Paper for Legalwise session at Religion and the Law Conference
12 November 2021
By Steven Moe, Partner at Parry Field Lawyers
“I alone cannot change the world, but I can cast a stone across the waters to create many ripples.” Mother Teresa
Introduction
Religious groups are filled with people who want to have positive impact on the world. Often this is motivated by their faith. In meetings and study groups, seminars and workshops individuals may learn a lot about examples in their faith tradition of people who helped others or gave back in some way in acts of service. Common across different religions is themes of generosity, supporting others, helping the poor and acts of service.
While the reason for those individuals to do something positive usually has their faith as the foundation, we often find that the outworking of the new initiative may not necessarily be about advancing religion. Instead it could relate to youth education, community services, environmental protection or mental health.
So if the religious group wants to encourage their members then how might it do so? What are the key points to consider? Should there be a link back to the religious group, or not?
In this paper we are going to discuss different legal structure options for new initiatives and how they can relate back to the religious group. We will also talk about the reasons why it may be best if there is no such link.
The reason for preparing this paper is that we often see confusion on this point and what should be considered. It doesn’t need to be that way though.
Structure of this paper
We have divided this paper into three parts:
Part 1: Initial considerations and questions
Part 2: Legal entity types
Part 3: Setting up as a registered charity
Part 4: Links back to the religious group
There are several cross links throughout this paper to others which have been written on specific topics but they key elements of those are also summarised here. In particular we draw your attention to the “Charities in New Zealand : A Legal Handbook” downloadable here as well as a guide for Churches which is similar but with specific information here and this paper on governance for religious groups here.
Part 1: Initial considerations and questions
The leadership of a group which is approached by an individual can help to empower them to achieve something good for the community. Some of the key questions which could be asked include the following:
- Who will be involved?
- Is it one person with a concept or are there more people who see a need?
- Can a team be developed?
- Will this be a membership based organization where people are involved in that way or an initiative providing services or how will it work?
- What role do you see our religious group as playing in the future?
- What do you want to do?
- Can you define in three bullet points the objectives?
- What sort of business plan can be created to show how it would work?
- Have you talked with the people you want to help – do they see the same need?
- Is the name already taken?
- Check if others are already using the name that is preferred because it might already be trade marked or in use by others – find that out early.
- Assuming the person would like charitable status then which of the following four heads of charity would they aim to be involved in?
- Reduction of poverty
- Advancing education
- Advancing religion
- Purposes beneficial to the Community
- Do you want to have a religious element or will it be secular? If there is to be a religious element then consider this
- What funding streams might be available for this initiative?
- Who will provide the seed funding to get the idea off the ground?
- What sources of funding in the community are available?
- Have you spoken with a funder – either private or community based?
- Direct them to this information from Kate Frykberg on funding sources in NZ.
- Could investors be interested in the idea and provide some impact investing?
- On this topic of accessing impact investing funding sources see this overview here.
- Is there a social enterprise type income stream where a business can also have impact?
- This model is increasingly used to combine both purpose and profit in a sustainable way.
- On this topic have a read of “Social Enterprises in New Zealand: A Legal Handbook” which is available here.
- Have you performed a SWOT analysis or other testing of the idea?
- There are lots of resources for entrepreneurs and templates – for example while written for a business audience this free business plan guide can help get ideas on paper, see here.
- How will the impact be measured?
- Can the idea be linked to objective criteria such as framing in terms of the Sustainable Development Goals (SDGs).
Asking some of these questions early on in the journey of the person who wants to start something will pay big dividends later. They will not know all the answers right away but it will help to refine for them what it is that they are wanting to achieve which will be very useful for the next stage.
Part 2: Legal entity types
“One of the great liabilities of history is that all too many people fail to remain awake through great periods of social change. Every society has its protectors of status quo and its fraternities of the indifferent who are notorious for sleeping through revolutions. Today, our very survival depends on our ability to stay awake, to adjust to new ideas, to remain vigilant and to face the challenge of change.” Martin Luther King Jr.
There is an easy to understand metaphor when it comes to legal vehicles that can be used. Without this it can seem a bit overwhelming to try and choose what type of entity will be best. That is, imagine that you are wanting to buy a new car. You wander around looking at all the different size cars, colours and features.
The most important question is to think about what you will use the car for. Are you planning to go up skiing? Well maybe get the 4×4. Do you want to cruise around town in the summer? Well maybe get the convertible. Do you have 3 children? Maybe get the seven seater van.
In the same way that you consider a new vehicle it is important to think about the legal vehicle you want to use in the same way. Depending on where you want to take it and what you want to use it for should determine what legal entity type you want.
Let’s imagine we are now at the legal vehicle lot. A few of the options to consider would be:
- Charitable Trust: A simple and easy structure which we find often works the best for a new initiative the key ingredients are to decide on a name, who the trustees will be (usually 3-5 of them) and what the purposes are. The benefit of this is also that people generally understand that a charitable trust is set up to advance charitable objects so there can be less explanations required. We’ve done a guide here on how to set this up.
- Incorporated Society: While an option we find these can become very political as there are elections and members so we do not recommend this structure. It may be appropriate in a very member driven group such as sports clubs. There are new changes coming in (finally) which will affect incorporated societies soon. As a side point some people are confused thinking those changes will affect all charities – they won’t.
