Kindness, Inc.

Setting up a Foundation for purpose and charity

Power of Purpose

Capitalism the old school way is crushed and crumbling under the existential weight of covid. To many people now the idea of running a company to do good is not only morally right, it makes pretty good business sense.

Some call them purpose foundation, others refer to them as social enterprise, or steward-ownership business, these entities are often real companies running viable and profitable business. Contrary to common belief and the news about their misuse for tax, these companies do not survive on donations and are not always run as charities.

As a matter of fact, these purpose-driven companies are usually set up and run by hired staff and experienced professionals. They generate income but the money they make are channeled towards specific objects and altruistic causes.

Company Limited By Guarantee (CLBG) 

The advantage of setting up a Limited Liability Company is that it can be used to create wealth while shielding its owner from personal liabilities including the risks of bankruptcy. Although this corporate model has served capitalism well, it also created the messy world today of unfair societies, broken communities and damaged natural environment.

There are two kinds of Limited Liability Companies: the ones limited by share capital and those that are limited by guarantee. Companies limited by guarantee (CLBG) are the entities primarily used for non- profit or purpose organisations that require a status of a legal entity.

CLBG does not have shareholders but instead have members who will each guarantee to pay for the liabilities of the company up to an amount (typically RM100) specified in the articles of the Constitution in the event of its insolvency or winding up.

Perpetual Succession

CLBG is created by incorporation under the Companies Act. As a corporation, it is a separate legal person in law. It is unaffected by the death or departure of any member but continues in existence no matter how many changes in its membership.

Membership

SSM (Suruhanjaya Syarikat Malaysia), Malaysia’s Registrar of Companies, has a sample constitution to follow. The sample is just a guide. You are allowed to amend and modify the membership criteria and admission procedures based on your requirements to suit the CLBG’s objectives.

For example: the membership can be restricted to clan members or those with certain family name or to the descendants of a named benefactor. It can also be restricted to, for example certain classes of persons such as employees of companies or armed forces personnel serving in a specific regiment, war or period.

Similarly, membership classes can be tailored to suit the requirements, such as honorary, ordinary or special membership with special voting rights or veto powers over matters similar to the way MOF exercises control over its GLCs with rights to nominate or appoint Board members.

In some family CLBGs, there are permanent Board of Trustees or Governing Trustees to ensure that the founding family maintains control over objectives and direction of the CLBG.

How many members in CLBG? It depends, there is really no optimum number of members. The decision on how many members to have is left to the promoters to make and set the tone depending on their intentions and foresight.

As there is no share capital in a CLBG, each member has one vote depending on what is written in the constitution relating to membership and rights. Bearing in mind, the more members there are, the harder it is to have control.

Some CLBGs give the chairman the right to co-opt and appoint Trustees onto the Board so that he has sufficient support to maintain control. This will also allow the chairman to carry out duties instead of being bogged down continuously with in fighting at the Board level.

Berhad or Yayasan?

The table above shows the difference between CLBGs with the word “Berhad” to its name and those without. Some CLBGs prefer to call themselves Yayasan or Foundation instead of using “Berhad”(Limited). To do this, they are required to first apply to the Minister of Domestic Trade and Industry for approval to drop “Berhad”.

The approval process can previously take up to 3 months, now it is maybe longer. The main condition to dropping “Berhad” is the requirement and written commitment from a party supporting the CLBG to donate at least RM1 million together with a forecast income and expenditure accounts for two years.

Alternatively, the CLBG can be incorporated with the word “Berhad” to its name and then later apply to change it to Foundation.

Name and Object Clause

This part is arguably the most important stage in the process of incorporating a CLBG. Careful consideration must be given to select a proper name for the CLBG and to describe in detail its objects.

The CV and biodata of the Promoters and the first Board of Trustees must be carefully prepared. Other important information include:

(a) the reasons why a CLBG is registered instead of an association under the Societies Act;

(b) will the CLBG be related to or associated with any existing associations or societies?;

(c) whether any of the Promoters have previously registered any society or association with the Registrar of Societies

No Payment to Members and Trustees

Although a CLBG is allowed to invest to earn money, run a profitable business and also receive donations, it is not allowed to use them to pay any fee, salary or benefit to its directors or Trustees. But CLBG is allowed to reimburse these volunteers for their out-of-pocket and traveling expenses.

As a legal entity with a purpose, a CLBG is free to employ full-time staff and pay them market salaries and other competitive remunerations.

CLBG has no share capital so Members do not hold any shares. Therefore, a CLBG is prohibited by its Constitution and the Companies Act 2016 from paying any dividend or share of profits to Members. All income and profit must be used towards the foundation’s purpose and objects as stated in its Constitution.

Lee Wee Hee, (ACIS), Director, CIS Secretarial Services Sdn Bhd and Kerk Boon Leng , Partner, Kerk & Partners, Advocates and Solicitors