The Non-Profit Organizations Law of 1901
History: 1901 and 1905
The legislation regarding non-profit organizations, known in France as “associations”, is a direct result of the separation of the church and state at the beginning of the 20th century. Prior to that time, it was virtually impossible to create any temporary or structured group of people. On the one side, there was the Catholic Church. On the other, there were political parties and there were professional groups in the form of trade unions, craft and trade guilds, or syndicates for the liberal professions. The idea during the 19th century was that private interests would necessarily be opposed to the interests of the nation and therefore there was no way that an organization could help the state do a better job.
At the turn of the century a liberal government was elected which analyzed the issue very differently. The new government still did not believe that private groups would improve people’s lives in any way. But for the first time in years the government was made up of anti-clerical atheists. The goal was to separate the state and the church. The idea behind the new legislation was that by making the creation of associations easy, the power and influence of the Catholic Church and clergy would be reduced, while the French population would be able to express their interests and concerns outside the political spectrum.
The law of 1901 enables two people or more to create an association, a non-profit organization called an Association culturelle. The law was followed by a complementary law of 1905 which enables at least two people to create a church, which is, among other things, a non-profit organization called an Association cultuelle (nuance), much more regulated than the first type.
The two types of associations are grounded on very different concepts.
First of all, the association must be structured by a stated goal, a mission statement, and a project that attracts people and, in any case, goes beyond the personal interests of the few (as few as two) that originally started the association. This is why the by-laws are such an important part of the creation of the association and, within this document, the provision called Objet social, i.e. the goal. By definition, the association cannot engage in any activity that does not correspond to the goal declared in the by-laws.
Second, the association must be a democracy where people give to the association in order for it to reach its goal. No one should receive any sort of personal and private compensation or preferential treatment. At first, Congress somewhat overlooked this aspect, assuming that only good people would be interested in creating such an association. Over the years, this attitude has changed, and now there is, from a legal as well as a fiscal point of view, a major difference between a charitable association and a professional association.
After seeing how to create an association, we will examine the differences between a charitable and a professional association.
Steps in Creating the Association
The Affectio Societatis
This is the French legal concept that means that two people or more share the same idea, and personally commit themselves to achieving the purpose of the association.
Drafting the By-Laws
Every association must have a fairly detailed set of by-laws which define the democratic procedures ruling the association, its purpose, the power and the duties of the Board of Directors and the Executive Committee. All the founding members must sign this document. By doing so, they effect this affectio societatis.
The association must have a headquarters clearly defined, and its location must be clearly declared. Either the association itself has the means to rent or purchase a space for itself so that the lease or deed secures the location; or the association is hosted somewhere, in which case, an affidavit of lodging must be produced by the person living or working at the hosting location. An association can always be hosted in a residential apartment, as long as it does not become a place where the public is received. All official documents must be kept there and should be readily available to the membership.
The documentation required consists of the affidavit of lodging and the identification of the individual who is hosting the association.
The Initial Board Meeting
The founding members are also the members of the first Board of Directors. In their first meeting, they concretize the identity of the Executive Committee members; document how the association is hosted; give power to someone to register the association with the préfecture; take responsibility for all the actions carried out by the association; prepare the declaration for the préfecture so that the creation of the association can be announced in the Journal officiel; and define the amount of the various dues to be paid by association members.
All Board, Executive Committee and General meetings must have minutes of their meetings drafted and approved. These minutes are kept in a special notebook at headquarters.
All the documents mentioned here are needed to register the association with the préfecture. The only grounds for refusal of registration is improper documentation. This is one of the fundamental democratic rights in France — the freedom to create an association.
- By-laws – at least two original sets. It is advised that four originals be signed, so that two other original copies are kept by members of the Executive Committee, one is kept at headquarters, and one in a safe place elsewhere.
- Affidavit of lodging for the association/proof of location
- Minutes of the first Board of Directors meeting
- Filling out the special form for the publication (the Journal Officiel) in which the association’s creation is formally announced
- Payment of 26.50 € for the purchase of this publication (which will be sent to the association’s headquarters by post)
- Copy of the ID of the president of the Board of Directors
The day of the registration is the association’s official birthday. From that date on, the association is legal and can function totally normally.
Opening a Bank Account
Several banks will allow the association to open an association bank account before the official registration but, as far as we know, none will allow the account to work normally (i.e. spend the money) before registration. The people having the authorization to sign on this account must either be specified in the by-laws or at the initial Board of Directors meeting. The bank should verify the credentials of each of these people.
