Can a non-profit company pay its directors?
Whether a South African non-profit company may pay its directors or members, what its income must be used for, and how payments show in the statements.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa
The chairperson of a community development NPC calls the firm with an awkward question. One of the directors has been running the organisation's programmes almost full-time for a year, unpaid. The board wants to pay her. Another director, who sits on the board and attends meetings, has asked whether directors can be paid "something" for their time. And the treasurer wants to know whether last year's surplus can be shared among the founding members, since they put in the original money.
Three questions, three different answers. A non-profit company can pay people for work, but it cannot share its income or property with the people behind it. The firm's role is to help the board see where that line falls and to make sure the statements show which side of it each payment is on.
No distributions to the people behind the company
The government's page on registering a non-profit company states the rule plainly. A non-profit company's income and property may not be distributed to its incorporators, members, directors or officers, except as reasonable compensation for services.
That disposes of the treasurer's question. Sharing a surplus among founding members is a distribution, and it is not allowed, however much money those members contributed at the start. The same applies to disguised distributions: paying members inflated fees, lending them money on terms nobody else would get, or transferring assets to them at less than their value. The test is substance, not the label on the payment.
Reasonable compensation for services rendered
The exception is narrow but real. The government's page allows payment "as reasonable compensation for services". Two conditions sit inside that phrase.
Services. There must be genuine work. The director who runs the programmes is providing services beyond her role as a director, and paying her for that work can fall within the exception, provided the amount is reasonable. A director who only attends board meetings is in a different position, and the board should think carefully before treating attendance as a service to be paid for.
Reasonable. The amount must be what the work is worth. A useful way to test it is to ask what the organisation would pay an outsider with similar skills to do the same work, for the same hours.
A board that wants to pay a director should, as a matter of good governance:
- Define the services in writing, separately from the director's board duties.
- Set the pay with reference to what the work would cost from an outsider.
- Have the decision taken by directors who are not being paid, with the paid director absent.
- Minute the decision and the reasoning.
- Review it each year.
Assets and income for the stated objectives
The government's page adds a broader duty: all of a non-profit company's assets and income must be used to advance its stated objectives. Every payment, including compensation for services, should be explainable in those terms. Paying a programme director advances the objectives; sharing a surplus does not.
The same page sets out the governance minimums. A non-profit company needs at least three incorporators to sign its MOI and must at all times have at least three directors, while appointing an auditor and a company secretary is optional. The Companies Act text published on the government's page, as originally published, also requires a non-profit company to have at least three directors unless its MOI sets a higher number. Those minimums matter here because a board of three, one of whom is paid, leaves only two to approve that director's pay. The government's non-profit company registration page sets out these rules alongside the registration process, which is covered in registering a non-profit company.
PBO control rules on top
Many non-profit companies are also approved as public benefit organisations, which brings SARS's requirements into play. SARS says a PBO's founding document must provide that at least three persons who are not connected persons accept fiduciary responsibility, and that no single person directly or indirectly controls its decision-making. These requirements come from section 30(3)(b) of the Income Tax Act, according to SARS.
For a PBO considering paying a director, the control rule adds a further check: paying one director, especially one who is also influential on the board, should not give that person control over decisions. The PBO founding document requirements are explored in the PBO founding document.
Showing directors' remuneration in the statements
Whatever the board decides, the statements should make it visible. Members, funders and SARS will want to see who was paid, for what and how much.
Achekam has statement templates for non-profits, among others such as companies on IFRS for SMEs, close corporations and trusts, with wording written for South African practice. From a mapped trial balance, the Studio builds a draft set of annual financial statements with every figure calculated in code, including the directors' report, the four primary statements, policies, notes and a detailed income statement. A block a person edited is kept when the draft is rebuilt.
For a non-profit that pays a director, the practical steps are in the mapping and the review:
- map payments to directors for services to their own accounts in the trial balance, separate from staff costs and programme expenses;
- check the draft statements and notes show those payments clearly, and add wording where the board's decision needs explaining;
- make sure the directors' report does not suggest that directors serve unpaid if any were paid.
Ask the client for its MOI and, if it is a PBO, its founding document, and read what each says about remuneration. Then give the board a short note setting out the distribution rule, the services exception and the five governance steps above, before it votes on any payment.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
