“Why or why not should one be incorporated?” is the question American lawyer Don Kramer asked in his Weekly E-Newsletter back in 2010.
For Mr. Kramer, the question is a legal one. The pros and cons that he outlines deal with personal liability and procedural/substantive questions. His fantastically succinct answer refers to state statute and case law.
For some, incorporation is relevant not because of legal concerns but rather taxation benefits. Others might contemplate incorporation through the lense of fundraising and its effects on donors. And yet to others, the act of incorporation or registration is simply a question of time and money — lacking either of the two might automatically render incorporation as an unwarranted expense.
As a banker, and more specifically, as a banker that deals with international nonprofits, I’m interested in easing a charity’s ability to open and manage a bank account.
So like any good Jew, I’ll answer a question with a question. When seeking to solve the riddle of “Should I incorporate?” I ask the following: Will your charity operate internationally?
If the answer is yes, then incorporate. It will make banking abroad much easier.
WHAT IS INCORPORATION
The definition of Incorporation as listed on Investopedia.com:
The process of legally declaring a corporate entity as separate from its owners. Incorporation has many advantages for a business and its owners, including:
1) Protects the owner’s assets against the company’s liabilities
2) Allows for easy transfer of ownership to another party
3) Achieves a lower tax rate than on personal income
4) Receives more lenient tax restrictions on loss carry forwards
5) Can raise capital through the sale of stock
A founder might consider incorporating his project or program for any of the reasons listed above, to allow donations to be tax-deductible or just to seem more legitimate in the eyes of donors, to name just a few reasons.
(Again, Don Kramer very nicely summarizes two benefits of incorporation in the article referenced above.)
The regulatory requirements demanded of Charities, as can be expected, vary from country to country; some governments give nonprofits the option to incorporate, others force it, while other deny it outright.
INCORPORATION: THE COMMON DENOMINATOR
The question whether to incorporate is not one of right or wrong, but rather, one of priorities and circumstance.
The United States, among other countries, does not force incorporation upon charities. As Mr. Kramer points out, a U.S. nonprofit can be formed as a Trust or an Unincorporated Association.
Since not all legal entities are internationally recognized (or even exist overseas), problems may arise when organizations that are not incorporated do business abroad.
As a general rule, when choosing to operate internationally it is best to fit into preexisting or predefined conceptions. This is true for bank accounts and other institutional processes where there is a need to define the legal entity of the account owner.
Corporations, in contrast to entities like a Trust or an Association, exist in most countries — albeit with different legal and tax ramifications — and are generally listed with some governmental registry and/or monitoring system. As such, for-profit and nonprofit corporations can generally rely on the somewhat universal concept of incorporation to become recognized and establish an official presence abroad.
Israeli institutions are sometimes unsure — and rightfully so — how to categorize charities that are unincorporated abroad, created as legal entities that have no local equivalent. This confusion may delay or hamper a nonprofit’s operations.
In conclusion: while a nonprofit doesn’t have to incorporate to do business abroad, it is definitely worth considering.
What has been your experience?
I was hesitant to write this piece as it touches on many legal issues, and I am not a lawyer. However, after helping a few unincorporated charities open accounts, I believe that spreading the lessons learned from these experiences is important. As always, please refer questions to the appropriate experts.
Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.
Photo Credit: “Registration Desk Sign” by NHS Confederation