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;
There are advantages and disadvantages to each type of community organisation.
For more information 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).
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 the people in the group, as in their eyes they readily identify the existence of the group and its operation separate to the individuals who form it. However, it means that the unincorporated association’s office bearers or committee members are personally liable for the association’s 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 office bearers or committee members may be personally liable for the association’s debts (and actions in tort; for example, where a person is injured because of negligence) – this can be concerning for groups that run higher risk activities (e.g. camps);
• there is no perpetual succession – unless a trust is established, all property acquired by the association belongs to the individual members and therefore, every time the members (or at least the office bearers) change, alterations may need to be made to documents relating to the association’s property (e.g. a lease);
• there can be some complexity when gifts or trusts in wills are made to unincorporated associations;
• the association generally cannot sue or be sued;
• members may have difficulty enforcing the association’s rules when those rules are not being complied with; this is because courts have sometimes considered that the arrangement between members of an unincorporated association is private in nature and not one that a court should enforce;
• members 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).
The rules of an unincorporated association may set out the duties of the office bearers or committee members (e.g. the duty to act honestly in the best interests of the group and to manage any actual or potential conflicts of interest). For more information about these duties, see www.nfplaw.org.au/governance).
It is unclear to what extent these duties are imposed on the office bearers under the common law. In addition, unincorporated associations need to comply with other laws (see “Other laws”).
Overview of incorporated associations
There are over 38,000 incorporated associations in Victoria. Each Australian state has legislation governing incorporated associations. 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. This means that the members are only personally liable to a limited extent for the association’s debts or liabilities during its operation, or for the expenses of its winding-up. (For more information, see “Incorporated associations”.)
• 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 the group continues to exist, and to be recognised by the law and the public, even when the group’s members change.
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 when a group is considering incorporating.
Incorporated associations must pay initial and ongoing filing fees. In summary:
• The fee for incorporation varies between $36.10 and $209.50 (from 1 July 2018) depending on whether the model rules are adopted or whether the association devises its own rules.
• The Associations Act requires certain information about the association’s operation to be reported yearly to the regulator of incorporated associations, 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 2018, the fees are:
– tier one (revenue less than $250,000): $57.80;
– tier two (revenue between $250,000 and $1,000,000): $115.60;
– tier three (revenue over $1,000,000): $231.20.
However, note that some Victorian incorporated associations that are registered with the ACNC as charities do not have to lodge an annual statement with CAV or pay the annual fee for the financial year that ended on 30 June 2018. This exemption does not apply to charities that have been approved by the ACNC to have their financial details withheld from the ACNC register.
As outlined in “‘Rules’ or ‘constitution’”, an association’s rules contain its purpose and internal processes. The rules are an instruction manual about how an association is to be run. In the Associations Act there is a list of matters that must be contained in the rules (e.g. a grievance procedure).
Associations that do not require a complex membership structure may find it easier to adopt either the model rules (which are set out in schedule 4 of the Associations Incorporation Reform Regulations 2012 (Vic)) or Not-for-profit Law’s simple rules (available at www.nfplaw.org.au/constitution). Both sets of rules contain all the matters required under the Associations Act.
An association’s rules can be changed when at least 75 per cent of the members at a general meeting approve passing a special resolution (members must have at least 21 days notice of a general meeting). A change to an association’s rules is effective once CAV has approved the alteration.
The legal duties of office bearers, and the penalties for breaching them, are set out in the Associations Act. Although, it is rare for penalties to be imposed and only then for serious breaches.
Broadly, office bearers have a legal duty:
• to act in good faith and for a proper purpose;
• to act with reasonable care, diligence and skill;
• to not misuse information or their position;
• to disclose and manage conflicts of interest.
More information about the legal duties of office bearers 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 office bearers as common sense and ethical standards of behaviour, rather than as a deterrent to being involved in the running of a group.
Given the benefits of incorporation – and that incorporation is a very common form of legal structure used by groups operating in Victoria – 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.
Overview of companies limited by guarantee
Groups may incorporate under 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 structure) for community organisations.
In a company limited by guarantee, the members guarantee to pay a fixed but nominal amount in the event that the company does not have enough money to pay all its debts when it is wound-up.
In general, a company’s internal management is governed by:
• the Corporations Act provisions that apply to that type of company (called “replaceable rules”);
• a constitution (or a memorandum and articles of association for 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 they are endorsed as a deductible gift recipient (DGR) for tax purposes. Broadly, the relevant tiers are:
• tier one: annual revenue less than $250,000 and with no DGR status;
• tier two: annual revenue between $250,000 and $1,000,000 and with no DGR status, or less than $1 million with DGR status;
• tier three: annual revenue over $1 million (with or without DGR status).
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 ACNC, rather than to the usual regulator of companies, the Australian Securities and Investments Commission (ASIC). ACNC does not charge fees. For more information about ACNC reporting requirements, and the differences in reporting to ASIC, see www.acnc.gov.au.
From 1 July 2018, the fee for incorporating a company limited by guarantee is $403. For companies limited by guarantee that are not registered as charities, there are other fees to consider. These ongoing fees range from $40 to $1,224 (these fees are correct as at 1 July 2018), depending on the company’s tier. More information is available on ASIC’s website (www.asic.gov.au). Also, in 2018 the federal government introduced the ASIC industry funding model. This model introduced a levy of $321 for the 2017–2018 financial year for public companies, including companies limited by guarantee. However, registered charities are exempt from this levy.
