Types of community organisations

 

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.

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

1 unincorporated associations;

2 incorporated associations;

3 companies limited by guarantee;

4 Indigenous corporations;

5 co-operatives.

There are advantages and disadvantages to each type of community organisation.

For more detail and free resources (including a web-based decision-making tool to help you work out which legal structure best suits your group), see Not-for-profit Law’s Information Hub (at www.nfplaw.org.au/gettingstarted).

1  Unincorporated associations

Groups are free to decide against registering a formal structure with the government. In the eyes of the law, the group remains a collection of individuals; the law (generally) does not recognise the group as a separate entity. This might 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. However, it means that officers of the organisation are personally liable for its obligations (although it is possible to reduce this risk if each officer obtains insurance).

Although unincorporated associations do not have formal legal structures, most groups choose a collective name and adopt rules that set out the association’s aims, membership qualifications, any subscription fees, management of meetings, financial matters, dissolution and amendment of the rules.

The advantages of unincorporated associations are that their organisational structure is very flexible and usually the least costly and time consuming of the organisational structures.

The disadvantages of unincorporated associations are:

the liability of members is unlimited – this can be of great concern for groups that run higher risk activities (e.g. camps and respite care);

there is no perpetual succession – all property acquired by the association belongs to the individual members and therefore, everytime the members (or at least the office bearers) change, alterations may need to be made to documents about the association’s property (e.g. a lease);

gifts or trusts in wills cannot be made to unincorporated associations;

the association cannot (generally) sue or be sued in its own name;

members of the association may not have clear contractual or proprietary rights in relation to the association (this can make obtaining insurance or leasing an office or meeting space difficult).

Even though a group is not formally incorporated, the group’s office bearers still have legal duties to the members; for example, to act honestly in the best interests of the group and to manage any actual or potential conflicts of interest (for more information, see www.nfplaw.org.au/governance). In addition, unincorporated associations need to comply with other laws (seeOther laws”).

2  Incorporated associations

Overview

There are over 39,000 incorporated associations in Victoria. Each Australian state has legislation governing associations and Victoria’s Act is one of the better examples. Under the Associations Incorporation Reform Act 2012 (Vic) (“Associations Act”), community organisations can formalise their association in a manner recognised by the law. This benefits the group, but also creates ongoing responsibilities.

The main advantages of incorporation are:

The liability of the association’s members (including the office bearers) is limited. The members are not personally liable for the association’s debts or liabilities during its operation, or the expenses of its winding-up (i.e. its ending).

The association can enter into contracts, sue or be sued, buy or sell property, raise or borrow money, and invest money in its own name. Importantly, the association can take out insurance and enter into funding agreements in its name.

The association has perpetual succession. This means that property acquired by the association remains with the association regardless of changes in its membership.

The Associations Act imposes certain obligations on incorporated associations, which are designed to protect the interests of members. These are not onerous, but should be taken into account in light of the particular circumstances of the group.

Fees

There are also some initial and ongoing filing fees. In summary:

The fee for incorporation varies between $34.90 and $202.10 (as at 1 July 2016) depending on whether the model rules are adopted or whether the association adopts its own rules.

The Associations Act requires certain information about the operation of the association to be reported to the registrar of incorporated associations (i.e. to Consumer Affairs Victoria (CAV)); the main information is the annual statement. The cost of lodging the annual statement depends on the association’s annual revenue. As at 1 July 2016, the fees are:

tier one (revenue less than $250,000): $55.80;

tier two (revenue between $250,000 and $1,000,000): $111.50;

tier three (revenue more than $1,000,000): $223.00.

An association’s rules

Any changes to the rules of an association must (in addition to meeting the requirements for member approval) be lodged with and approved by CAV. Also, there is a list of requirements about matters that must be contained in the rules, including a grievance procedure. To ensure they comply with their obligations under the Associations Act, organisations that do not require a complex membership structure may find it easier to adopt or modify either the model rules, or Not-for-profit Law’s simple rules (available at www.nfplaw.org.au).

