Many believe the law prohibits an Israeli NPO (Amutah) from operating business activity in order to maximize profits for itself. One of the reasons for this is the language of section 1 of the Amutot Law. The section prescribes that “two or more persons who wish to incorporate as a body corporate for a lawful purpose not aimed at the distribution of profits to its members and whose principal object is not the generation of profits may incorporate a nonprofit organization ...”
However, a more precise reading of the section shows it does not expressly prohibit activity that maximizes profits for an Amutah. Instead, the law stresses the activity should not constitute one of the Amutah’s principal objectives. It also prohibits the activity from maximizing profits for the Amutah’s members (rather than for the Amutah itself).
Furthermore, guidelines published by the Registrar of Amutot expressly allow Amutot to engage in business activity. They even consider the operation of such activity to be a desirable trend. This stems from the possibility an Amutah may need to recruit independent resources that constitute a steady source of income (in addition to the donations and support it receives from various sources). According to the guidelines, an Amutah may engage in business activity as long as it takes strict precautions to ensure the following:
- The business activity does not jeopardize the Amutah.
- The business activity does not become its principal activity.
- The activity does not attempt to circumvent the prohibition on distributing profits to the Amutah’s members.
Business activity may take various forms, such as renting out offices the Amutah is not using or granting third parties a right of use to a building owned by the Amutah for a fee (during hours when the Amutah is not using the building).
The guidelines also prescribe specific conditions an Amutah must fulfill before initiating a business activity (and during engagement in the business activity).
The guidelines’ key points are as follows:
- The Amutah must manage its business activity efficiently to maximize profits.
- The Amutah must be diligent about maintaining a separation (in terms of both accounting and the nature of the activity) between the Amutah’s registered objectives and the business activity. The separation must enable clear and transparent oversight and monitoring of the activity.
- The resolution to initiate business activity must be passed after having consulted with relevant professionals (lawyers, appraisers, economic consultants, and accountants).
- Approval of the resolution must follow a stringent and meticulous process within the Amutah.
- When approving engagement in business activity, the gamut of considerations must also include aspects about the level of risk and profitability of the business activity, the connection between the business activity and the Amutah’s routine activities, optimal utilization of the Amutah’s assets, operation of proper professional management tools, and more.
Amutot may also establish a special-purpose company to operate the business activity. In this regard, the Amutah must consider the relevant framework for carrying out the business activity according to the actual circumstances. For example, considerations should include the anticipated volume of activity, tax implications, creating a separation between the Amutah’s assets and the business activity, etc.
Naturally, in addition to the specific guidelines that apply to such business activity, an Amutah must ensure it maintains compliance with additional provisions of the law that apply to Amutot and in general.
Daniel Kleinman is a lawyer in the firm’s Commercial Department.