Credit Proofing Charity Assets
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.
In the coming months we will discuss the credit proofing of assets in more detail, focusing on the key elements of this type of asset protection strategy including membership issues, control provisions, accountability, reporting, staffing and management of the new structure.
If you would like more information on this topic, please contact us at office@drache.ca.