The legal duties of office bearers

It is important that office bearers understand their legal duties under the Associations Act. These duties are effectively the same as the duties of officer bearers in unincorporated associations, but the Associations Act sets them out (rather than being in case law) and includes penalties for breaching them (although it is rare for penalties to be imposed and only then for serious breaches). Broadly, the legal duties of office bearers are:

the duty to act in good faith and for a proper purpose;

the duty to act with reasonable care, diligence and skill;

the duty to not misuse information or position;

the duty to disclose and manage conflicts of interest.

Further information about the legal duties of office holders can be found at Not-for-profit Law’s Information Hub (www.nfplaw.org.au/governance).

It is best to see the legal duties of officer holders as common sense and ethical standards of behaviour that apply no matter which legal structure is adopted, rather than as a deterrent to being involved in the running of a group.

Given the benefits of incorporation – and that it is the most common form of legal structure used by groups operating in Victoria (only) that are not registered as charities – this form of organisational structure is discussed in more detail in “Incorporated associations”. More information about the process of incorporation and the administration of incorporated associations is available at www.nfplaw.org.au/legalstructure.

3  Companies limited by guarantee

Groups may incorporate under the provisions of the Corporations Act 2001 (Cth) (“Corporations Act”). A group may incorporate as either a company limited by shares, or as a company limited by guarantee.

Only the latter is discussed here, as it is the most appropriate (and most common) for community organisations. There are about 12,000 companies limited by guarantee in Australia, with the number growing annually.

A community organisation can register as a company limited by guarantee under the Corporations Act. This means that the members guarantee to pay a fixed but nominal amount (e.g. $10) in the event that the company does not have sufficient assets to pay all its debts when it is wound-up (i.e. ended).

In general, a company’s internal management is 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 that 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 lodgment of accounts) must be observed. Also, companies limited by guarantee have different auditing requirements depending on their size (or “tier”) and whether for taxation purposes they are endorsed as a deductible gift recipient (DGR). The relevant tiers are:

tier one: annual revenue less than $250,000 and no DGR status;

tier two: annual revenue between $250,000 and $1,000,000 and not a DGR, or less than $1 million with DGR status;

tier three: annual revenue over $1 million (with or without DGR status).

For companies limited by guarantee that are not registered as charities, there are other fees to consider. These include the initial fee for incorporation of $387 and ongoing fees ranging from $47 to $1,176 (these fees are correct as at 1 July 2016). Further information is available on ASIC’s website (www.asic.gov.au/forms).

For a company limited by guarantee that is also a registered charity, the annual report and most notices of changes to the organisation are given to the ACNC, rather than to ASIC. For more information about ACNC reporting requirements, and the differences in reporting to ASIC, see www.acnc.gov.au.

Similarly to office bearers in an incorporated association, the directors (and, in some situations, other company officers) of companies limited by guarantee have legal duties they need to understand and comply with. The Corporations Act contains defences and penalties in relation to these legal duties. It is best to see these legal duties as common sense and ethical standards of behaviour that apply no matter which legal structure is adopted, rather than a deterrent to being involved in running a group.

A company limited by guarantee can be a preferable option to an incorporated association or a co-operative if your group thinks it might want to carry on business (regular activities) outside Victoria, or if it is likely to register as a charity with the ACNC. For a comparison of an incorporated association and a company limited by guarantee, and tips about when to use which structure, see www.nfplaw.org.au/legalstructure or use the “getting started” decision-making tool at www.nfplaw.org.au/gettingstarted.

4  Indigenous corporations

The structure of an Indigenous corporation is similar to the structure of a company limited by guarantee. Indigenous corporations are incorporated under Commonwealth law and can operate anywhere in Australia. Members of an Indigenous corporation may elect to have limited liability.

To be eligible for registration as an Indigenous corporation, organisations must satisfy the requirements for registration set out in the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (“CATSI Act”). The basic requirements include:

an Indigenous corporation must have at least five members (although it is possible to request an exemption on certain grounds);

at least 51 per cent of the members of an Indigenous corporation must be Aboriginal or Torres Strait Islander (as defined) who are over 15 years old;

the Indigenous corporation must have a “rule book” (i.e. a constitution) that governs the corporation’s activities and complies with the CATSI Act.

The Indigenous corporation structure has been designed to take into account Indigenous customs and traditions. Corporations managing or holding land under the Native Title Act 1993 (Cth) and the Native Title (Prescribed Bodies Corporate) Regulations 1999 (Cth) must incorporate as this structure. Any other group run by Indigenous people can use this structure, or they may (and often do) choose to use one of the other options.

