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Incorporated Association or Company Limited by Guarantee

When starting a Not-for-profit organisation understanding the various structures and choosing the optimal one for your needs can be a difficult and confusing process. The following document aims to summarise the advantages and differences between the two most popular structures- incorporated associations and companies limited by guarantee.

 

What is an Incorporated Association?

It is an association incorporated under a State and Territory based statutory regime. Technically, the organisation can only operate in the State in which it is incorporated but this can be overcome by registering with ASIC as an Australian Registered Body.  In registering as an Australian Registered Body, the association would need to comply with both the state’s particular policies and the Corporations Act.  For example, the association would need to keep its details such as registered office and office holders updated with both ASIC and the NSW Dept of Fair Trading.

Incorporated associations have the advantage of being relatively easy and inexpensive to establish.  However, with the 2009 Act, the operation of an incorporated association has become more onerous and there is now more corporate governance style requirements imposed on the incorporated association.

The main disadvantage is that these are State based organisations which causes difficulties for them to operate outside the State of Incorporation.  The legislation governing the incorporation of associations is not uniform for each State and territory.  Furthermore it is necessary to have a trading name registered in each State and Territory in which the association is carrying on business.

 

What is a Company Limited by Guarantee?

This is an organisation registered under the Corporations Act 2001 as a not-for-profit company limited by guarantee, and thus has the right to do business interstate and internationally.

It is defined as “a company formed on the principle of having liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up” meaning by the amount of money that the members will have to contribute if the company ceases business, such as bankruptcy.  The amount of the guarantee is usually between $10 and $100.

Profits of the company are to be reinvested into the company to continue the company’s operations and further the company’s objects.  They may not be paid to members or directors of the company.

The administrative requirements of the company are more onerous then for example an incorporated association but not greatly.  The costs associated with the governance of the company can be similar too or greater than an incorporated association.

 

Things to consider:

When deciding between these two types of Not-for-profit organisations there are several important facets to consider, including the scope and purpose of the organisation, public perception of the organisation, legal requirements, taxation and fees.

 

Scope and purpose of your organization:

A key component of deciding between an incorporated association or company limited by guarantee is the scope of your organisation.

An incorporated association might be preferable for state-based organisations or small community organisations that do not have a frequent need to work outside of the state of incorporation. They will not have a right to do regular business outside their state unless they register as an Australian Registered Body (which while straightforward to do, means that they will have a dual registration and the need to comply with dual requirements).

A company limited by guarantee structure is generally preferable for larger organisations that wish to work in multiple states and/or overseas. Therefore, future considerations are important when choosing between the two structures, considering if and where the organisation would like to expand (it should be noted that converting from an incorporated association to a company limited by guarantee can often be a costly exercise in terms of money and time).

 

Public perception of organisation:

Public perception of the organisation is also important to consider.

Regulation

A company limited by guarantee is regulated under ASIC which is considered to have a vigilant and quality regulatory framework. This means that companies limited by guarantee may be seen as more serious, trustworthy organisations that are recognized as credible companies not only by the public but also by other regulated organisations such as banks and insurance companies.

However, not every organisation needs this level of credibility and it does come with more stringent rules, more complex policies and with more duties for the directors.

Grants

Due to its ability to function interstate and internationally a company limited by guarantee would find it easier to get specific grants around the country, while an incorporated association, such as one in Victoria, may find it more difficult to win a grant from a different state.

 

Legal requirements:

Generally, incorporated associations might be considered to have simpler legal requirements and their board less accountability for their actions, which is acceptable for small, community based organisations. However, for entities that work with larger budgets and memberships, accountability and transparency are important factors in ensuring that governing bodies are working in the best interest of the organisation.

For a full comparison between the two types of organisations in a legal sense please visit:

https://www.murfett.com.au/MurfettLegal/media/Documents/Article/56-Associations-vs-Company-Limited-by-Guarantee.pdf

 

Taxation:

While tax is more dependent on the activities of the organisation than the difference between incorporated associations and companies limited by guarantee, any organisation that is created should consider its tax implications and seek advice where necessary.

