Most charities and not-for-profit organizations are incorporated as non share capital corporations. These corporations are considered separate legal entities from their members or directors. This ‘separateness’ protects the members (and to a large extent directors) from being personally liable in the event the organization finds itself liable for damages as a result of a court finding.
At the corporate level, insurance for property damage and personal injury should always be in place, but it may not offer complete protection, and therefore, other asset protection strategies should be considered. Separating assets into different corporate entities is one strategy that has been implemented by charities in Canada.
Some not-for-profits and charities do not realize that their assets may be available to answer any claims made against the organization. Even a simple operation can result in a devastating lawsuit. Consequently, it may be prudent for the not-for-profit or charity to transfer their assets into a separate corporation. One of the main reasons for establishing separate corporations and running different aspects of the activities in each one is to protect the assets and limit liability.
Separating the assets and activities into different legal corporations provides for control to be under a separate Board of Directors and, where practicable, separate management. Corporate law permits a not-for-profit or charity to organize itself in this way provided that the separate corporate entities, although “owned” by a parent corporation, have the elements of independence and authority to avoid what is known as “piercing the corporate veil.”
The process of separating assets involves the incorporation of new corporations, the number being dependent on the extent of separation desired and types of assets to be transferred. For charities, each new corporation would become a charity in order for the assets to be transferred by way of inter-charity transfer. The establishment of this structure also requires by-laws for each new corporation that balances control and independence with the parent corporation.
The determination of whether to transfer assets and activities into separate corporations requires an in-depth analysis of a charity’s objectives in relation to its organizational structure, the range of activities and the value of the assets to be protected. Considerations of administrative burdens, filing requirements and the ongoing management of the corporate affairs of each corporation also need to be taken into account when considering if this credit-proofing strategy makes sense.
Mark S. Anshan provides legal, business, strategic and organizational advice to nonprofits and charities at Drache Aptowitzer LLP. He was instrumental in the conception and launch of URJ Camp George, the first summer camp in Canada for children from Reform Synagogues, and served as Director and Treasurer for the Micah Homes Non-Profit Housing Corporation during its planning and construction of Plaut Manor, a housing project for disadvantaged single-parent families.
Contact him by email or at 416.900.5572 ext. 15.