Thinking of setting up a charity? If it’s your first time, choosing the right business structure is just one concept you’ll have to get your head around. Below, we outline the differences of each structure before explaining their pros and cons.
1. Unincorporated Associations
An unincorporated association, unlike a proprietary limited company, is not a separate legal entity from its members. The advantages of such an informal group are that you don’t have to pay the cost of incorporating. You also don’t need to comply with many of the requirements of incorporating (such as annual reporting). Members are jointly and severally liable meaning a company cannot pursue the personal assets of each member to settle a debt or satisfy a liability.
An unincorporated association is not a suitable structure for a charity because members are personally liable if anything goes wrong. You also won’t be eligible for many government grants and other stipends and you’ll likely find it difficult to open bank accounts and obtain insurance.
2. Incorporated Associations
An incorporated association is a separate legal entity which means that the liability of its members is separate from the association’s liability. In NSW, the current fee to incorporate is $164 and registration is $469. The Associations Incorporation Act 2009 (Cth) governs incorporated associations and provides a lower compliance burden than the Corporations Act 2001 (Cth).
Incorporated associations in NSW only have to lodge an annual summary of financial affairs with the Department of Fair Trading. Proprietary limited companies must provide an annual statement to ASIC along with annual fees. Companies must notify ASIC of changes to the members’ register, directors’ register, issuing shares and a suite of other matters.
Incorporated associations, however, can only operate in one state so if a charity expands interstate, it must register as a ‘registered body’ or change its structure.
3. Proprietary Limited Companies
A proprietary limited company has limited liability and can operate Australia-wide. The fee is $469 to incorporate along with ongoing costs and compliance obligations. You cannot just register a proprietary limited company as a charity in Australia. Rather, you must register as a not-for-profit with the ACNC.
4. Public Company Limited By Guarantee
A public company limited by guarantee is the most appropriate structure for registering a charity. Members’ liability is capped to the extent of the guarantee they provide (this is usually nominal, e.g. $10) and they can operate Australia-wide. The stated purpose of the company in its constitution would be for the community benefit rather than profit (as with a standard proprietary limited company). However, note that a company is relatively more expensive to establish and there are higher compliance costs.
Each business structure has pros and cons depending on the type of organisation. For example, an unincorporated association might best suit the needs of a small community group that does not enter into any legal contracts. However, a public company limited by guarantee would likely suit a bigger charity with a national operation. If you are unsure which business structure best suits your purpose, get in touch with our commercial lawyers on 1300 544 755.