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Establishment of a Charitable Foundation

Wednesday, 08 February 2017 00:00
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By the Africa Legal Consulting Team

www.africalegalconsult.com

There are various types of non-profit organizations which can be established in Kenya. These include: companies limited by guarantee, charitable trusts and Non-governmental organizations.  The Public Benefits Organizations Act which was enacted in 2013 commenced on 9th September 2016.  It repealed the Non-Governmental Organizations Coordination Act and established an elaborate legal framework that consolidates the law regulating not-for profit organizations.  This article shall compare and contrast three main forms of public benefit organizations.

 Non-Governmental Organizations

A non-governmental organization is any group that is non-profit, independent from local, national and international government organizations. NGOs are usually formed by a group of people with common interests on a voluntary basis. They engage in various undertakings such as advocating for peoples’ rights, lobbying for policies which enhance public participation in government and act as watch dogs of the interests of the members of the public. Some NGOs are organized around specific issues such as education, environment or health. They provide analysis and expertise, serve as early warning mechanisms and help monitor and implement international agreements.

Some of these organizations are based in one country while others operate across borders at the international level. It is worth noting that all NGOs do not engage in political roles, some are set up to perform other activities such as charitable work.  Non-Governmental Organizations are at times given observer status during meetings of the United Nations.

Legal Regime governing NGOs in Kenya

The operation of NGOs in Kenya is governed by the Public Benefits Organizations Act. The Act commenced in 2016 and repealed the former Non-Governmental Organizations Coordination Act. This Act harmonized all the existing laws on NGOs and other public benefit organizations.

The Act further sought to re-brand NGOs to PBOs. It defines a Public Benefit Organization as a duly registered voluntary membership or non-membership grouping of individuals or organizations, which is autonomous, non-partisan and non-profit. It can be locally, nationally or internationally organized and engages in public benefit activities. A public benefit activity is defined as an activity that supports or promotes the public benefit by: enhancing or promoting legitimate economic, environmental, social, or cultural development; protecting the environment; or lobbying or advocating on issues of general public interest or the well-being of a group of individuals or organizations.

Procedure of registration:

The registration of NGOs is currently being done in accordance with the new Act which outlines the procedure of registration. These organizations will be referred to as PBOs. A group that wishes to register a PBO shall make an application for registration to the Public Benefit Organizations Regulatory Authority which is established under the Act. The application is accompanied by:

  • A copy of the constitution or other constitutive document of the public benefit organization;
  • Names and addresses of the founders of the public benefit organization;
  • The public benefit purposes for which the public benefit organization is organized and operated and all of the principal activities that the public benefit organization shall engage in;
  • The postal and physical address of the principal place of doing business of the public benefit organization;
  • The prescribed fee;
  • Such other particulars or information as may be required by the Authority in order to assist the Authority to determine whether or not the organization meets the requirements for registration under the Act.

The constitution of the organization makes provisions for the matters relevant to its affairs such as qualifications and admission of members, election of officials, acquiring and management of dispositions, making of investments, membership fees among others. It should also state the name, objectives, voluntary participation and membership and rules relating to regulation of assets.

International NGOs may apply for registration as PBOs in Kenya by making an application to the authority. The application should include proof that the entity is a registered legal entity in another country, its address in Kenya and a written statement from a representative of the organization’s headquarters indicating the purpose, general activities of the organizations and its authorized agent in Kenya.

Upon registration, the organization is issued with a certificate of registration which is conclusive proof that the PBO has the authority to operate in accordance with its constitution. A registered PBO is a body corporate with perpetual succession with all the attributes of a juristic person. It is capable of suing and being sued, acquiring and disposing property and entering into contracts. Registration of an organization maybe denied where the board is satisfied that the proposed activities are not in the national interest or false information was given in the application form. 

Companies limited by Guarantee

A company limited by guarantee under the new Kenyan Companies Act is one which is incorporated without share capital. The liability of members is limited to the amount that the members undertake to contribute to the assets of the company in the event of liquidation in the articles of association. Each member of a company limited by guarantee undertakes to contribute a specified sum towards the assets of the company in the event of its being wound up while he is a member, or within one year after he ceases to be a member. The certificate of incorporation must indicate that the company is limited by guarantee.

Companies limited by guarantee but which were formed before the new Act came into force in 2015, and which were established with share capital are permitted to continue operating as such. Promoters of a company limited by guarantee can only participate in the divisible profits of the company as members but not otherwise.

Procedure of incorporation

The process of registering a company limited guarantee is set out in the Companies Act as follows:

An application for reservation of a name is lodged with the registrar by completing form CR 14. The registrar confirms the availability of the name. Upon reservation of the name, the following prescribed forms are lodged with the registrar:

  • Form CR 1– Application to register a company containing the proposed name (as reserved), the registered office, liability of members (whether limited by shares or by guarantee), the nature of the company (if private or public) and the name, consent of the initial director and secretary of the company and address of the agent if an agent is used to make the application.
  • Form CR 3- Model memorandum for a company limited by guarantee.
  • Form CR8- Notification of directors’ residential address.
  • Articles of Association (if those provided in the Regulations have not been adopted).
  • Statement of the Nominal Capital.
  • A statement of guarantee.
  • Applicants should attach copies of ID Card, KRA PIN and passport size photos.

