What type of community organisation should you form?

The merits of forming an incorporated association include limited liability for members and the ability to buy or sell property and raise or borrow money. Unincorporated associations are more flexible but liability of members is unlimited. A company limited by guarantee has higher compliance costs but can be useful if the organisation wishes to operate interstate. Co-operatives must conform to co-operative principles to satisfy registration.

Four main types

The four main types of community organisations that can be established are:

  • incorporated associations;
  • unincorporated associations;
  • companies limited by guarantee; and
  • co-operatives.

There are advantages and disadvantages of each form of association typically used by community organisations.

Incorporated associations

Each Australian state has Associations legislation and Victoria’s Act is one of the better examples. The Associations Incorporation Reform Act 2012 (Vic) (“Associations Act“) provides for a system where community organisations may formalise their association in a manner recognised by the law. This then creates a number of benefits for the group, but also a number of possible difficulties. The relative merits of incorporation and how it is achieved are the principal areas covered in this chapter.

The advantages of incorporation are:

  • the liability of the members (including the office bearers) of the association is limited. The members will generally not be personally liable for either the debts or liabilities of the association during its operation or the expenses of its winding-up (that is, its ending);
  • the association can enter into contracts, sue or be sued, buy or sell property, raise or borrow money, as well as invest money in its own name; and
  • the association has perpetual succession. This means that property acquired by the association remains with the association regardless of changes in its membership.

Disadvantages of incorporation are that the Associations Act imposes certain obligations and costs, which are designed to protect the interests of members. These are not onerous, but should be taken into account:

  • the fee for incorporation as at 1 July 2014 varies between $33.10 and $192.00 depending on whether the Model Rules are adopted and whether the application is made by individuals or a company/co-operative or society; the Associations Act requires certain information concerning the operation of the association to be reported to the Registrar of Incorporated Associations. The main information is the Annual Statement). The cost of lodging the Annual Statement depends on the revenue of the association: tier one (less than $250,000): $53.00; tier two ($250,000″“$1,000,000): $105.90; or tier three (more than $1,000,000): $211.80 (as at 1 July 2014). These and other reporting requirements impose a minor administrative and financial obligation on associations;
  • the structure of an association is more rigid ““ many changes can only be achieved with the approval of the Registrar; and
  • associations have to adopt certain requirements such as grievance procedure rules.

Full details relating to the process of incorporation and the administration of “incorporated associations“ are provided separately.

Unincorporated associations

Groups are free to decide against a formal structure. In the eyes of the law, the group will remain a collection of individuals; the law will (generally) not recognise the group as a separate entity. This might well mean very little to many people, as in their eyes they readily identify the existence of the group and its operation, separate to the individuals that constitute it.

Despite the fact that there is little formal structure required of unincorporated associations, most groups will, as a minimum, need to choose a collective name and adopt rules of association that will set out such things as: the objects of the association, membership qualifications, subscription fees, management of meetings, financial matters, dissolution and amendment of the rules.

Although officers of the organisation will be personally liable for its obligations, this can, in practice, be limited by indemnification (insurance).

The advantages of unincorporated associations are that the structure is very flexible and the least costly and time consuming of any form of organisational structure.

The disadvantages of such associations are:

  • the liability of members is unlimited;
  • there is no perpetual succession; all property acquired by the association belongs to the individual members;
  • similarly, gifts or trusts in wills cannot generally be made to an unincorporated association;
  • the association cannot (generally) sue or be sued in its own name; and
  • members of the association may not have clear contractual or proprietary rights in relation to the association.

Generally, the advantages of incorporated associations are the disadvantages of unincorporated associations. Given the benefits of incorporation, however, this form of organisational structure will not be considered further in this chapter.

Companies limited by guarantee

Groups may incorporate under the provisions of the Corporations Act 2001 (Cth) (“Corporations Act“). A group may incorporate in a number of ways, including:

  • a company limited by shares;
  • a company limited by shares and guarantee; and
  • a company limited by guarantee.

Only the last of these options will be discussed further here (the relatively complex administration of the first two makes them unattractive to most community groups).

A community organisation could achieve the status of a corporation (thus achieving limited liability) by forming itself as a company limited by guarantee under the Corporations Act. This means that the members guarantee to pay a fixed but nominal amount in the event of the liquidation of the company. In general, a company’s internal management must be governed by:

  • the provisions of the Corporations Act that apply to that type of company (known as Replaceable Rules);
  • a Constitution (or a Memorandum and Articles of Association in the case of a company formed before 1 July 1998 which has not adopted a constitution); or
  • a combination of both.

A Board of Directors must be appointed, and the various requirements of the Corporations Act (especially in relation to meetings and the lodgement of accounts) must also be observed. Also bear in mind that no matter how small a company is, it needs an auditor.

However, most community organisations will not use this structure. This is mainly because it is more expensive to register this form of corporate body than it is to register an incorporated association and the compliance costs are also greater. It may be a useful option, however, if the form of an incorporated association is unsuitable. For example, if your group wishes to carry on business outside Victoria it may be more efficient to incorporate under the Corporations Act.

Co-operatives

On 3 March 2014, the Co-operatives Act 1996 (Vic) was replaced in Victoria by the Co-operatives National Law (CNL), applied in Victoria by the Co-operatives National Law Application Act 2013 (Vic). Co-operatives registered under the Co-operatives Act 1996 will have their registration transferred to the CNL automatically. Co-operatives do not need to do anything to transition to the CNL. The CNL also allows co-operatives to operate freely across state borders, without requiring separate registration and reporting in each state. While this is presently limited to NSW and Victoria, it is expected to expand to include other states and territories over the next 18 months.

Some groups may be able to register as a co-operative under the CNL. The CNL provides that a group may register as a co-operative if the Registrar of Co-operatives is satisfied that the registration requirements have been met.

