The structure of an organisation can determine its exposure to civil liability (being sued). Some groups simply gather behind an individual who is prepared to take the responsibility for saying or doing something (perhaps because they have no assets to risk). Others decide to establish a formal structure that creates an artificial ‘legal person'. Registered companies and incorporated associations are examples of such structures' however, the board members of these entities can still be personally liable in some instances.
For a discussion on legal structures and the decision on whether to incorporate, check out the PilchConnect website.
The Wrongs Act 1958(Vic) provides some protection from liability for volunteers undertaking community work (as defined in the Act) by transferring liability to the community organisation organising the work in some circumstances.
An unincorporated association is not really recognised by the legal system. Such entities are the result of people who share a common lawful purpose simply agreeing to further their interests by collective action - provided they do not legally incorporate under legislation, or fall within the definition of a partnership (i.e. they are a non-profit organisation). Some small recreational, sporting and special interest clubs and societies are structured in this way.
The important features of an unincorporated association are that it:
- Has a common lawful purpose (but not for financial advantage)
- Has a set of rules setting out things like its name, purpose, eligibility for membership and the like. Having a set of rules is not mandatory, but can be a very wise thing
- Operates through a private agreement between members, by consent (not a contract)
- Cannot hold commonly owned property in the name of the association
Some unincorporated associations rely on membership subscriptions and fees to fund their activities, while others rely on contributions, donations or raised funds.
A major reason for not using an unincorporated association as the chosen method of organisation is the risk of direct civil liability for the members of the group. An unincorporated association cannot take responsibility for this liability as distinct from its members. Instead, each member of the association, or in some cases, each member of its committee of management (if any), carries the liability jointly and severally (where all of the members are liable in part, or, any one or more of the members are liable for the whole). In addition to this major limitation, an unincorporated association may find that it is difficult to:
- Get tax concessions
- Enter into contracts in its own name
- Raise philanthropic or other gifts
- Deal with assets equitably and easily because they are common property, not in the ownership of the association
For further information on unincorporated groups, including answers to frequently asked questions, check out the PilchConnect website.
Incorporating as a registered company or an incorporated association has a range of legal benefits. Such an entity is able to sue and be sued, to borrow money, to enter contracts of insurance, to open and operate bank accounts, to own, hire, rent and sell property, commit wrongs and complain of wrongs done to it. Its officers are subject to a range of statutory duties and responsibilities, which if breached, can have serious consequences.
The three most common forms of incorporation for non-profit groups are:
- Incorporated association
- Company limited by guarantee
These legal structures are discussed in more detail below, and for further details on the different types of non-profit legal structures, check out the PilchConnect website.
Co-operatives are organisations concerned with providing for the common needs of their members. They are regulated in Victoria by the Co-operatives Act 1996(Vic) (the Act) and the Commonwealth Corporations Law. Making a profit is not the main aim of a co-operative, but they must adhere to the usual rules of business to achieve sound business outcomes and fair management.
Democratic rules used by a co-operative include:
- All co-operative members have equal status - one member one vote,
- No member can hold more than 20% of the shares
- All active members can nominate as directors and elect directors
- Capital is used to run an activity rather than being invested for an individual's benefit
Directors of co-operatives need to be aware that:
- A co-operative is a legal 'person' and its directors and officers hold responsibilities similar to those of a trustee of a personal estate, or a director of a company
- Directors should be familiar with the Co-operatives Principles, as outlined in the Co-operatives Act1996 (Vic)
- Directors must disclose any possible conflict of interest with their duties as directors
- Directors must not allow the co-operative to incur further debt if they believe it would become insolvent by doing so
- Directors must keep accurate and fair accounts and records and take responsibility for financial statements prepared for members
Co-operatives are a more formal type of incorporation than associations and are more related to the conduct of a business activity though the main purpose is not profit for its members, as with a company, but to advance the co-operative's activities. A co-operative may be either a trading or non-trading co-operative:
- A trading co-operativemust have share capital and at least five active members. It can distribute part of the surplus of the co-operative to members by way of bonus shares, dividends or rebates
- A non-trading co-operativemust have at least five active members, but must not distribute any surplus to members. It may or may not issue shares to members
The Co-operatives Act1996 (Vic) covers co-operatives in Victoria. Consumer Affairs Victoria (CAV) keeps a public register of co-operatives, authorises registration and enforces the Victorian Act. A detailed guide about running a co-operative can be obtained from the CAV website. The rules by which different types of co-operatives operate can also be downloaded there.