It is a mandatory requirement that if the company being registered is a foundation, then it shall only be registered as a company limited by guarantee. Upon furnishing the requisite documents, the registration is approved and the company becomes a body corporate whose members’ liability is only limited to the amounts guaranteed in the statement of guarantee. However, the registrar will not incorporate a company limited by guarantee without prior clearance from Special Branch, a police department under the office of the President. This process discourages registration of companies limited by guarantee.

Charitable Trust

A trust is an entity created to hold and manage assets for the benefit of others. The operation of trusts in Kenya is governed by the Trustees (Perpetual Succession) Act. Unlike other not-for profit organizations which can be established for numerous purposes without limitations, trusts can only be established for religious, educational, literary, scientific, social, athletic, or charitable purposes pursuant to Section 3(1) of the Trustees Act.

Procedure of incorporation;

A body or group of persons that has come together for the advancement of any of the purposes set out above may apply to the Cabinet Secretary for a certificate of incorporation of the trustees as a body corporate. The trustees are required to prepare and furnish a trust deed for incorporation. The Trust deed should contain;

  • The objects of the trust and constitution of the trust concerned.
  • The name of the trust as well as the names and addresses of the trustees. The words ‘trustees’ and ‘registered’ shall form part of the proposed name of the trust.
  • A statement and short description of the property or interest therein which at the date of the application is held or intended to be held by the trustees.
  • A statement as to whether the trust concerned is a society registered or exempted from registration under the Societies Act, or is incorporated under the Companies Act, together with the relevant certificate of registration, exemption or incorporation.
  • The powers of the trustees, procedure of their appointment and removal and regulations on their meetings.
  • The regulations for the custody and use of the common seal.

Upon execution of the Trust Deed, it is presented to the Registrar of documents upon payment of the requisite stamp duty for registration under the Registry of Documents Act. This does not create the trust. However, once the trust is registered under this Act implementation of the objects of the trust as a simple trust can commence pending final incorporation under The Trustees (perpetual succession) Act.

The second step is to petition for incorporation under the Trustees Act. This petition is lodged to the Cabinet Secretary of lands together with a certified copy of the registered Trust Deed.
The petition must state, among other things, that the trustees are desirous of being incorporated under the Act and give a pictorial representation of the common seal of the trust, which must be rounded in shape and with the name of the trust inscribed thereto. If the Cabinet Secretary is satisfied that substantive and procedural requirements have been met, he approves the petition and grants the trust a certificate of incorporation. The names of the trustees appointed in the Trust Deed are noted on this certificate.

Upon incorporation, the Trustees Act provides that “the trustees shall thereupon become a body corporate by the name described in the certificate, and shall have perpetual succession and a common seal, and power to sue and be sued in their corporate name and, subject to the conditions and directions contained in the certificate, to hold and acquire, and by instruments under the common seal to convey, transfer, assign, charge and demise any movable or immovable property or any interest therein now or hereafter belonging to, or held for the benefit of, the trust concerned in the same manner and subject to such restrictions and provisions as trustees might so do without incorporation”. The trust thus acquires the status of a juristic person.

Comparison of the three forms of organizations;

Non-Governmental Organization Company Limited by Guarantee Charitable Trust
Proprietary interests Distribution of assets to members and officials is prohibited The law is silent on distribution of assets. The assets of the trust can only be dealt with according to the stipulations of the Trust Deed.
Tax exemptions If it is established that it is wholly a Public-Benefits Organization, it is exempt from income tax, tax on interest and dividends on investments and gains earned on assets or the sale of assets and stamp duty It is exempt from income tax to the extent that it has been established solely to relieve poverty or distress of the public, or to advance religion or education and must benefit the people of Kenya. It is exempt from income tax to the extent that it has been established solely to relieve poverty or distress of the public, or to advance religion or education and must benefit the people of Kenya.
Dissolution The constitution must provide for the process upon dissolution including assigning of assets. Under the PBO Act, a wound up organization shall transfer its assets to another PBO which has similar objectives. It can be wound up voluntarily or involuntarily. Upon dissolution, the assets are applied towards payments of debts in accordance to their rank. Promoters are liable to the extent guaranteed. The Cabinet Secretary can order dissolution of a trust. Trust land vests to the County Government where it was situated. The law is silent on other assets.
Economic Activities An NGO can engage in any activity as long as it is lawful and in line with its constitution. The company can engage in any activities unless restricted by its articles of association. The activities that a trust can engage in are limited by the Trustees Act and stipulated in the Trust Deed
Political activities PBOs are prohibited from engaging in any political activities. They must be independent from the government and its actors. They are free to engage in any activity, including those of a political nature provided the articles of association permit it. The activities of the trust are limited by the Trustees Act and stipulated in the Trust Deed
Distribution of funds to members The constitution of an NGO must prohibit the NGO from distributing funds to members. Kenyan law does not require them to prohibit the distribution of funds Kenyan law does not require them to prohibit the distribution of funds.

Conclusion

In light of the foregoing, I would recommend that persons intending to establish a charitable foundation ought to register it as a company limited by guarantee. They have better self-regulating mechanisms and freedom to undertake whichever activities they desire unlike the other two forms of organizations. They can also enjoy a corporate tax exemption if the activities that the foundation engages in fall within those contemplated under the Act.

In case you need more information or advice on the above changes, please contact the Africa Legal Consulting team on .

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