Similarly to office bearers in an incorporated association, the directors (and, in some situations, other company office bearers) 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.
For companies limited by guarantee that are also registered charities, most of these duties are set out in ACNC governance standard 5, rather than in the Corporations Act.
It is best to see these legal duties as common sense and ethical standards of behaviour, rather than as deterrents 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;
• is likely to register as a charity with ACNC; or
• intends to be a large organisation.
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 framework” at www.nfplaw.org.au/gettingstarted.
Overview of Indigenous corporations
Indigenous corporations incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (“CATSI Act”) can be for-profit or not-for-profit. The structure of a not-for-profit Indigenous corporation is similar to the structure of a company limited by guarantee. The Indigenous corporation structure has been designed to take into account Indigenous customs and traditions.
Members of an Indigenous corporation may elect to have limited liability.
Indigenous corporations are regulated by a specialist regulator, the Office of the Registrar of Indigenous Corporations (ORIC), not ASIC. ORIC has additional regulatory 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”, “Torres Strait Islander Corporation” or “Indigenous Corporation” (or an allowable combination) in their name.
To be eligible to register as an Indigenous corporation, organisations must satisfy the registration requirements set out in the CATSI Act.
Registered Indigenous corporations must have:
• at least five members (although it is possible to request an exemption on certain grounds; e.g. the corporation is a sole trader) who are 15 years old or older;
• at least 51 per cent of the members are Aboriginal or Torres Strait Islander (as defined);
• a “rule book” (i.e. a constitution) that governs the corporation’s activities and complies with the CATSI Act.
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 Indigenous corporations.
Also, under the CATSI Act, organisations receiving grants of more than $500,000 from the Indigenous Affairs Group (part of the Australian Government Department of the Prime Minister and Cabinet) must also incorporate.
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 available.
The advantages of incorporating as an Indigenous corporation include:
• the corporation’s rules or constitution can take into account Indigenous customs and traditions;
• registering as an Indigenous corporation is free and there are no ongoing fees under the CATSI Act;
• corporations may be exempt from producing annual reports (especially corporations with a small revenue, see below);
• Indigenous corporations deal with a specialist regulator (ORIC), rather than with ASIC.
The reporting requirements of Indigenous corporations vary according to the size of the organisation. In summary, the reporting obligations are based on the corporation’s registered size and are:
• small corporation (with a consolidated gross operating income of less than $100,000): a general report only;
• small corporation (with a consolidated gross operating income of between $100,000 and $5 million): a general report, financial report and audit report (or, if eligible, a financial report based on reports to government funders);
• medium corporation (with a consolidated gross operating income of less than $5 million): a general report, financial report and audit report;
• large corporation (with a consolidated gross operating income of $5 million or more): a general report, financial report, audit report and directors’ report.
Broadly, members of an Indigenous corporation have the same rights and obligations as members of an incorporated association or company limited by guarantee. The CATSI Act sets out the duties and obligations of directors and other office bearers in an Indigenous corporation. These duties are consistent with those of a director of a company limited by guarantee (discussed above).
For more information about setting up an Indigenous corporation, see ORIC’s step-by-step guide (www.oric.gov.au/start-corporation/steps-register).
Overview of co-operatives
Co-operatives are uncommon incorporated structures. In 2014, the Co-operatives Act 1996 (Vic) (“Co-operatives Act”) was replaced by the Co-operatives National Law (CNL), which was 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 state and territory borders, without requiring separate registration and reporting in each state or territory.
The CNL has been applied in most Australian states and territories; however, as of May 2018, Queensland still has not adopted the CNL. This means that if co-operatives wish to operate in Queensland, they still need to register under the Cooperatives Act 1997 (Qld).
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 profit (during operation or winding-up) or a return on capital if the co-operative is winding-up.
A non-distributing co-operative (which may issue shares, not issue shares, or be guaranteed by the government) should be formed if any profit is going to be reinvested back into the co-operative, or if members receive only the original value of their shares on winding-up. Non-distributing co-operatives are 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 (i.e. $31.80 from 1 July 2018). The fee to apply for approval of a proposed name and rules varies between $79.50 and $362.50 (from 1 July 2018), depending on whether a non-distributing or a distributing co-operative is being established.
A co-operative must function in accordance with co-operative principles, which are focused on providing democratic member participation and control (one member, one vote).
If a proposed arrangement does not accord 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.
Financial reporting for co-operatives is broken into two categories according to their size and fundraising activities: small and large co-operatives.
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.
Small co-operatives only need to submit a simplified annual report to CAV within five months of the end of a financial year, unless their rules require them to have their accounts audited.
All co-operatives that do not fall within the definition of a small co-operative are large co-operatives. Large co-operatives must have their financial statements audited in accordance with the Corporations Act and obtain an auditor’s report. These financial statements, the auditor’s report and annual report must be lodged with CAV within five months of the end of a financial year.
For more information about co-operatives and resources relating to setting-up and running a co-operative, see CAV’s website (www.consumer.vic.gov.au).