Can an NGO in Israel conduct business activity?
The existence of business activity in a Israeli NGO (“Amutah”) is permissible and even desirable as long as it complies with all legal requirements and considerations.
In order to prevent confusion, the Registrar of Amutot published legal guidelines (in Hebrew) which give clear detail on regulations concerning Business activities of an NGO in Israel.
In this blog we will be delving into these guidelines in order to assess when and how an NGO can conduct business activity.
What are these requirements and considerations?
As noted above, an NGO in Israel can freely engage in business activity that generates profit as long as three requirements are met:
Firstly, the profits must be used for the optimal utilization of the Amutah assets.
Secondly, the profits must be used to contribute to the advancement of the NGO objectives.
Lastly, the business activity must not constitute the main activity of the NGO, diverting resources from the promotion of its goals, or causing interference or disruption in their fulfilment or promotion.
This latter point is possibly the most important:
Though there is no prohibition on an NGO generating profits, the primary activity of the NGO must be to promote its non-commercial objectives. In other words, the business activity must contribute to advancing these objectives.
If, in practice, all activities conducted directly by the NGO or indirectly through subsidiaries are business activities unrelated to its objectives, the NGO may be viewed as primarily profit-oriented, contradicting the provisions of Section 1 of the NGOs Law.
In cases where an NGO directly promotes its objectives and, in addition, engages in distinct business activities, the Registrar of NGOs will examine, based on various indicators, whether the business activity of the NGO and profit-making constitute its main activity.
While most NGOs in Israel are Amutot and the two terms are used interchangeably in this article, the restriction above also applies to a Public Benefit Company (Heletz).
When is the business activity of an NGO permissible and does not amount to its primary activity?
The first indicator is the existence of a connection between the business activity and the NGO’s objectives or the NGO’s assets. The closer the connection, the more likely it is to be considered permissible activity, such as a hospital establishing a parking lot or a charity operating a clothing store alongside its social objectives.
Secondly, if there is no accumulation of high surpluses by the NGO due to business activities.
Thirdly, if a high percentage of the NGO’s income is directed towards promoting its objectives.
Fourthly, if a low percentage of the NGO’s income or resources is allocated to its business activity. This is because it is important to ensure that the business activity of the NGO does not jeopardize its economic position.
Lastly, if the primary time commitment of the NGO’s employees is not in the business activity.
Are there any other considerations an NGO must make as to the permissibility of their potential business activity?
Yes! Considerations that an NGO must consider regarding business activity include, among others, the following:
The risk level of the business
- The NGO must ensure that the level of business risk is low, including by obtaining an opinion from a professional.
- There is great importance in the question of whether any loss due to business failure may endanger the ongoing activities of the NGO.
Relation to the NGO’s current activity –
- There is greater justification to carry out business activity in areas where the NGO has gained experience during its current activities, and this consequently reduces the risks involved in conducting this activity.
Relation to the NGO’s assets
- Business activity that optimally utilizes an asset of the NGO which is not needed on an ongoing basis to advance its goals is a desirable business activity.
- For example, renting out offices owned by the NGO that are not being used by it to third parties or using the NGO’s building during hours when the NGO is not operating there. For example a synagogue that is also used as a joy hall, and a kindergarten that also runs classes for children in the afternoon.
- There is greater justification for business activity that involves the NGO’s activity
- Such as the establishment of a parking lot by an NGO that operates a hospital for the use of visitors to the hospital
Requirements according to law
- The NGO must carry out the business activity in accordance with the relevant laws and instructions, including examining the tax aspects, licensing requirements and/or other regulatory requirements, requirements from various administrative authorities such as the accountant general or the Israel Land Authority.
Adequate professional tools
- The NGO must ensure the existence of professional tools that will enable supervision of the business activity and its management, such as hiring a manager with appropriate training and experience, examining profitability and conducting a proper market survey.
The viability of the business activity
- The NGO is required to regularly assess its ongoing activities, with a thorough review at least once a year.
- Special attention should be given to activities where resources have been consistently invested beyond the initial years. If an activity, particularly crucial to the NGO’s goals, proves unsustainable despite continued investment, resources should be reallocated, or the activity should be considered for discontinuation.
When should an NGO consider conducting business activity through a separate company instead?
There are advantages and disadvantages to conducting business activity in Israel through a separate company as opposed to conducting it within the NGO. The NGO must consider what is the relevant framework for carrying out the business activity according to its circumstances and the relevant considerations detailed below.
Relevant Considerations for deciding whether to establish a separate company to carry out the business activity:
- The expected scope of the business activity.
- Tax implications, including regarding the transfer of a dividend from a separate company to the NGO.
- The desire to create complete separation between the NGO’s assets and the business activity that will be carried out in the company which in turn will separate and reduce the risk to the NGO’s assets as a result of the business activity.
- The possible awkwardness and difficulty in supervising and controlling the NGO when the activity is conducted in the separate company.
- The possibility in a separate company to appoint a professional board of directors to supervise the business activity.
There will be other considerations that could be applicable which will depend on the circumstances in each case.
What are the rules regarding ownership of a separate company?
- As a general rule, it is desirable that the NGO itself or in partnership with other non-profit entities own 100% of the company’s shares
- And at the very least, that it itself or in partnership with other non-profit entities own 51% of the means of control in the company.
- In exceptional cases, it will be possible to act differently, as long as the NGO’s board is convinced that there is a special justification for joint holding together with a private entity where the NGO holds less than 51% of the means of control in the company
- The reasons for the special justification must be detailed in the minutes of the meeting of the board of the NGO. It is also suggested that in such cases, the NGO should apply in advance to the Registrar of NGO to receive their position on the matter.
Are there any restrictions on an NGO conducting business activities in Israel, directly or indirectly?
When submitting an application for NGO registration involving activities typically considered as commercial ventures in the market, the initial assumption is that the primary aim is profit generation. This stance contradicts Section 1 of the Law on NGOs. However, the NGO can justify its registration by convincingly demonstrating to the Registrar of NGOs that its operational methods for advancing objectives significantly differ from those employed by typical business entities pursuing similar goals.
If an NGO wishes to incorporate in order to establish a store to sell food products, which is an activity that is usually carried out in the business sector, it will have to convince the registrar of associations during the registration phase that the manner of operating the store will be clearly non-profit, for example, charging significantly reduced prices from the prices charged by a business entity that maintains the same activity.
An Amutah whose main activity is to promote its objectives through holding shares in a business that advances those goals may violate Section 1 of the Amutot Law, which stipulates that the primary purpose of the Amutah should not be profit-making, even if it promotes its goals through such actions. This is because the expectation is that goals will be prioritized by a non-profit entity, aligning with its nature as a non-profit organization. For example, an NGO whose goal is to operate a nursing home is not allowed to establish a subsidiary company that performs the activities and merely hold the shares.
If your NGO is intended to rely on a business venture for a part of its funding, registering it as a Public Benefit Company may be a more appropriate option.