Incorporation can require a lot of paperwork and involves incurring legal fees, all of which may lead you to ask, is it worth it?
No federal or provincial legislation requires a Not-for-Profit Organization (NPO) to incorporate. Like anything in life, there are both benefits and costs associated with incorporation. The answer to whether or not an NPO should incorporate does not have a "one size fits all" solution. Each NPO needs to consider its activities, size, and purpose when considering whether or not it should incorporate.
Members of an unincorporated NPO can be held personally liable
An unincorporated NPO is considered to be like-minded people coming together for a common purpose, goal, or cause. It has no real legal status and is not required to file any tax returns. However, members of an unincorporated NPO can be held personally liable to any of the NPO's creditors for the full amount of any debt that it has outstanding. The unincorporated NPO isn't able to own property or enter into contracts on its own.
Members of an incorporated NPO are sheltered from being personally liable
On the flip side, an incorporated NPO has legal status. Legal status means that the NPO can enter into contracts, purchase or own property, or even borrow money and must file a tax return. The legal title to any property stays with the NPO, even if members change. The individual members are sheltered from being personally liable for any actions of the NPO, including its debts. Incorporation also provides a perception of being more stable and therefore, can increase the chances of receiving grants.
Once incorporated, the NPO must follow the guidelines set forth by the Federal or Provincial Act under which the NPO was incorporated. Both Acts contain directives as to the number of required directors, annual meetings, the maintenance of records, and by-laws.
Incorporation ensures the continuation of the NPO irrespective of any changes in membership. An incorporated NPO maintains its legal status regardless of what happens with its members. While members may change over the years, the NPO continues until it is formally dissolved.
When considering whether incorporation is the most appropriate avenue for your NPO, you should discuss this with your advisors.
For more information on this topic, please contact your McCay Duff advisor.
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