described in Te Ture Whenua / The Maori Land Act 1993, and each has a different purpose and different Rules. All are for Maori landowners and have the primary purpose of keeping Maori land in Maori ownership, while allowing it to be used for the benefit of the people. The kinds of projects involved may be different from an ordinary Charitable Trust, since they relate to land development as well as the social benefits to Trust members. They are likely to be whänau related or smaller hapü or iwi based projects such as forestry projects, wänanga, kapa haka or culture groups. Ahu Whenua continues land development projects such as horticulture, silviculture, viticulture and agriculture projects.
The five kinds of Maori Land Trust are:
1. Putea Trust: this aims to prevent further fragmentation of the land title by preventing future succession to the interest in their land:
2. Whanau Trust: this brings whänau land interest and share holdings together to preserve the turangawaewae of the whänau:
3. Ahu Whenua Trust: this promotes and helps the use and administration of the land in the beneficial owners interests:
4. Whenua Topu Trust: an "Iwi" Trust for all or part of the land owned by members of an iwi or hapü:
5. Kai Tiaki Trust: this is for people who need help to manage their affairs because of disability, youth or imprisonment.
While companies are less commonly used by community groups, they can be particularly useful where the group is likely to be involved in significant business activities or business activities that are not related to the group's core purposes. Groups intending to register as a company should seek legal advice.
Characteristics of Legal Structures
The following chart compares some of the characteristics of legal structures mentioned above:
Which Legal Structure for Which Group: Examples
Here are six examples of different community groups and a discussion of which legal structure is the most appropriate for each.
A group of four people involved in environmental education for schools and the community has been meeting and operating informally. They want to extend their activities and apply for funding from the Ministry for the Environment.
This group's requirements can be easily met by either an incorporated society structure or an incorporated charitable trust structure. Its aims are charitable. To form an Incorporated Society the four members have to find an additional 11 supporters to meet the minimum requirement of 15. While this may not be too difficult, the small size of the group and the fact that they have already worked together well for a year suggests that an Incorporated charitable trust might be more suitable. The four can form an incorporated charitable trust with themselves as the initial trustees, allowing for additional trustees to be appointed in the future if needed. The group can apply for funds to employ people including themselves without affecting their charitable status.
A group of 20 unemployed people and their whänau want to try and create employment opportunities for themselves through contract work with the local council. They want to apply for funding for wages through Task Force Green and also to purchase some equipment with assistance from the Community Employment Group (CEG), Department of Labour. The money they earn from their work contracts will be divided amongst members of the group. The group's aims are to provide work, financial support and training opportunities for themselves and their whänau.
While the group intends to make money from its work this money will first go to paying expenses such as fuel and equipment costs; any surplus will be distributed to members in the form of wages.
Because one of the group's main aims appears to be to provide ongoing employment for its members, it will probably not be considered charitable by Inland Revenue and therefore cannot set up as a charitable trust. It may be able to set up as an incorporated society with 'non-profit' tax status or set up as a commercial business. Wile getting non-profit tax status may have some tax advantages and may make the group elible for more grants and donations, it may limit their ability to determine their level of pay because of conflict of interest rules that apply apply to charitable and non-profit groups. If this is important the group may need to consider setting up as a commercial business. A company or cooperative company would probably be most appropriate.
Youth Work Group
A group of five youth workers wish to provide assistance for young people in their city. They want to provide housing, employment, and social and cultural activities. The groups want to seek funds for its various projects and also to provide salaries for youth workers.
An Incorporated charitable crust might be the best legal structure, because there is a small stable group of people providing charitable services for the general community. The youth workers could become the initial trustees, although if they are seeking funds for wages they may need to find other trustees to avoid conflicts of interest. Other people themselves can be invited to be Trustees, either as representatives of the group's various projects or as Trustees in their own right.
An incorporated society could also be used, particularly if a more democratic structure was required, where some of the young people taking part in the programmes were to be involved in the group's decision-making by becoming members of the incorporated society.
Maori Carving Group
There are two Maori carvers who are known and respected for their art in Maori carving. They wish to carry out their art in a way that exposes it to others - particularly young Maori who want to learn the art of carving. Some of their work will be commissioned, for which they will receive payment, and some will be sold in a retail outlet attached to the carving workshop. The two carvers want advice on what legal structure would be the most appropriate for them.
The first consideration is the extent to which they want to profit financially from their work. If personal profits are important, a company, cooperative company or partnership would be appropriate. If, however, the two carvers see the fostering of their art and culture and the education of young people as their prime motives, an incorporated charitable trust or incorporated society would be appropriate.
The objectives of fostering the art of carving and the education of young Maori are charitable and fulfil the requirement of wide public benefit. The group can sell its work to fund the members’ wages, equipment and the costs associated with training, provided that any profits over and above these items do not go to any individual member of the group.
The size of the group suggests that an Incorporated Charitable Trust would be more suitable than an Incorporated Society. The two carvers would be the original Trustees with the scope to include others.
Design and Print Collective
A group of six people with design and publishing skills wish to set up a collective for the pooling of their skills. The group intends to work in a co-operative way.
The group wants to focus on work for community and performing arts groups. They also hope to make some of their facilities available to young unemployed people to develop screen-printing and design skills.
They want to take on a lease and to purchase equipment, and want to know which legal structure would be the most appropriate.
Since the group will be acquiring equipment, possibly with the assistance of a bank loan, and they will have the responsibilities of a lease, an incorporated legal entity would give them some protection from personal liability. However, the bank would most likely require personal guarantees from each member of the collective.
Which structure would be most suitable requires first an examination of the aims of the group. They appear to be business oriented, though the type of work they intend to do has an artistic and community focus. Educating young people appears to be a secondary goal and unless the group has a clear education and training focus their aims would not be sufficiently charitable.
The group could form an Incorporated Society that does not have Charitable Status, but given the size of the group, and the fact that they appear to want to make a profit from their work, a Company would be the most appropriate structure. A Company can be designed so that decision making, assets ownership and profit sharing are made on a co-operative basis.
Maori Health Group
A number of iwi authorities and Maori Trust Boards wish to pool their resources to provide co-ordinated Maori health initiatives for their region.
Most of the groups are already legal entities in their own right.
An umbrella organisation can be formed as an unincorporated body (i.e. where no registration is required but where the group is guided by its own set of Rules) or as an Incorporated Society, or an Incorporated Charitable Trust. The Umbrella Group will have its own objects, separate from but compatible with those of the individual groups.
The various groups each nominate one or two members who form the Trustees or Trust Board in a Charitable Trust or the Management Committee in an Incorporated Society. Kaumätua may also be appointed to the Board or Management Committee as full Members or Trustees or as Advisory Members or Trustees.
Last updated: 21/12/2005