Note on Tax Exemption

Not all NFPs are exempt from income tax.  Organisations that are charities must be endorsed by the ATO to be exempt from income tax.  Organisations that are not charities can self-assess their entitlement to income tax exemption, but must meet certain rules and tests to do this.  If the organisation is not exempt from income tax then the rules of mutuality are used to determine tax liabilities.  This relates to splitting the income and costs based on whether they have been derived from members or non-members and taxing accordingly.

https://www.ato.gov.au/Non-profit/your-organisation/do-you-have-to-pay-income-tax-/income-tax-exempt-organisations/

 

Fees:

The initial start up fees of a company limited by guarantee are higher than an incorporated association, however the ongoing costs are very similar if the company is registered as a special purpose company.

 

Incorporated Association Fees

Initial incorporation fee:

  • $180 to use your own rules
  • $145 to use model rules

Annual Review Fee:

  • Nil

Application for declaration of an association’s financial tier- $50 (needed to know whether you need to have an annual audit)

Application for approval or an auditor or reviewer- $40

Application to exempt requirement to provide auditor or reviewer’s representation- $50

To register as an Australian body (to be able to do business in any state)- $395

 

Company Limited by Guarantee Fees

If you do not register under the Australian Charities and Not-for-profits ACT 2012

Initial Incorporation Fee $387

Annual review fee: $1,176

OR

If you do register under the Australian Charities and Not-for-profits ACT 2012 (This is done to omit the word Limited from name to qualify as a special purpose company- which allows you to reduce annual review fees)

Initial Incorporation: $387

Fee to omit word Limited from name: $395

Annual review fee: $40

 

Useful links to be defined as a special purpose company and reduce annual fees:

https://www.corneyandlind.com.au/resource-centre/not-for-profit/companies-limited-by-guarantee/special-purpose-companies-ltd-by-guarantee-save-1000-pa-with-asic/

http://asic.gov.au/regulatory-resources/forms/forms-folder/432-application-to-change-a-company-name-to-omit-the-word-limited/

https://www.legislation.gov.au/Details/C2012A00168

 

Concluding Recommendations:

While this document does try to simplify the complex issues of not-for-profit structures, each organisation is different and must decide for themselves what is the best option for them. The following are general and simplified recommendations and individuals wishing to start a Not-for-profit are still recommended to seek further advice from experts in legal, financial and organizational matters.

Incorporated associations:

This structure is recommended for smaller state-based or community organisations which require a simpler legal structure and less demanding regulation.

Company Limited by Guarantee:

This structure is recommended for organisations who wish to work nationally or internationally, who require greater legal and financial credibility, and have larger financial resources. The stringent regulation will ensure that the resources are handled more carefully and the spatial flexibility will allow for greater room to grow beyond state or national borders.

 

Note on other legal structures:

It should also be noted that there are other legal structures that your organisations can choose which may be more specific to your needs, including:

Proprietary Limited Company:

Also incorporated under the Corporations Act 2001.  There is a restriction to the number of members it may attract (being 50) and this can sometimes be seen as a disadvantage when dealing with larger scale projects.  In addition, the presence of shareholders and a share structure allows the perception that the profits and dividends of the company are the objectives of the stakeholders themselves.

Administrative requirements are similar to those imposed on a company limited by guarantee under ASIC rules.

Trust:

A trust is a legal relationship whereby the trustee is the legal owner of the trust property and deals with the property for the benefit of some other person or persons (beneficiaries) or for some object permitted by law, such as a charitable or educational object.

A trust is not a separate legal entity and does not enjoy limited liability (as opposed to a public company limited by guarantee) although it is common to use a company as the trustee and thereby limit the potential liability of the trustee.

A trustee owes a high standard of care to beneficiaries, and is subject to a number of duties.  These include a duty to act in good faith, to avoid conflicts of interest, to make full disclosure to beneficiaries and not to make a secret profit or gain.

The main benefit of a trust is that it can be controlled to a greater degree than a company as there is no open membership to consider.  Effectively the directors of the corporate trustee would essentially control the trust and be members of the trust.  This can be a good option if you wish to control the organisation tightly but may as a result increase costs due to having two entities.

 

Other useful links:

Another comparison

https://www.nfplaw.org.au/sites/default/files/Incorporated_association_or_company_limited_by_guarantee_0_0_0.pdf

State information and other structures:

https://www.nfplaw.org.au/legalstructure

Starting a charity

http://www.acnc.gov.au/ACNC/Register_my_charity/Start_charity/ACNC/Reg/Start_charity.aspx?hkey=989e3f9c-cb69-4d80-ba9f-f07110cfe08f