Limited Liability — La Personne morale
- Responsabilité civile – limited liability
- Because the association has an existence of its own, it can have assets and liabilities distinct from those of its members, regardless of any of its members’ personal financial holdings.
Keep in mind that there are only 2 types of entities that have legal rights in France:
a) A human being (or personne physique), who is defined by:
• His/her date of birth, once and for all, which must be promptly recorded with the state (city hall) in order to protect this new person.
• His/her name (surname and first name) given at birth. The parents, under supervision of the state, give the name because it is an important matter.
• Identification of his/her domicile - where he/she primarily lives at any given time.
• An ability to conduct business him/herself, that is, his/her capacity to carry out his/her affairs in a clear and responsible manner.
• His/her patrimoine - a legal concept which means all the assets and liabilities of the individual for his/her entire lifetime. Thus, a human being can have only one patrimoine.
b) An incorporated entity (or personne morale), which comes into existence when at least two people agree to create an entity that is greater than the sum of the individuals, is defined in exactly same way:
• A date of birth promptly recorded with the state (in this case, the préfecture de police) in order to grant this new entity its right to exist; the signature of the by-laws by all the founding members concretizes the existence of the association.
• A name given at "birth", almost once for all. The founding members, under supervision of the state (in this case the INPI, or Institut National de la Propriété Intellectuelle) decide upon the name because, again, it is an important matter.
• Identification of a domicile or headquarters where business is primarily conducted at any given time. Again, for this reason, this domicile must be protected. For these last two items, only an Extraordinary General Meeting can change them.
• The ability to carry out its affairs through key people – Executive Committee members, members of the Board of Directors and any other members as specified in the by-laws (see below). These matters must be stipulated in the by-laws.
• A patrimoine – a legal concept that includes all the assets and liabilities for the entire lifetime of the entity. Thus, a human being can only have right of ownership through shares in the entity as regards his/her personal patrimoine.
• Since all human beings will die, the by-laws define how long the entity will live (usually 99 years). An Extraordinary General Meeting can allow the corporation to continue for another term of 99 years. The only exception to this is an association.
Senior managers, their power and liability
- This concept is absolutely crucial, because it means that no one can mix his/her personal interests with the association’s interests, and any personal use of the association’s assets is a criminal act. Today, simply getting a favor, no matter how small it may be, can disqualify the association for treatment as a complete association.
- The association has an obligation to keep accounting books and submit a year-end report to the administration.
Three positions are extremely sensitive:
• Managing Director
- The position of president is the ultimate level of responsibility. Therefore, if the association is found liable for something, very often the president’s personal liability is on the line. This is especially true if it has been impossible to pin down the exact circumstances of the deed that led to a liability suit.
- The treasurer is also personally liable for anything connected with financial issues, including misuse of funds. Considering the complexity of the French legislation, it is virtually impossible to do everything 100% legally, even with the best intentions of doing so.
- The managing director is in charge of the daily activities of the association. Therefore, nothing should happen without his or her knowledge and authorization, and he or she should take all measures possible to prevent any possible wrongdoing. Of course, should an incident of some sort occur, the blame can often be put on the director.
- This means that it is highly advisable to have a special type of liability insurance to cover this type of liability for any such occurrence. Indeed, since it is virtually impossible to avoid all potential risks, all Executive Committee members should be covered by the policy.
THE CHARITABLE ASSOCIATION
The concept behind a charitable association is that people donate time and money to the organization and get nothing material in return from the organization, either directly or indirectly.
Such associations offer some sort of help or support that might be found on the open market, but in such a way that there is no real competition. For example:
- A soup kitchen feeds people on its premises just like a restaurant, but there is no other comparison possible.
- A shelter for the homeless lodges people just like a hotel.
- Programs fighting illiteracy resemble school and education programs.
Members gather together to play a specific game.
There is no interest other than having the most appropriate setting for the sport.
Protection and Support of Private Interests
People suffering from the same illness who gather together to help each other and attempt to improve the situation of all of the members.
People facing an identical situation because of where they live (e.g. close to an airport); a similar thing happening to them (customers or suppliers of a bankrupt company); owners in the same building (condominium, coop, co-ownership).
- A normal association has members. On a regular basis, they vote to elect a Board. The Board elects an Executive Committee consisting of a president, a treasurer and a secretary.
- The by-laws define who is a member and what needs to be done to acquire this status. The same thing applies for the Board and the Executive Committee members. The most common way to be a member is to be up-to-date in the payment of dues.
