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All You Need To Know About Registration Of And Accounting For Non Profit Organization Or NPO

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I met a group of very successful businessmen just after the CNY holidays who would like to contribute and pay forward to the society.

They enquired about how to set up an organization legally to help the needy.

I shared with them, and because of the good cause, it prompted me to write this article to share on this platform just in case you have the same thoughts and plan when you can afford the time and have the heart to pay forward …

 

What is a NPO?

A Non profit organization (NPO) in Singapore is a legally constituted organization whose main purpose is to support or engage in activities of public or private interest without any commercial or monetary profit.

When NPOs earn a “profit”, more accurately called a surplus, it is retained by the organisation for its future activities and unlike a profit making organisation, does not distribute its earnings as dividends amongst its members.

NPOs are commonly referred to as Voluntary Welfare Organisations (VWOs) in Singapore and can be registered under the law as a public company limited by guarantee, society, or charitable trust.

Setting up a NPO in Singapore allows it to function like a traditional organization.

It can also claim a tax exemption.

 

Key Characteristics of NPOs in Singapore:

* are self-governed by a board of trustees or ‘managing committee’/ governing council, comprising individuals who generally serve in a fiduciary capacity;

* exist independently of the government;

* produce benefits for others, generally outside the membership of the organisation; and

* are ‘non-profit-making’ i.e. they are prohibited from distributing a monetary residual to their own members.

* are eligible for full tax exemption only after receiving the charity status

 


Registration Benefits

* Although in Singapore it’s not mandatory to register your NPO, it will be difficult to engage in any meaningful and sustainable activities unless you are a registered entity.

* For example:
It is important for you to consider that only legal entities can enter into contractual agreements (e.g. leases, purchasing contracts).

* If an organisation is not a registered entity, the individual persons concerned may have to accept contractual obligations/liabilities in their personal capacities.

* Without a registered entity, it will be almost impossible for you to raise funds from non-members.

* Without a registered entity, you won’t be able to claim tax exemptions on the funds raised.

* Registering your NPO brings about a sense of clarity and formality.

* Working with an established set of legally binding rules provides clarity, to those within the organisation and to stakeholders outside the organisation.

A registered entity is a criteria which most donors use to evaluate requests for funds.

An organisation is publicly accountable once it is registered and this establishes a sense of trust.

 

How to set up an NPO?

Listed below are the three (3) types of registration that a non-profit entity can opt for.

Each of them has its own benefits.

 

1. Public Company Limited by Guarantee

* Registering a non-profit entity as a public company limited allows it to function like any other organization.

* It enjoys independence and can enter contracts and make deals with other organizations like an individual entity.

* A member’s liability is considerably lower in this type of registration.

* However, members of the organization need to guarantee an amount that will cover the liabilities of the organization in case the situation calls for it.

* In certain cases, that amount could be as low as S$1.

* To run a public company limited by guarantee, at least 1 director and 1 member are needed, plus a company secretary.

* Another stipulation is that the company secretary and at least 1 of the directors must be a resident of Singapore.

Benefits and Drawbacks

* Enjoys an independent legal personality

* Members’ liability is restricted

* Subject to ongoing public disclosure obligations and statutory control

* Professional assistance required for incorporation and ongoing statutory compliance

* More complex annual reporting requirements that are not always suitable for small groups

Tax exemptions

* Associations registered as company limited by guarantee in Singapore are exempt from income tax if surplus funds are from members’ contributions;

* or if over 50% of gross revenue receipts are from members and are not tax-deductible for members.

* For full tax exemption, the company must apply for Charity status after its registration.

Key facts at a glance

* Requires at least 2 directors, 2 members, and qualified Company Secretary.

* 1 director & secretary must be ordinarily resident in Singapore i.e. a Singaporean Citizen, a Singaporean Permanent Resident.

* A foreigner who wishes to act as a local director of a company has to be a person who has been issued a Employment Pass or a Dependant Pass.

* Must draft a Memorandum & Articles of Association setting out the objects and by-laws of the organisation.

* Must audit accounts annually.

* Must hold Annual General Meetings.

* Must file its Annual Returns with ACRA.

* Public companies limited by guarantee are registered with Accounting and Corporate Regulatory Authority (ACRA) & are governed by the Singapore Companies Act.

You should seek professional assistance if you are interested in registering a Public Company Limited By Guarantee in Singapore.

 

2. Society

* A NPO registered as a society is a little less formal than a public company limited by guarantee.

* A society is easy to establish but has some drawbacks. For one, it isn’t allowed to function as an independent legal entity, which makes its members more liable.

* Registering as a society is feasible for small groups that function on the basis of volunteers.

* On the bright side, societies registered with the Registrar of Societies enjoy income tax exemption if the surplus come from members.

Benefits and drawbacks

* Quick, easy and inexpensive to establish
Donors prefer more formal business structure arrangements such as public company limited by gaurantee

* Does not enjoy a separate legal identity status thus members are exposed to liabilty issues
Tax exemptions

* Societies registered with the Registrar of Societies (ROS) are exempt from income tax if surplus funds are from members’ contributions;

* or if over 50% of gross revenue receipts are from members and are not tax-deductible for members.

