Operating your business or organisation as a not-for-profit offers numerous benefits. However, to benefit from these advantages, you must establish a suitable business structure that aligns with your goals and actions. Additionally, your organisation’s structure determines its operational scope, expenses, and obligations to government authorities. This article explains legal structures available to not-for-profits and guides you in choosing the best structure for your situation.
Why Does the Structure of Your Not-For-Profit Matter?
Your not-for-profit should have a structure that supports its aims, culture, activities and growth plans. Many relevant considerations will determine the best structure for your not-for-profit, including:
- should your organisation incorporate?;
- will you operate in only one state or territory or throughout Australia, both now and in the future?;
- the cost of your organisation’s operations and how much funding is available to support those operations – will you be able to cover any additional costs associated with a particular structure?;
- the size of your organisation – do you have a group of people willing to be members or part of the governing body of the organisation if required for a particular structure?; and
- the capacity of your organisation to comply with reporting requirements – will you be able to record, compile and provide the information required by a government regulator as a result of choosing a particular legal structure?
Incorporated or Unincorporated
Your organisation must decide whether to incorporate. Incorporating involves setting up a separate legal body registered under relevant laws and regulations.
Operating informally without incorporation can be risky for individual members and interfere with group growth. Without an incorporated legal body, members must individually handle legal arrangements and contracts for the group. They may also face personal risks and liability if issues arise.
Continue reading this article below the formCommon Incorporated Legal Structures Available
Not-for-profit organisations mainly use these legal structures:
- incorporated associations;
- companies limited by guarantee (CLG);
- non-distributing co-operatives; and
- indigenous corporations.
We will explain some important points and the main features of each of these two structures below.
Incorporated Association or Company Limited by Guarantee
| Incorporated Association | CLG | |
| Description | An incorporated association is a separate legal body that has rights similar to a person or company under the law. You need to register your incorporated association depending on the state or territory you operate in. They are similar to company laws, but incorporated associations can be a simpler and less expensive way for a not-for-profit to structure itself. | A CLG is a special type of public company often used by charities in Australia. Instead of shareholders, a CLG has members. If the company winds up, the member’s liability is limited to the amount they agree to contribute to the company’s property (or the amount they ‘guarantee’). |
| Governance | An incorporated association usually has a group of people called a ‘committee’ who manage it. The committee members must follow specific duties similar to those of company directors. Incorporated associations also need to adopt a governing document. Most states and territories have a set of model rules that incorporated associations can adopt as their own rules in that state or territory. | A board of directors runs a CLG, much like a for-profit company. Additionally, you can also appoint a company secretary (who may also be a director). CLGs also need to adopt a constitution as their governing document, which should reflect its not-for-profit status and charitable purpose (if applicable). |
| Government Regulator | In each state and territory, the laws for setting up and operating an incorporated association vary slightly. An incorporated association must report to the regulator of the state or territory where it is incorporated. For example, if you are incorporated in New South Wales, you will report to NSW Fair Trading. If registered as a charity, you also have obligations to the Australian Charities and Not-for-profits Commission (ACNC). These obligations may or may not replace your obligations to the relevant state regulator. | The Australian Securities & Investments Commission (ASIC) regulates corporations in Australia, including CLGs. However, if a CLG registers as a charity with the ACNC, it primarily reports to ASIC and some rules of the Corporations Act are ‘switched off’. |
| Requirements | An incorporated association needs to: have at least five members; be not-for-profit; operate entirely within the state of registration (unless registered as a Registrable Australian Body with ASIC); and meet any requirements regardingthe size of the organisation as applicable in the relevant state or territory. For example, in New South Wales, an incorporated association must be ‘small-scale’. | A CLG must: have three directors, one of them being an Australian resident and a company secretary; have at least one member; be not-for-profit; and be governed by a constitution. |
| Advantages | Setting up and running incorporated associations for small-scale, local not-for-profit groups is simple and cheap. It can cost less to set up an incorporated association than a CLG. Incorporated associations can provide a good structure for not-for-profits that do not plan to register as a charity, as they have simpler reporting obligations to follow compared to other types of incorporated legal structures. State and territory regulators provide plenty of helpful and easy-to-access guidance on how to operate a compliant incorporated association. | A CLG suits groups wanting to operate in multiple states and territories. It also suits larger organisations or those planning to expand. If a CLG registers with the ACNC, they only need to report to them and not ASIC, which makes compliance easier. A CLG can also work for a for-profit company wanting to create a charitable subsidiary that they own entirely. |
| Disadvantages | This structure is not suitable for groups with less than five members. Incorporated associations are not usually the best choice for organisations that want to work in more than one state or territory. They will have to register a separate incorporated association in each state or territory or register as a Registrable Australian Body with ASIC. | A CLG is generally not an appropriate structure for a not-for-profit that cannot become a charity with the ACNC. This is because CLGs not registered with the ACNC must comply with many requirements under the Corporations Act. They also face higher penalties for non-compliance with reporting requirements and directors’ duties. Setting up and operating CLGs can cost more than running incorporated associations, regardless of whether they are registered charities. |
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Key Takeaways
If you are looking at setting up a not-for-profit, your organisation’s legal structure should reflect the organisation’s:
- activities;
- size;
- goals; and
- priorities.
If you choose to set up your not-for-profit as an incorporated association, you will generally choose between two main types:
- incorporated associations; and
- CLGs.
You should carefully consider each structure’s requirements, advantages and disadvantages to determine which will best support your organisation’s particular circumstances.
If you need help deciding which not-for-profit structure to choose, our experienced not-for-profit and charity lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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