Part 1: Not for Profits and Charities – Which Structure Should I Choose?

If you run a charity or not-for-profit organisation, you must choose the appropriate structure for your business. Several types of structures include public companies, private companies, incorporated associations and trusts. You must select the correct type as your organisation will be subject to various rules and regulations specific to that structure. This article is the first of a five-part series on assisting charities in choosing the right structure and will explore the various options available.

In this five-part series, each part will explore a separate topic as follows:

• Part 1: choosing the right structure;
• Part 2: the legal documents that you need; 
• Part 3: registering with the Australian Charities and Not-for-profits Commission (ACNC);
• Part 4: Public Benevolent Institution, a health promotion charity and a religious charity; and 
• Part 5: how to obtain deductible gift recipient (DGR) status.

Types of Structures

In Australia, you can establish a not-for-profit organisation as:

• an Australian public company limited by guarantee – the most common type of company structure for charities and not-for-profit organisations;
• an Australian private company limited by shares – can be used where a business is wholly owned by a charity that has a similar charitable purpose;
• an incorporated association – a separate legal entity; or
• a trust – either fixed or discretionary trust.

If you are establishing a charity under any of these structures, you must meet the regulatory requirements of the relevant structure and the ACNC’s governance standards. The two most common structures for a not-for-profit organisation or a charity are an incorporated association or an Australian public company limited by guarantee. 

Incorporated Association

An incorporated association is incorporated in a specific state or territory. It does not operate nationwide. However, you may register it under the Corporations Act so the association becomes an Australian registered body and can carry on business in other states and territories. While there is no obligation to incorporate an association, there are a few advantages to doing so. The main advantage is that an incorporated association is a separate legal entity, like a company, so it can:

• hold assets;
• sue other entities; and
• be sued in its own name. 

A key difference between an incorporated association and a company is that the incorporated association can only operate in the relevant state or territory that it is incorporated. Furthermore, the purpose of choosing an incorporated association over a public company is to provide a simple and affordable way to create a legal entity for small, community-based groups with limited resources. For this reason, it is most appropriate for smaller community groups that do not intend to operate beyond their state or territory. 

The relevant state and territory legislation regulates and administers how you incorporate an organisation. For example, in NSW, this is the Associations Incorporation Act 2009, and the Office of Fair Trading for NSW administers this. This legislation generally imposes less onerous conditions than the Corporations Act.

Generally, the organisation’s constitution will outline the rights of its members. In NSW, there must be a minimum of five members, and there is no maximum. A charity lawyer can help you understand the requirements to incorporate an association in the relevant state or territory.

Australian Public Company Limited by Guarantee

A company is a separate legal entity from its members. A public company will reinvest any profits it makes towards the organisation’s purpose as it cannot pay dividends. Consequently, this is a very popular structure for sports clubs and cultural and charitable organisations. 

Limited by guarantee means the liability of the company’s members is limited to the amount that the members undertake to contribute to the property of the company if the company is wound up. The company’s constitution will outline this. Additionally, companies limited by guarantee cannot issue shares so no individual can acquire a controlling interest or profit from a share sale. Similarly, each member of the company only has a single vote.

Companies must comply with the Corporations Act 2001. ASIC administers and enforces this. Once the company registers with ASIC, it can apply to be a charity.

Public companies must have:

• at least three directors and one secretary;
• at least one member;
• a registered office address and principal place of business in Australia;
• a registered office open and accessible to the public;
• a constitution or replaceable rules; and
• a register of its members.

The company must also:

• keep a record of all directors and members; meeting minutes and resolutions;
• keep financial records;
• appoint a registered company auditor within one month of registration;
• prepare, have audited and lodge financial statements and reports after the end of each financial year unless exceptions apply;
• provide its members with a copy of the company financial statements and reports, unless exceptions apply;
• hold an annual general meeting once every calendar year, within five months of the end of the company’s financial year;
• receive and review an annual company statement and pay an annual review fee to ASIC; and
• lodge notices with ASIC if it changes officeholders, office addresses, constitution and its name.

Despite the above, there are certain rights and obligations of the Corporations Act that do not apply to registered charities under this regime.

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Key Takeaways

You should consider the size and available resources when determining the best structure for your organisation. Most charities and not-for-profit organisations choose to be public companies limited by guarantee or incorporated associations. However, when choosing the appropriate structure, ensure you can meet the corresponding requirements.

If you need help choosing a structure for your charity or not-for-profit organisation, our experienced 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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