The term ‘not-for-profit’ describes a range of organisations that are bound together by a purpose to achieve a public, social or community outcome, not for the profit or gain (either direct or indirect) of its individual members.
The term ‘not-for-profit’ does not indicate any specific type of legal structure and there are a range of alternatives available.
Not-for-profit organisations fall within two broad categories:
- charities, and
- other NFP organisations that are not charities such as professional and business associations, community service organisations, social organisations and clubs.
Which not-for-profit structure or model is appropriate for a particular organisation’s needs and objectives will depend on a range of factors such as:
- time and process taken to incorporate
- flexibility of rules
- transparency of operations and public disclosure
- size of assets and requirement for accountabilities
- member rights
- governance requirements
- duties and obligations of Board or management committee
- process for amalgamation or merger
- extent of its commercial activities and if they extend beyond state borders
- tax status and whether its operations are for a charitable purpose.
Limitation of liability and tax
The two principal considerations that Meridian’s clients appear to have been concerned with when setting up a not-for-profit structure are:
- Personal liability – to limit liability of board members, officers, employees and members.
- Taxation – to benefit from more favourable tax rules that apply to a not-for-profit entity as opposed to a for profit corporation.
Different tax concessions are available and depend upon the type of not-for-profit organisation, which may include:
- income tax exemption
- fringe benefits tax (FBT) exemption or rebate
- goods and services tax (GST) concessions
- deductible gift recipient (DGR) endorsement
- refund of franking credits.
In the case of a charity it must be endorsed by the Australian Charities and Not-for-profits Commission (ACNC) to access charity tax concessions and apply for certain categories of deductible gift recipient (DGR) status.
Other NFP organisations can generally self-assess whether they are income tax exempt or taxable and whether they will have access to other tax concessions. Similar to a charity, a not-for-profit entity will need to be endorsed by the ACNC to obtain DGR status.
The majority of not-for-profit organisations choose to structure as an incorporated association and the remainder generally establish a company limited by guarantee. A third alternative, to form a non-trading co-operative, is also available.
The table below compares a number of salient differences between a company limited by guarantee and an incorporated association, which may be relevant to choosing the appropriate not-for-profit structure.
|Feature||Company limited by guarantee||Incorporated association|
|Governing legislation & jurisdiction||Commonwealth Regulation – Corporations Act||State Regulation – Relevant Associations Incorporation Act|
|Incorporation process||Regulated by the Australian Securities and Investments Commission. Application for incorporation of a company approved within 24-48 hours of lodgement with ASIC.||Regulated by Office of Fair Trading (or equivalent State regulator). An application for incorporation of an association can take up to two months to approve.|
|Rules or constitution||The Corporations Act provides flexibility for the type of provisions in a company’s constitution and can be amended by member resolution. A set of Replaceable Rules prescribed under the Corporations Act can otherwise be adopted.||The IA Act prescribes various matters which must be in the Rules or a Model Constitution can be adopted. An amendment to the Rules does not take effect until approved by the Office of Fair Trading (or equivalent State regulator).|
|Trading activities||Can operate nationally, or in more than one State or Territory||Cannot operate outside State unless also registered with ASIC as an Australian Registered Body|
|Directors or Officers||Managed by Board of Directors. Requires minimum of 3 directors and 1 secretary.Prescribed statutory obligations imposed on Directors and in addition common law duties apply.||Managed by a Committee. Requires minimum of 3 members, who are at least 18 years old and at least 3 members ordinarily resident in Australia.Duties and obligations of Office Bearers less prescribed than a company and in addition common law duties apply.|
|Members||Minimum of 1 member required. Liability of members is limited to the ‘guarantee’ amount the members undertake to contribute to the property of the company if it is wound up, which is prescribed in the constitution.Under Corporations Act, members have an express right to appoint a member or non-member as a proxy (a person to vote at meetings on their behalf) and a minority may call a members meeting. Generally one vote per member.||Depending in the State a minimum number of members ranges from 1 to 7.Liability of members is limited to amounts due for unpaid subscriptions, joining fees or other amounts payable under the Association’s rules. Member rights to vote and call meetings depend on the Rules of the association. Generally one vote per member.|
|Public disclosure||Public inspection of director and member details permitted. Annual audit required. Auditors report and annual financial accounts presented to members.||No mandatory obligation for public inspection of director and member details. Only the details of the Public Officer provided to the Office of Fair Trading (or its equivalent State body) are public. No audit required if income less than $200,000 or assets under $500,000. Annual financial accounts presented to members.|
|Amalgamation, merger and change of corporate status||Generally there is no company merger process other than by application of the reconstruction and amalgamation provisions in the Corporations Act or takeover mechanism. Otherwise one or both companies must end their existence or by way incorporation of a new company.||Generally the relevant Associations Incorporation Act makes provision for one incorporated association to amalgamate with another, with all of the assets, liabilities and staff automatically transferred to the amalgamated association without the need for winding up. An association may convert to a company limited by guarantee by applying under the Corporations Act after being approved for transfer of registration under the Associations Incorporation Act.|
Why legal structure is important
A number of factors will influence an organisation’s decision as to whether to become an incorporated association or a company limited by guarantee.
The legal structure chosen will affect matters such as its legal identity, governance structure, reporting regime, public disclosure, director, officer and member legal obligations and limitations and liability for debts.
Meridian provides expert advice and assistance to the not-for-profit and charitable sectors including community organisations, industry and professional associations in choosing the right structure for their needs, objectives, funding options and growth strategies.
Should you require advice on registering or restructuring your organisation, please contact our corporate advisory Principal Michael Bracken.