The Office of the Registrar of Indigenous Corporations (ORIC) has additional powers to those of ASIC (e.g. the power to call meetings of members and to appoint special administrators).

Organisations that are incorporated as Indigenous corporations must have the words “Aboriginal Corporation” or “Torres Strait Islander Corporation” (or an allowable combinations) in their name.

The advantages of incorporating as an Indigenous corporation (rather than any other type of incorporation) include:

the rules/constitution for the organisation can take into account Indigenous customs and traditions;

registration is free;

organisations may be exempt from producing annual reports (especially organisations with a small revenue, see below);

Indigenous corporations deal with a specialist regulator (ORIC), rather than with ASIC (although any corporation that is a registered charity deals primarily with the ACNC rather than ASIC).

The reporting requirements of Indigenous corporations vary according to the size of the organisation. In summary, the reporting obligations are:

small corporation (with a consolidated gross operating income of less than $100,000): general report only;

small corporation (with a consolidated gross operating income of between $100,000 and $5 million): general report, financial report and audit report;

medium corporation (with a consolidated gross operating income of less than $5 million): general report, financial report and audit report;

large corporation (with a consolidated gross operating income of $5 million or more): general report, financial report, audit report and directors’ report.

Under the CATSI Act, members of an Indigenous corporation broadly have the same rights and obligations as members of an incorporated association or company limited by guarantee. Directors of Indigenous corporations are required to comply with the same legal duties (discussed in “Incorporated associations”).

For further information about setting up an Indigenous corporation, see ORIC’s step-by-step guide (available at www.oric.gov.au/start-corporation/steps-register), or Not-for-profit Law’s Information Hub resource on setting up a corporation (www.nfplaw.org.au/settingup).

5  Co-operatives

Overview

Co-operatives are one of the least common incorporated structures; there are only around 1,400 registered co-operatives in Australia.

On 3 March 2014, the Co-operatives Act 1996 (Vic) (“Co-operatives Act”) was replaced 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 had their registration automatically transferred to the CNL. The CNL allows co-operatives to operate freely across New South Wales and Victorian state borders, without requiring separate registration and reporting in each state. It is expected to eventually expand to include other states and territories.

Not all groups are eligible to register as a co-operative. The registrar of co-operatives has to be satisfied that the registration requirements have been met (see below).

There are two forms of co-operatives. 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 (co-operatives can also distribute surplus funds while still operating).

A non-distributing co-operative (which may issue shares, not issue shares, or be guaranteed by the government) should be formed if any surplus is not to be distributed through shares, or if members would receive only the original value of their shares on winding-up. Only non-distributing co-operatives are considered to be not-for-profit organisations.

The obligations and costs that apply to the registration of a co-operative are similar to those that apply to the registration of an incorporated association. The fee to apply for approval of a proposed name and rules varies between $76.70 and $348.50 (as at 1 July 2016), depending on whether a non-distributing or a distributing co-operative is being established.

Co-operatives’ registration requirements

A co-operative must function in accordance with the co-operative principles, which are focused on providing democratic member participation and control (one member, one vote).

If a proposed arrangement is not in accordance with the principles, CAV must be satisfied that there are special reasons why the co-operative should be registered.

Current incorporated bodies may change to co-operatives if they meet the registration requirements.

Co-operatives’ financial reporting

Financial reporting for co-operatives is broken into two categories according to their size and fundraising activities: small and large co-operatives.

Small co-operatives – that do not have a specific requirement in their rules to have their accounts audited – only need to submit a simplified annual report to CAV within five months of the end of a financial year.

A small co-operative is a co-operative that, 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.

All other co-operatives are defined as 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 of co-operatives (i.e. with CAV) within three months after the end of a financial year. All other large co-operatives must lodge financial statements within five months after the end of a financial year.

Large co-operatives must have their financial reports audited in accordance with the Corporations Act, and obtain an auditor’s report.

For more information, see CAV’s website (www.consumer.vic.gov.au; search for “co-operatives”). The website has resources to help set-up a co-operative, further information on registration and reporting requirements, information about penalties and forms.