The proprietary limited (Pty Ltd) company structure is generally not suitable to charities.
This is because charities must be not-for-profit. A proprietary limited company is generally structured for businesses that operate for-profit purposes, with the structure usually allowing shareholders to receive private benefits.
For a proprietary limited company to be eligible for registration as a charity, its governing document must also contain an appropriate ‘not-for-profit clause’ and an appropriate ‘winding-up clause’ (sometimes called a ‘dissolution clause’).
A proprietary limited company wishing to register as a charity should ensure its purpose clause, restriction of exercise of powers clause, and not-for-profit and winding-up clauses take precedence over the rest of its governing document, and that the governing document includes a clause to ensure members cannot decide to change its charitable nature in the future.
You can use our recommended not-for-profit and winding-up clauses in the governing document for a charitable proprietary limited company. While it is not necessary that the governing document contains clauses with this exact wording, it is important that the governing document as a whole has the effect of meeting the requirements.
See our guidance on proprietary limited companies for more information.
1. Not-for-profit
1.1 The company must not distribute any income or assets directly or indirectly to its members, except as provided in clauses 1.2 and 3.
1.2 The company must apply its income and assets solely in pursuit of the object(s) in clause [insert].
1.3 Clauses 1.1 and 1.2 do not stop the company from doing the following things, provided they are done in good faith:
- paying a member for goods or services they have provided or expenses they have properly incurred at fair and reasonable rates or rates more favourable to the company, or
- making a payment to a member in carrying out the company’s charitable purpose(s).
1.4 This clause shall override any other clause in this constitution and shall prevail to the extent of any inconsistency.
Winding up
2. Surplus assets not to be distributed to members
If the company is wound up, any surplus assets must not be distributed to a member or a former member of the company, unless that member or former member is a charity described in clause 3.1.
3. Distribution of surplus assets
3.1 Subject to the Corporations Act 2001 (Cth) and any other applicable Act, and any court order, any surplus assets that remain after the company is wound up must be distributed to one or more charities:
- with charitable purpose(s) similar to, or inclusive of, the object(s) in clause [insert], and
- which also prohibit the distribution of any profits and surplus assets to its members to at least the same extent as the company.
3.2 The decision as to the charity or charities to be given the surplus assets must be made by a special resolution of members at or before the time of winding up. If the members do not make this decision, the company may apply to the Supreme Court to make this decision.
3.3 This clause and the clause immediately preceding it shall override all other clauses in this governing document and shall prevail to the extent of any inconsistency.
Further tailoring of the wind-up clause, or the addition of a DGR revocation clause, would also be required if the proprietary limited company seeks endorsement as a deductible gift recipient.