This article is part 3 of our charity article series. Click here to read Part 1: Before you Start. Click here to read Part 2: Charity Tax Concessions.
Part 3: Choosing the Right Structure
An essential preliminary step when establishing a charity is to consider which legal structure is most appropriate. Structures commonly used include an unincorporated association, an incorporated association, a company limited by guarantee or a trust.
This article sets out some of the considerations that apply when selecting a legal structure.
What does it mean to incorporate?
A key decision is whether to establish an incorporated entity. An incorporated entity is a separate legal entity – most commonly an incorporated association or a company limited by guarantee. Unlike an unincorporated association (which is legally a group of people) or a trust, an incorporated entity is a separate ‘legal person’.
What are the benefits of incorporation?
Incorporation results in the establishment of a ‘legal entity’ that has a separate and distinct identity from the group of individuals who established, or are a part of the entity.
Separate legal identity
An incorporated entity can (among other things):
- open and operate a bank account;
- obtain insurance (although some insurers will offer cover to unincorporated bodies);
- enter into contracts (including employment contracts) and agreements and sign documents;
- buy, sell, own, lease and rent property and other assets;
- borrow and loan money; and
- sue and be sued in its own right.
‘Limited’ liability for members
A key benefit of incorporation is that the legal entity has ‘limited liability’. This protects members from being personally liable for the entity’s debts in the event that a legal claim is made against the entity and cannot satisfy debts out of its own assets. Depending on the type of legal structure chosen, liability is usually limited to $10 or to the assets of the legal entity.
Protection for committee members / directors
The committee members or directors of an incorporated entity also have protection from liability for claims made against the entity. This is known as the corporate veil. However, this protection may not be available if the entity trades while insolvent, or if a claim against the entity arises in connection with actions of a committee member or director which are fraudulent, criminal or dishonest.
Perpetual succession
Incorporation results in perpetual succession – the legal entity will continue to exist irrespective of changes to the entity’s membership and will only cease to exist if it is deregistered or wound up by the entity’s members. Among other things, this means that it is not necessary to change the name of the owner of assets (such as vehicles or shares) or to enter into new contracts (such as employment contracts) when the individuals involved in the entity change.
Unincorporated associations
A group of individuals that choose not to incorporate but operate under an agreed set of rules and have a common purpose will ordinarily be an unincorporated association. Unincorporated associations are simpler to establish than incorporated bodies and are not subject to ongoing reporting obligations to the incorporating regulator.
However, each of the ‘benefits’ of incorporation above has a corresponding disadvantage for an unincorporated association. For example:
- An unincorporated association (being a group of individuals) legally cannot enter into contracts, which makes employment arrangements problematic.
- If there is a claim against the unincorporated association that cannot be satisfied out of its assets and is not covered by insurance, each of its members could be separately and jointly liable.
Trusts
There are a variety of trusts (including ‘mere’ charitable trusts and ancillary funds) that can be established. They are usually used for specific purposes. A trust can be described as a “bucket of money” governed by a legal set of rules (a trust deed) prescribing the use of that money and administered by a group of people (or an organisation), who are bound by those rules (the trustee(s)). As a general rule, trusts are not designed for “doing” organisations that actively engage in the provision of services. A trust is used for more “passive” support and investment purposes.
Companies limited by guarantee
A company limited by guarantee is a federal structure designed to operate in each State and Territory and is incorporated under the Corporations Act 2001 (Cth) and regulated by ASIC. Companies that are registered charities have reporting obligations to both ASIC and the Australian Charities and Not-for-profits Commission (ACNC), although the ACNC is the primary regulator.
Incorporated associations
An incorporated association is a state-based entity which is designed to operate within its home State and is governed by the relevant legislation of the State in which incorporation takes place and the State regulator. For example, in Victoria this is the Associations Incorporation Reform Act 2012 (VIC) and Consumer Affairs Victoria.
Incorporated associations that are registered charities have reporting obligations to both the State regulator and the ACNC.
Similarities between incorporated associations and companies limited by guarantee
There are a number of similarities between incorporated associations and companies limited by guarantee, including the following:
- both structures are membership-based bodies which elect a governing body;
- both have purposes and rules set out in a governing document which dictate the way in which the structure is to operate and make decisions;
- in the case of charities, both structures are regulated by the ACNC and subject to the ACNC Governance Standards;
- both can apply for charity tax concessions and deductible gift recipient status based on their purposes and activities;
- both provide a corporate veil to protect members from liability; and
- both can be wound up in the event of insolvency.
Differences between incorporated associations and companies limited by guarantee
While there are a number of similarities between an incorporated association and companies limited by guarantee, there are also number of key differences, including in relation to the following:
- the ability of a company limited by guarantee to have a sole member, which allows for the charity to be established as a subsidiary of another entity;
- charitable companies have better integration with the ACNC;
- statutory duties of committee members / directors – the committee members of incorporated associations are subject to two sets of duties (under the relevant associations legislation and the ACNC Governance Standards), whereas company directors are intended to be exempt from the Corporations Act duties and only subject to the ACNC Governance Standards duties;
- member registers and the circumstances in which entities may be required to provide the register to a member;
- public perception – there is a perception that companies are better governed than incorporated associations;
- the ability of a company limited by guarantee to operate in any jurisdiction of Australia (an incorporated association must obtain an Australia Registered Business Number to operate outside its home State); and
- better international recognition.
How can we help?
Moores can help if you have any questions about setting up your NFP or charity.
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This is part 3 of our ‘So you want to start a charity’ series.
See Part 1 – Before you start here
See Part 2 – Charity Tax Concessions here