What does not for profit actually mean?
- Written by Sam Agars, 1 September 2016
Most of us immediately think charity when we hear not for profit, but there are numerous other organisations out there providing a service to the community for free. To complicate things further, some of these can legitimately generate an income. Sam Agars investigates.
Discovery Bay has countless organisations in place that are there to serve the community and help those in need. Societies, charities, social enterprises and companies limited by guarantee – all serve a similar yet intricately different purpose and each one must meet a certain set of criteria on a day-to-day basis. Not all are not for profit, nor are they required to be.
Confused? We catch up with those in the know in DB to nut out exactly what each of these organisations actually are and how they operate.
People often question how charitable organisations are run and if they are in fact operating correctly. With such a vast range of different structures in place, it’s no surprise. According to Harvey Law Group lawyer Amelia Polisano, what we first need to understand is the difference between a charity and a social enterprise.
“While turning over a profit is not the most important objective for a social enterprise, it is in fact allowed,” Amelia explains. “Hong Kong law states that less than 50% of annual income must be generated by direct sales and less than 35% of profit can be distributed to shareholders. The crux of it is that social enterprises should be financially sustainable and their major income source should come from selling goods and services.”
DB resident Nikki Boot, who runs the social enterprise DB Mothers & Friends, adds: “The difference between the social enterprise and the non-profit is that the social enterprise focuses on the socially beneficial objective, instead of focusing on whether it is profit or non-profit.”
Initially just a Facebook group to allow DBers to share tips and communicate with each other, Nikki registered DB Mothers & Friends as a social enterprise in 2014. She collects useful second-hand goods at a small cost from those who no longer want them and distributes them to people in need.
Starting up was a relatively simple process for Nikki – it was just a matter of obtaining a business registration and a limited company registration. “You also have to show what your objective is and that you are doing something to benefit the community,” she says.
In Nikki’s line of work – one that requires a lot of physical labour – she has found the social enterprise option to be far more suitable than if she were to become a charity. “A charity could be driven by donations and volunteers, but we would rather work on a business model,” she says. “We hire movers and drivers to do our collection jobs and then we pay them. I need to make sure I hire someone reliable.”
As a social enterprise, Nikki pays regular tax on any profit she makes.
Becoming a charity in Hong Kong is a far more difficult process, and a charity must prove that its purposes are exclusively altruistic to ensure it is exempt from tax. According to Amelia, acceptable purposes include relief of poverty, advancement of education or religion, and community work. While charities are allowed to cover their expenses through the money they raise and donations they receive, all other monies must go towards their charitable causes.
DB resident Tracey Read faced a lengthy wait when registering Plastic Free Seas as a Hong Kong charity in 2013. Plastic Free Seas’ aim is to clean up Hong Kong’s beaches, by promoting education and awareness in schools and actively cleaning our waters from its converted ex-fishing trawler.
“Starting a charity is a very complicated process,” Tracey says. “They really need to be sure you are a legitimate charity. We were quite lucky in that we got pro-bono support, so a law firm basically did everything for us. Even though we had professional help, it took about seven months from start to finish and cost us a lot of money.”
Charities must make sure all donations and financial transactions are recorded properly, again to maintain tax exemption. “Inland Revenue will only let you receive tax-free donations if you record it properly, it’s very strict,” Tracey explains. “You have to do annual returns to show that you are still operating within the parameters that you were set up in and that you’re not engaging in any illegal activities.”
Of course, having all this in place is the best way to encourage people to donate. Pointing to Hong Kong initiative WiseGiving, which helps donors know exactly where their money is going and how well it is being used, Tracey says: “People feel more comfortable if they know their donations are going to projects rather than overheads.”
It is much easier to start up a society than a charity, though the way they operate is similar. Registering with the local police, the founder must provide his Hong Kong Identity Card (permanent resident status is not required), plus the address of every premise owned or occupied by the society (including its principal business address). The name and objectives of the society must be given, and the application must be signed by three of the society’s office-bearers.
A society, like a charity, is not for profit. Unlike a charity, however, a society cannot issue receipts for donations, which in some cases makes it tougher to gather funds.
For Kate Wade, founder of DB Green, this has not been an issue due to the small size of the organisation and the way it operates. Registered as a society in 2007, DB Green organises regular beach clean-ups in DB and also holds tree-planting sessions from time to time.
“Our main function is not to do with fundraising,” Kate says. “Most of the fundraising comes from the flea market so people are actually buying something, they’re not just making a donation. More than money, we want people who can offer actual physical labour.”
There is little that Kate needs to do on a continuous basis to maintain DB Green’s standing as a society, although she of course records her transactions like any business does.
Companies limited by guarantee
A different kettle of fish altogether is the company limited by guarantee, which is a not-for-profit registered company, with no shareholders. Multi-sports club DB Pirates made the shift from society to company limited by guarantee in January 2014 and now has to conform to a whole new set of rules.
“Once registered, a company limited by guarantee must adhere to a complex set of criteria,” Amelia explains. “This includes complying with the Inland Revenue Department and the Companies Registry by completing annual filings and undergoing an annual audit. A minimum of 50% of income must come purely from members otherwise the company becomes liable for tax.”
Pirates’ director of operations, Steve Tait explains the motives behind the move: “The problem you have with a society is it has totally unlimited liability for the officers involved and for the members of the society. So if something ever happens, particularly in our field, if something were to happen to one of the kids and we were found liable as a club for negligence or anything like that, then every member within the society would be liable for an unlimited amount. It is really hard to get insurance because you are not a physical entity within the Hong Kong system, just a piece of paper with the police.”
As a company limited by guarantee, the Pirates now has access to insurance to mitigate the risk to its members. “The members are the endorsers of the club, and they guarantee the club to the tune of HK$1 each within their membership,” Steve says. “So if the whole thing went horribly wrong, the best anyone would ever get out of it is HK$1 per member.”