* For full tax exemption, the society must apply for Charity status after its registration

Statutory Requirements

* A minimum of 10 persons are required to form a society, out of which the President, Secretary and Treasurer need to be Singapore Citizens or Singapore Permanent Residents.

* Must audit accounts annually.

* Must file Annual Returns with Registrar of Societies

* Must draft a Constitution that governs the society

* Societies are registered with the Registrar of Societies (ROS) & are governed by the Singapore Societies Act.

You should seek professional advise if you are interested in registering a Society in Singapore.

 

3. Charitable Trust

* A charitable trust is an entity that is set up by an individual and managed by a group of trustees.

* The trustees follow a deed that defines their role within the trust.

* The deed is a guideline that the trustees must adhere to and uphold.

* The administrative power of the trust is in the hands of the trustees and they manage the funds.

* Setting up a charitable trust in Singapore can be quite expensive.

Benefits and drawbacks

* Limited public disclosure – there need not be an auditor or audited financial statements unless these are required by the trust deed

* Expensive and time consuming to establish and requires professional assistance

* No independent legal personality

* Control is with the trustees – there is no accountability to a wider membership base
Statutory Requirements

* Must have a board of trustees.

* Must have a trust deed – the constitution of the charitable trust, which sets out the framework within which the trustees must operate.

* Trusts are licensed by the Monetary Authority of Singapore (MAS) & are governed by the Singapore Trust Companies Act.

You should seek professional advise if you are interested in registering a Charitable Trust in Singapore.

 

How to legalize receiving of Donations which are tax-deductible to the Donors ?

Once the non-profit entity is registered under any of the 3 types, it’s possible to claim full tax exemption by applying for charitable status.

 

Charity Status

* Applying for charity status is beneficial to a non-profit entity, because it provides automatic tax exemption.

* Acquiring charity status makes it possible for your organization to receive donations from charitable trusts.

* In order to receive this status, the actions undertaken by your organization must be charitable in nature.

* This means it’s should be geared towards the assistance of the poor and the needy.

* There are certain stipulations that this status entails – one of which is that the organization needs to be more transparent with its fund raising activities by making the information available online.

 

Institutions of a Public Character ( IPC ) Status

* Non-profits entities that already possess charity status can apply for an ‘Institutions of a Public Character’ status.

*This means that the organization is working towards the upliftment of Singapore and not just a particular cause or a group of people. Donations made to an organization that has an IPC status are tax deductible.

* It’ll be easier for your organization to secure funds due to this fact.

* Donations made to a charity without approved IPC status is NOT income tax-deductible.

The following types of donations normally qualify you for a tax deduction:

* Cash Donations
* Shares Donations
* Computer Donations
* Artefact Donations
* Public Art Tax Incentive Scheme
* Land and Building Donations

If the donations or gifts are for a “foreign charitable purpose”, they are not tax deductible even though they are made to an approved Institution of a Public Character (IPC).

In essence, registering your non-profit organization is beneficial.

The benefits that you receive by registering your organization will help it function more effectively.

In essence :

Public company limited by guarantee is quite a popular type of registration, due to the individual identity that it provides to your organization.

This allows it to function like any other company.

The other two types of registration have their own benefits, but mainly to smaller organizations.

Once your organization is registered you should apply for charity status, as it will help you get tax exemption.

If you want your donors to get tax deduction on their donations, then you should get the IPC status.

You should seek professional advise if you are interested in registering a NPO. Corporate BackOffice will be more than glad to assist.

 

How to do Accounting for NPO ?

Key pointers about Charity Accounting Standards ( CAS )

 

1. Changing our normal understanding of “income” under the Financial Reporting Standard (FRS) to suit that of the CAS.

* Currently, income in CAS includes both income and capital items.

* For example, under the FRS, donation to a permanent endowment fund, which is capital in nature, will be taken up directly to the endowment fund in the balance sheet.

* However, it will be recognised as income (under the endowment fund column) in the Statement of Financial Activities (SOFA) under the CAS, if the donation meets all three of the income recognition criteria – entitlement, certainty and measurement.

 

2. The allocation of support costs to the various categories of costs may be very challenging to some.

* The bases and accuracy of the costs apportionment are some of the concerns expressed by accountants.

* Some even ask whether there is a need to prepare time sheets to account for the time spent by employees in the relevant cost areas.

* The CAS, however, does not prescribe such details. What is required is that the bases of apportionment are reasonable and justifiable and it is consistently applied over the years, whether it is time spent, area occupied, headcount or any other basis used.

 

3. The comparative year’s figures can be difficult to determine, as the CAS treatment of some balance sheet and SOFA items is different from the FRS treatment.

* However, it is stated in the CAS that charities need not restate or reclassify the comparative information to conform to the accounting principles of the CAS if it is impracticable to do so.

* The Charities Unit advised that for such situations, charities can have the option to attach the previous year’s audited financial statement to serve as a comparison.

You should seek professional advise if you would like outsource the Bookkeeping of your NPO.

 

If you need help, feel free to contact us at :

(O) +65 63851011

(M) +65 90880669

(E) [email protected]

www.corporatebackoffice.com.sg

 

Written by Kelvin Loh