A not-for-profit organization may be an incorporated entity or an unincorporated association. There are five similarities between for-profit corporations and not-for-profit corporations:
- The corporation has a perpetual existence;
- The corporation exists separately from its shareholders or members;
- The corporation may hold title to real estate in its own name as a separate legal entity;
- The corporation can sue, be sued, and enter into contracts in its own name as a separate legal entity;
- Individual shareholders or members are usually not personally liable for the corporation’s debts and liabilities.
Despite those similarities, there are important distinctions between for-profit and not-for-profit corporations. Three such distinctions are:
- Not-for-profit corporations do not have shares or shareholders, but members;
- Members of a not-for-profit corporation are not permitted to receive any pecuniary gain;
- Not-for-profit corporations are required to identify goals other than pecuniary gain for their members.
A not-for-profit’s goals are called objects. The objects must be stated in the corporation’s articles of incorporation. The objects may be charitable, but not necessarily.
Structure of not-for-profit corporations in Ontario
Filing articles of incorporation creates an Ontario not-for-profit corporation. The articles must state the corporation’s objects. Incorporation is not automatic, but may be withheld if the objects are not considered to be in the public interest. The Corporations Act governs Ontario not-for-profit corporations.
Once incorporated, a not-for-profit corporation must establish bylaws. The bylaws define the structure for making decisions and carrying on business. The bylaws also define each member’s rights and responsibilities.
Structure of federal not-for-profit corporations
Federally incorporated not-for-profit corporations are incorporated under Canada’s Not-for-Profit Corporations Act. Like provincially incorporated entities, they are established through articles of incorporation that define the entity’s objects. Not-for-profit corporations under earlier federal legislation will be dissolved unless they file certificates of continuance.
Canada’s recently enacted Not-for-Profit Corporations Act updated and modernized the rules for creating, organizing, and maintaining not-for-profit corporations. The new legislation placed some emphasis on transparency in relation to management and handling of finances.
Board of directors
Not-for-profit corporations are managed by boards of directors consisting of at least three members. Only members over the age of 18 can be directors. An undischarged bankrupt cannot be a director.
When a not-for-profit corporation is created, the first directors are identified in the articles of incorporation. They remain as directors until replaced by other elected or appointed directors. Directors are appointed or elected by members according to the corporation’s bylaws.
Directors may themselves choose a president, secretary, vice-presidents, and other officers. The bylaws will state the remuneration, functions, and duties of officers. They bylaws will also state the process for removing and replacing officers.
All not-for-profit corporations must have at least three members. A newly incorporated not-for-profit corporation’s members are those who signed the application for incorporation. Corporations may admit new members after incorporation according to the bylaws.
Membership ceases when a member dies or resigns. Membership cannot usually be transferred. Members may be natural persons, corporations, or unincorporated associations.
No not-for-profit corporation is permitted to pay dividends to its members. No member is permitted to receive any profit from the corporation. This is a key distinction between not-for-profit and for-profit corporations. Not-for-profit corporations must be carried on for some purpose other than the members’ gain.
Any profits generated by the not-for-profit must be used to pursue the objects defined in the articles of incorporation.
Auditor and records
All not-for-profit corporations are required to account for its financial activities. Proper and legal administration requires appointment of an auditor and detailed record-keeping. The corporation must maintain: accounting records of all transactions; books containing minutes of all meetings of members and directors; and registers of members and directors. Records must be kept at the corporation’s head office and made available for inspection by directors during normal business hours.
The requirements for creating and maintaining and incorporated entity are detailed and complex. If you require assistance with these issues, you should consider seeking legal advice about your rights and obligations.
Innovation, Science and Economic Development Canada
Not-For-Profit Incorporator's Handbook Ontario