- The association must hold a minimum of accounting records, documenting where the money comes from and where it is spent. The requirement is much harsher for professional associations than for charitable ones.
- The general meeting approves the financial statement submitted by the treasurer after closing the books, as well as the activity report, submitted by the Executive Committee.
- In many ways, a charitable association will be treated like a normal consumer. Everything bought is full price and there is no way that the sales tax (i.e. TVA) can be deducted. The reason is that the activity is not commercial so there is no TVA collected, since professional and commercial organizations pay TVA purely on the balance between TVA collected through sales and the deductible TVA paid on purchases.
- Because of this, the association is exempted from most commercial and professional taxes.
- Since the association may be an employer like any other one, it will pay the normal social charges invoiced by the usual organizations for health, retirement and unemployment. Several programs exist which enable associations to be partially or completely exempt from paying these charges. The DDTE is often in charge of running those programs.
The Purpose of a Professional Association
- Some professional service is rendered by this type of association.
- It can be more cost-effective to create a professional association rather than a commercial enterprise, while maintaining similar legal protection.
- This trend has existed for about 30 years, and the French government is cracking down more and more on this type of association, treating them much more like normal businesses. Nevertheless, this is still often an efficient way to start a business, as long as all the implications of this choice are fully understood.
Creating an Association for Professional Activity
- This can include all education activities, some travel activities, some sports activities and, to a certain extent, some consulting work.
- In any case, the non-profit nature of the association must be maintained? following the guidelines shown below. The association cannot split the profits at the end of the year. However, a professional association can pay or compensate Executive Committee members or Board members for work done, either as an employee or as an outside consultant, as long as this payment is within the norm for the type of activity.
Limiting Individual Liability
- The main purpose of creating a limited liability company is to limit the level of personal liability to the amount of money invested in the company.
- In the case of the professional association, since the association is used for the same purposes as a company, doing business through the association enables individuals to limit their liability to the amount of money and assets they have put into the association. Should the association declare bankruptcy the assets of the individuals involved are protected unless fraud is proved.
- In France the break-even point is quite high since social charges are quite heavy. This is the reason why so many self-employed people create an incorporated entity once they need to hire someone.
As a rule of thumb, in France, the social charges (close to the amount of each employee’s net salary) are owed for every employee and can create a dangerous liability for the association in the case of default of payment.
Better Recognition by Third Parties
- Running a company, even a small one, is generally better recognized by the community than an individual working alone.
- When there is a need for a marketing strategy it is always better to have created a company or even an association. It is not simply a matter of credibility while facing competition, there is also the assumption that an organization will last longer as a business than an isolated individual.
- Therefore when professionals envisage starting their own business, they choose to run the business through an incorporated entity (company or association). Often having a better image that carries more credibility can make the difference in negotiations with a potential customer, especially if the customer is a large company.
How the Association Functions
Depending on how the association is set up and run, it is considered by the fiscal authorities as either charitable or professional.
TO QUALIFY AS A CHARITABLE ASSOCIATION, ALL THESE CONDITIONS MUST BE MET
According to Article 207-1 5th of CGI there are five conditions:
- The association must have a purpose and thereby an activity that the normal market cannot address properly.
- The officers of the association must receive no personal benefit or advantage, either directly or indirectly, of any sort (e.g. compensation by the association for use of space; or allowing a member to use association property for personal ends — computers, photocopy machines, the association’s premises, or a car owned by the association).
- The activity that is actually performed is fully compatible with the declared purpose of the association.
- Officership in the association is such that it does not conform to commercial standards, either because of the prices charged for services or goods, or because of the general way it is managed. The charitable purpose must be clear and obvious.
- If, at the end of the year, the association makes a profit, this must always be reinvested in the association, and in direct line with its purpose. There must be absolutely no way that any member of the association can profit in any way, shape or form.
If any one of these conditions is not met, then the association has a professional status and will be treated as a commercial operation.
There is only one major exception: If an association is involved with continuing education and has an official ID number for this activity, then it can choose not to be subjected to TVA and, therefore, will not be taxed as much as a commercial operation.
Financial and Fiscal Obligations of Professional Associations
- The most important obligation is the TVA status. The association must charge and, therefore, collect TVA. TVA is a specific sales tax, with a quarterly declaration and payment of the estimated amount, followed a yearly catching-up based on the actual figures once the books are closed.
- The corporate tax (impôts société), based on the profits made at the end of the fiscal year.