A co-operative is a body with separate legal status from its members (it can purchase property, sue and be sued etc). Generally, a member of a co-operative is not under any personal liability to the co-operative, except that:
- A member of a co-operative with a share capital is liable to the co-operative for the amount, if any, unpaid on the shares held by the member together with any charges payable by the member to the co-operative as required by the rules of the co-operative
- A member of a co-operative without a share capital is liable to the co-operative for any charges payable by the member to the co-operative as required by the rules of the co-operative
However, the limitation on personal liability of members, particularly directors of co-operatives will depend on the specific actions of the individuals, and whether they have acted appropriately.
Non-profit associations can be incorporated under legislation in each state. In Victoria this legislation is the Associations Incorporation Act1981 (Vic).
Incorporated associations are usually small bodies of people, clubs, etc that wish to gain legal status (wish to purchase property in the name of the club, sue and be sued, etc). Incorporation offers some protection for the organisation's office holders from the debt and liabilities incurred by the association as long as the association does not trade or make a profit for its members. Incorporation is voluntary, and once incorporated the Act provides a standard for operation.
Incorporated associations are an alternative to the corporation/company and are particularly appropriate for small non-profit groups and community bodies. Consumer Affairs Victoria is charged with the responsibility for registering and maintaining records on incorporated associations (just as they are for registered co-operatives).
The rules of incorporated associations have to conform to minimum legal requirements about membership, management, meetings and the administration of an organisation with a separate and potentially perpetual existence.
At least five people are necessary to form an incorporated association. There are also controls on what names can be used so as not to mislead people.
The advantages of incorporated associations are:
- Simplicity - incorporation requires authorisation by its members, and application for registration by a representative
- Model Rules - model rules can, with care, be adopted without the trouble of drafting your own, although if you will be seeking tax concessions, special provisions will need to be included
- Legal Personhood - the incorporated association is a legal person and therefore able to own property, defend and claim rights, and to some extent protect the members who are generally not liable for its debts and liabilities
- Except as provided under the Associations Incorporation Act1981 (Vic), or the particular rules of an incorporated association, a member of the committee, the public officer or a member of the incorporated association shall not, by reason only of membership, be liable to contribute towards the payment of the debts and liabilities of the incorporated association or the costs, charges and expenses of the winding up of the incorporated association
Because incorporated associations are State-based, if your group intends to conduct substantive activities in other jurisdictions, it should be registered with an Australian Registered Business Number under the Corporations Act (Cth). It may also be required to obtain separate fundraising registration.
For further information on Victorian incorporated associations, including details on how to set one up, check out the PilchConnect website.
A company has a legal identity separate from its members who are associated together in a company formed under the Corporations Act (a Commonwealth Act). The ‘legal person' is born at the point that it is incorporated. Almost all non-profit companies are companies limited by guarantee. Their members guarantee to pay, say, up to $100 towards the debts of the company on its winding up. Membership is generally of no value and is not transferable. They must have at least three directors who are appointed by the members.
The main features of a company/corporation are:
- It is a separate legal entity, with an existence distinct from its members
- If there is a dispute, the corporation is the person that must act to resolve it. The corporation must defend or enforce its rights (though a court can sometimes look behind the ‘corporate veil' to trace the individuals behind the company)
- Liability of members can be limited - though this also can be set aside
- It must be registered under the Commonwealth Corporations Act. The company name and Australian Company Number or its Australian Business Number should appear on all letters, invoices, orders, notices and cheques
Companies limited by guarantee are becoming increasingly popular for non-profits although their directors can have a higher level of personal liability for unpaid debts than committee members of incorporated associations. Concessional ASIC incorporation and annual statement fees are payable by charitable companies limited by guarantee.