Non-governmental organisations: what are the differences between the various legal forms?
With the growing interest in corporate social responsibility voiced not only by our clients, we are faced more and more with questions relating to various aspects of NGOs. Some would like to know which legal form to choose; others wonder how an NGO’s bookkeeping is different from that of a regular business or how to recognise a contribution to an NGO; and others would like to know more about audit obligations – and these are just the most common questions. That is why we decided to use this article to summarise the basic facts that we consider useful and that should point you in the right direction to obtain more detailed information.
Before we begin, we would like to point out that the information below does not apply to non-profit organisations established by the government, i.e. state-funded organisations (hospitals, schools, social care institutions) or towns and municipalities.
An NGO can have many possible legal forms. Some of them are defined by the Civil Code, some by their own separate acts. The Civil Code defines the following legal forms: society, foundation, endowment fund, institute, interest association of legal persons, and association of property owners. Legal forms defined by separate acts include political parties and political movements, churches and religious associations, universities, public research institutions, school legal persons, public benefit societies, hunting associations and professional chambers. Therefore, if you are considering establishing an NGO, it is worth thinking very carefully about its purpose, expected activities and method of funding, and then choose the legal form accordingly.
Are you interested in what the main differences are? We see them mainly in the following aspects, to which we also provide some illustrative examples:
The difference between the activities and goals of a foundation and, for example, an association of property owners is quite clear. But the difference between a foundation and an endowment fund can be more difficult to pinpoint. And how does an institute differ from all the other legal forms? The purpose is usually defined by the relevant legal standards, but even then the difference does not have to be crystal clear. For example, under Section 306 of the Civil Code, a foundation is formed “to permanently serve a socially or economically beneficial purpose. A foundation may have a publicly beneficial purpose if it aims to promote common welfare, as well as a charitable purpose if it aims to support a specific group of persons defined individually or otherwise”. Under Section 394, an endowment fund is formed “to serve a socially or economically useful purpose”. And under Section 402 of the Civil Code, an institute is created “for the purpose of pursuing socially or economically useful activities using its personal and property resources. An institute pursues activities the results of which are equally available to everyone under predetermined conditions”.
The bodies of NGOs not only have various names (for example, the supreme body of a foundation or an endowment fund is a Management Board, whereas in the case of an association it is determined by the statutes, or, if not determined by the statutes, it is a Meeting of Members); they also differ in their structure and minimum number of members. In some cases, certain bodies only have to exist if specific conditions are met (for example, a foundation with a foundation capital of more than CZK 5 million has to establish a Supervisory Board), but they can nevertheless be established by the instruments of incorporation. And not even the statutory body itself is always defined by law, which is why it is necessary to define it in the instruments of incorporation.
NGOs record themselves in various registers. Many of them are recorded in the Public Register (societies, foundations, institutes, associations of property owners, and public benefit societies); other legal forms are recorded in special registers that exist on the basis of other acts (public research institutions, schools and educational establishments, political parties, political movements, etc.).
NGOs also differ by their minimum contribution / equity and the potential limitations of the future use of both contributed and subsequently raised funds.
- Obligation to have financial statements audited
Besides the criteria stipulated by the Act on Accounting, which are relevant for any reporting entity, the obligation to have financial statements audited arises either on the basis of another legal regulation (in the case of political parties and political movements) or when certain conditions stipulated in this other legal regulation are met (foundation, institute, special-purpose establishments of churches and religious associations, public benefit societies). However, this obligation may also be imposed by the instruments of incorporation / statutes.
- Obligation to prepare an annual report and its contents
This obligation too is governed not only by the Act on Accounting but also other legal regulations specific for the respective legal form. These legal regulations also stipulate the mandatory contents of the annual report.
- Conducting business and equity investments in companies
If such an activity is permitted by law, it is generally considered a secondary activity and subject to income tax. The use of the proceeds from this activity is restricted. In case the organisation decides to conduct such an activity, it is important to clarify and define what is the main (non-profit) and secondary (profit) activity. For accounting and tax purposes, these activities need to be recorded separately.
What all the above legal forms of NGOs have in common are accounting regulations. Currently, the superior legal standard is Act No. 563/1991 Coll., on Accounting, which is in the case of NGOs further specified by Regulation No. 504/2002 Coll., Czech Accounting Standards nos. 401–414 for double-entry accounting, and Regulation No. 325/2015 Coll. for single-entry accounting. For some legal forms, there is an option (not an obligation) to keep simplified accounts (e.g. in the case of a society, endowment fund or an institute). Other forms are obliged to keep accounts to the usual extent. In relation to the amendment to the Accounting Act, certain changes can be expected, about which we will inform you in time.
It is clear from the above that the area of non-governmental organisations is very vast and quite difficult to understand in detail. When thinking about establishing a company that would conduct charitable or otherwise publicly beneficial activities, it is worth clarifying a number of questions beforehand and subsequently weighing the advantages and disadvantages that the individual legal forms bring.