THE LIFE OF AN ASSOCIATION
How to Choose Between Professional and Charitable?
- Considering the importance of the choice is, it is essential to clearly identify the reasons why the association is being created and to organize it so that there is no risk of being misjudged, especially by the fiscal authorities.
- The key question here is: IS IT A JOB OR IS IT A HOBBY?
- If you want the association to be an entity that allows you directly or indirectly to work or make a living, then there is virtually no way that the association can have a charitable status.
- If you want the association to benefit the public, defined in a more or less narrow way, and there is no expectation of gaining anything from it, then charitable status should be easy to secure.
- In the course of the life of the association, its status can change from charitable to professional. It is never possible to change from professional to charitable.
Where does an association get its funds?
- Associations are funded by the membership dues, by funds received from either members or donors, by subsidies granted by the French administration.
- Professional associations charge for their services, members as well as non-members. There is always the right to differentiate between members and third parties for the costs to access the services offered or the nature or the level of services that people can get.
- Finally, fundraising activities are possible for charitable associations, but must be clearly identified as such. Also, the association must inform the tax authorities beforehand, in the case there is an audit of the books or on the premises. This is rarely done; but if it is, it can create serious problems.
Levels of Representation: Meetings and Prerogatives
- The general membership is the lowest level of representation in the association; but the General Meeting (Assemblée Générale) is the most powerful body of the association. Depending on the specific requirements for each instance, this General Meeting can decide everything, including the end of the association. The normal frequency is once a year to approve the general accounts of the last fiscal year within 6 months after the closing of the books. This General Meeting also elects on a regular basis the members of the Executive Board.
- The Board of Directors (Conseil d’Administration) meets whenever needed. Depending on the association, it may once a month, 4 times a year, etc. The only obligation is that it meet at least once a year to call the General Meeting, after approving the books for the year before. Within the guidelines of the vote of the general meeting and the by-laws, the Board can decide just about everything. The issue of quorum and majority vote is defined by the by-laws. In most associations, this is in effect the governing body. The Board elects the Executive Committee.
- The Executive Committee also meets when it is needed. The frequency, then, can be extremely variable. Its members, at most, are:
– President and vice-president (président)
– Treasurer and vice-treasurer (trésorier)
– Secretary and vice-secretary (secrétaire)
The managing director (directeur) can be a voting member of the Executive Committee, an ex-officio non-voting member or simply be present to present a report on the current activities of the association.
Members and Others
- The by-laws define who are the members. In some cases, there can be many different types of members. There can be voting and non-voting members. In the latter case, it will be very difficult to be anything but a professional association, since democracy is an important element in the life of a charitable association.
- There can be several levels of members, depending on the dues paid. Each level can have different rights and obligations, as long as there is no personal discrimination. All this and much more must be defined by the by-laws.
- Finally, honorary members are often named for political reasons.
- In many associations, only the members benefit from the association, so these two categories are then the same. Sports clubs are a good example.
- Other associations target their activities for specific beneficiaries who are not members, such as the homeless and the hungry. Some others target both the members as well as anyone who could qualify as a member, such as the sick and the victims.
- Often, those associations which help only their members have a better chance to qualify as charitable then those dealing with third parties, except when services are offered for free.
It is assumed that each volunteer is some sort of member (see above), since the volunteer donates time, effort, services and know-how to the association. In some instances, there is a possibility that the volunteer is not a member, on the example of the Salvation Army, which has a lot of volunteers who are not members but simply donate a few hours per week.
How Are Major Changes Made?
- The Extraordinary General Meeting, or Assemblée Générale Extraordinaire, is conducted, in terms of agenda, quorum and special majority vote, according to the by-laws.
- The Extraordinary General Meeting deals solely with changes in the by-laws. It can be a matter of moving the headquarters, changing the purpose of the association, changing the definitions or the obligations of the members at various levels of involvement.
- An Extraordinary General Meeting is always seen as a very important step in the life of the association.
- Often, the notice time to call the meeting with the agenda is longer than for an ordinary General Meeting, with much stricter rules about the quorum and the majority vote, such as half of the membership and 2/3 of the votes.
- The most important of these meetings is the one voting to terminate the association.
The End of the Association
- In many ways, this final Extraordinary General Meeting follows the same guidelines as the other general meetings. The main difference is that since the association will no longer exist, any assets left must be bequeathed to another association that has the same, or a similar, purpose.
- At termination, members are never allowed to receive anything from the defunct association.