There are two forms of co-operatives: distributing co-operatives and non-distributing co-operatives (which may issue shares, not issue shares, or be guaranteed by the government).

A distributing co-operative should be formed if members will receive a share of any surplus funds or a return on capital if the co-operative is wound up.

A non-distributing co-operative should be formed if any surplus is not distributed through shares, or if members would receive only the original value of their shares on a winding-up. Only a non-distributing co-operatives would be considered a non-profit organisation.

The obligations and costs that apply to the registration of a co-operative are similar to those that apply to registration of an incorporated association. The fee to apply for approval of proposed name and rules varies between $72.80 and $331.10 (as at 1 July 2014) depending on whether you are establishing a non-distributing or a distributing co-operative. Further information about fees is available from the Consumer Affairs Victoria (CAV) website at consumer.vic.gov.au.

For groups that have a common service motivation and pool money for the members’ mutual benefit, this form of incorporation is highly suitable. The CNL bestows limited liability on co-operatives, which means that the co-operative has a separate legal identity, distinct from that of its members. It may sue and be sued in its corporate name and has the power to acquire, lease, hold, sell and dispose of property. It also has the power to form unit trusts or partnerships and enter into joint ventures.

Registration requirements

A co-operative must function in accordance with the co-operative principles, which relate to such issues as the openness of membership, democratic control, independence, and the education and training of members to contribute effectively to the development of their co-operative. Co-operation among co-operatives and concern for the community are also desirable principles. If a proposed arrangement is not in accordance with the principles, the “Registrar must be satisfied that there are special reasons why the co-operative should be registered”.

The following are some of the questions relevant to whether registration is granted, although not every question need be answered in the affirmative:

  • Will membership be voluntary and open to all?
  • Will the co-operative allow one member, one vote?
  • Will financial decisions be made democratically?
  • Will the co-operative be an autonomous community-focused organisation controlled by its members?
  • Will surpluses be distributed for developing the co-operative?
  • Will the active membership requirements be met?
  • Will the co-operative’s policies contribute to community development?

Current incorporated bodies may also change to co-operatives provided that they meet the registration requirements.

Forming a co-operative

  • An application form and Model Rules must be completed. These documents can be obtained by contacting the Registrar of Co-operatives at CAV (see “Contacts and resources” for details) or download them from the CAV website (at consumer.vic.gov.au). After discussing the rules for the co-operative with prospective members, insert the appropriate details into the Model Rules.
  • A Disclosure Statement must also be completed for a distributing co-operative (using the guide supplied by the Registrar). This document can be obtained by contacting the Registrar at CAV (seeContacts and resources“ for details) or download it from the CAV website (at consumer.vic.gov.au).
  • Return the application and the Rules (together with the Disclosure Statement if relevant), to the Registrar for approval, along with the fees required for registration.
  • Within 28 days the Registrar will either approve the name, rules and any Disclosure Statement and send an Application to Register form to be completed at the formation meeting and an approved copy of the rules to be presented to the formation meeting, or the Registrar may request selection of a different name or redrafting of the rules or Disclosure Statement.
  • At least five prospective members must attend the formation meeting. Two-thirds of those present must vote to adopt the proposed Rules.
  • A Chairperson, a Secretary and a Board of Directors should be elected. The Secretary must record minutes of the meeting.
  • Prospective members should complete an application for membership.
  • Within two months of the formation meeting, the Application to Register should be returned to the Registrar, together with two copies of the Rules (and, if necessary, the Disclosure Statement, signed by the Chairperson and the Secretary) and the application fee.

Financial reporting

To allow for more appropriate financial reporting, co-operatives are now broken into two categories according to their size and fundraising activities.

Small co-operative

A small co-operative is a co-operative which, in a particular year, did not raise funds from the public issue of securities, and satisfies at least two of the following criteria:

  • the consolidated revenue of the co-operative and the entities it controls (if any) is less than $8 million for the previous financial year
  • the value of the consolidated gross assets and the entities it controls (if any) is less than $4 million at the end of the previous financial year
  • the co-operative and the entities it controls (if any) had fewer than 30 employees at the end of the previous financial year.
  • Each financial year a small co-operative must prepare a report for its members containing the following financial statements:
  • income and expenditure statement (including sources of income and expenses incurred in the operation of the co-operative)
  • balance sheet (including the assets and liabilities of the co-operative)
  • statement of changes in equity
  • cash flow statement (depending on the value of the consolidated assets and the consolidated revenue).

Small co-operatives, which don’t have a specific requirement in their rules to have their accounts audited, will only need to submit a simplified annual report to the Registrar within five months of the end of the financial year.

Large co-operative

All other co-operatives are large co-operatives.

A large co-operative that is a disclosing entity (as defined in the Corporations Act) must lodge financial statements with the Registrar within three months after the end of the financial year. All other large co-operatives must lodge financial statements within five months after the end of the financial year.

Large co-operatives must prepare a financial report, a directors’ report and declaration for each financial year. Large co-operatives must have their financial reports audited in accordance with the Corporations Act, and obtain an auditor’s report. Further information about these requirements (including an example Auditor’s Report) is available on the CAV website (at consumer.vic.gov.au).

Non-legal considerations

Apart from these legal considerations there can, of course, be other non-legal considerations. These include the following.

Funding

If the association will be seeking funding (from government, business or non-government sources), it is important to establish the requirements of the funding body. Many funding bodies, for example, will require an organisation to be incorporated before they will consider its funding request.

Government requirements

It is possible that the area in which your group proposes to operate is regulated by legislation. This legislation may require certain structures to be adopted by your group.

Taxation considerations

Groups should investigate the taxation implications of the forms of association that they are considering (seeOther issues“).