- Company: Well understood, the limited liability structure is an option although there are certain assumptions that people will make about them – in particular that they are for profit. In fact, a company may be used to advance charity and be registered as a charity itself. You will need to have a name, shareholder and directors.
- Combination of Charity and Company: Increasingly we are seeing this combination of structures being used. It could be that the charity owns 100% of the company (in which case both need to register as a charity) or it could be that they are aligned and work together. It is possible that the company be for profit and for purpose.
Of course it may be that the situation of a particular group has a certain way of arranging things – for example, it could be that they use unincorporated associations. Some denominations may have ways of organizing the ownership of property as well which is unique to them (this is the case for the Baptist, Anglican, Presbyterian denominations).
It may also be that a religious group is part of an international movement and that they will want to have input on the structure as well and how leadership is chosen.
When it comes to a Founder and how they relate to the new charity we have written an in depth article about common issues we see, which is here.
While we have not focused on it there are other options as well such as the idea of a bare trust – this can be a helpful way for assets to be held, depending on the context.
Getting the legal vehicle chosen is really important as we have seen too many people set up an entity and then a year later be looking to switch to another form. That can be done and most often when winding up the assets can be transferred to another entity – but that is inefficient, costly and takes time. Why not get it right from the start with a bit of extra homework and consideration?
One of the key elements is to focus on the purpose and mission – let that guide the action taken and the vehicle that is chosen rather than the other way around.
Part 3: Setting up as a registered charity
If the legal vehicle is chosen then the next stage is not automatic – registering it as a charity with Charities Services. That key step is actually really important though to provide standing in the community as there is credibility from doing so. Being able to talk to funders, donors, community leaders, volunteers and other stakeholders will be enhanced by having this status.
There are also major tax benefits of being a registered charity which cannot be overlooked. The two key benefits are that the entity will not pay tax and it will be able to give tax deductible receipts to donors. This can be a major incentive to encourage generosity because if someone gives the new entity $3,000 then they can claim back $1,000 at the end of the financial year when filing their personal tax returns.
In the last year we have helped about 40-50 new charities set up and sitting on the Charities Services sector group have seen a lot of people struggle with the detail of this step – however with good advice it is definitely possible to get onto the charitable register and join around 28,000 other entities who have achieved that status.
Part 4: Links back to the religious group
This is perhaps the most important question for the religious group – will there be ongoing involvement, or not? In this final part we are going to raise some points which it is important to think about.
From the originating group’s perspective someone with new enthusiasm to start an initiative can be very helpful to further enhance what they do. Selfishly it may feel like the new initiative is coming from a member and so of course it should be linked back to the religious group which has inputted into that person’s life.
If there remains an association then the religious group could use this as a way outwork their own mission in the world. This could be in an aligned area where there is a need. For example if someone sets up a youth focused charity then there could be lots of synergy with the religious group.
However, it is important to consider if the new entity will be under the “control” of the religious group. That could result from having the ability to appoint all the new trustees of a trust, or remove them all or the power to force a wind up. We have spent a lot of time on this article on this point so if this is of a concern have a read here. The point is that if a religious group does control the new initiative then it may need to consolidate the accounts with their own.
Another consideration is that even if the new initiative starts with strong links it may be that over time there is less of a close link. For example if a preschool is started it might initially be connected back to the Church but over time it might be that they become less connected. We have seen this happen with social services in particular where the origins are with a religious group but then the new entity grows and grows and eventually dwarfs the starting point. It is usually best for it to grow into its own stand along initiative by then.
It is also worth considering if what is planned actually has alignment back with the religious group. For example, a youth focused charity trying to prevent youth suicide may find that its funding sources want for the work it does to not have an affiliation with a particular belief system. Having the name of the group involved or including an “advancing religion” purpose as an afterthought in the Trust Deed may actually hinder the new entity when it comes to seek funding.
Having said that, some new initiatives do naturally link back and it may be appropriate to control them and consolidate accounts. As an example a religious group might want to be more active in the community and meet pastoral needs so it might decide to start a funeral business. The money generated from the business in profits could then go back to the religious group but perhaps key is that the business itself could make use of the facilities of the religious group both in terms of people, buildings, food preparation while also being there to support those at a vulnerable time who have lost a loved one.
Having considered all these points the key is that it should not simply be a given that the religious group stays involved in the new initiative. Instead, it might be the place of the elders of that group to help shape and guide the person with the new idea but ultimately to let them fly free with their idea. This is perhaps the most altruistic attitude that can be taken – rather than ongoing control, instead allowing something new to start.
As a final note we are aware that many religious groups themselves are not operating in an optimal way. Assisting someone else with working out their vision and how to achieve it might actually be the springboard to reconsider the religious group itself. For example, many groups that have been around for a long time may be unincorporated associations which potentially means that there members themselves have liability. It can be worth considering the legal form of the entity, how its governance works, how decisions are made, the links with other groups and a myriad of other points which can help the religious group operate even better.
We hope this paper has been helpful and are happy to brainstorm and discuss with people about what might be the best option in their own situation!
Questions can be sent to stevenmoe@parryfield.com
