Setting Up Your Not-for-Profit? Here’s How to Choose the Right Legal Structure in Australia

Introduction

Selecting the appropriate legal structure is a foundational step for any not-for-profit (NFP) organisation in Australia, profoundly impacting its governance, operational capacity, and long-term sustainability. With several different legal structures available, making an informed choice is essential for an NFP to effectively pursue its mission and comply with Australian law.

This guide offers insights into the various business structure options available to Australian NFPs, assisting those establishing new organisations or considering a restructure. Understanding these frameworks is key to ensuring your chosen legal structure not only aligns with your core objectives but can also support diverse operational models, including those with social enterprise ambitions.

Why the Right Legal Structure Matters for Your Australian Not-for-Profit

Impact on Governance & Accountability

The legal structure you select for your NFP organisation fundamentally shapes its governance framework and how it operates. This choice dictates crucial aspects of your organisation, including:

• Who holds decision-making powers
• The procedures for conducting meetings
• The minimum number of members required

Consequently, the chosen business structure directly influences your organisation’s accountability to its members, donors, the wider community, and regulatory bodies.

An appropriate legal structure establishes clear lines of responsibility and can foster greater transparency. For instance, certain structures, like public companies limited by guarantee, often provide a more formal governance model. This formality can enhance how your organisation is perceived and ensure adherence to both internal policies and external legal requirements, thereby protecting its reputation.

Effective governance practices are imperative for all organisations in Australia, and the legal structure is the bedrock upon which these practices are built.

Implications for Liability & Asset Protection

Choosing the right legal structure for your NFP organisation carries significant implications for the personal liability of its members and the protection of the organisation’s assets. Different legal structures offer varying degrees of safeguards against debts and legal actions.

One of the primary advantages of an incorporated legal structure is that it typically establishes the organisation as a separate legal entity. This means the organisation can enter into contracts, own property, and be sued in its own name, rather than individuals carrying this burden.

This separation is crucial for protecting members and office-holders from personal responsibility for the organisation’s debts or liabilities, provided they have acted in good faith and in accordance with their duties. For example:

• Incorporated structures generally limit members’ liability to a nominal amount, safeguarding their personal assets if the organisation faces financial difficulties
• In contrast, individuals involved in unincorporated associations might face unlimited personal liability for the group’s obligations

Furthermore, certain structures, like charitable trusts, are specifically designed to ensure assets are preserved and used solely for their intended charitable purposes, offering an additional layer of asset protection.

Effect on Funding Opportunities & Tax Concessions

The legal structure of your NFP organisation can significantly influence its ability to secure funding and its eligibility for various tax concessions. Many government grants and philanthropic funding bodies have specific requirements regarding an applicant’s legal status. Therefore, selecting an appropriate business structure is a critical step for the financial sustainability of organisations in Australia.

Different legal structures may also affect your organisation’s eligibility for important tax benefits, such as Deductible Gift Recipient (DGR) status, which allows donors to make tax-deductible contributions. Consider these key points:

• An incorporated legal structure often makes it easier for an organisation to apply for government grants in its own name
• Some structures, like companies limited by guarantee, may be more readily understood and accepted by funders, potentially making it easier to attract external funding and finance compared to less formal arrangements

Careful consideration of these factors when choosing your legal structure can therefore be crucial for maximising both operational efficiency and financial benefits for your social enterprise or charitable mission.

Common Incorporated Legal Structures for Australian Not-for-Profit Organisations

Incorporated Associations An Overview & Considerations

Incorporated associations are legal entities formed under state or territory legislation, providing a separate legal identity distinct from their members. This structure is particularly common among smaller, local NFP organisations such as community groups, sporting clubs, and societies.

Each Australian state and territory has its own laws governing incorporated associations, which means the rules and requirements can vary depending on where the organisation is registered.

Key features of incorporated associations include:

• State or Territory Regulation: Incorporated associations are regulated by the relevant state or territory authority, such as the Office of Fair Trading in Queensland or the NSW Fair Trading in New South Wales. This means they generally operate only within the boundaries of that jurisdiction.
• Suitability for Smaller Groups: This structure is ideal for organisations with limited resources and a local focus, as it offers a simpler and more affordable way to establish a legal entity.
• Separate Legal Identity: Incorporated associations can hold property, enter into contracts, sue, and be sued in their own name, providing members with protection from personal liability for the organisation’s debts.
• Governance and Compliance: They must comply with state or territory legislation, which typically includes requirements such as having a committee, holding annual general meetings, maintaining financial records, and lodging annual statements. The governing document, often called the constitution or rules, outlines the rights and responsibilities of members.

Reporting requirements vary by size and jurisdiction. For example, in Queensland, a tiered reporting system applies:

• Tier 1 (assets or revenue over $100,000) requires audited financial statements.
• Tier 2 ($20,000 to $100,000) requires financial statements certified by an approved person but no audit.
• Tier 3 (below $20,000) requires a signed statement confirming proper record-keeping, with no audit or review.

It’s important to note that incorporated associations are limited to operating within one state or territory. Therefore, they may not be suitable for organisations planning to operate nationally or across multiple jurisdictions, in which case other structures may be more appropriate.

Companies Limited by Guarantee Explained & Their Suitability

Companies limited by guarantee (CLGs) are a popular incorporated structure for NFP organisations that operate nationally or have larger, more complex operations. Unlike for-profit companies, CLGs do not have shareholders; instead, members guarantee to contribute a nominal amount (often as little as one dollar) if the company is wound up.

Key characteristics of CLGs include:

• National Operation: CLGs are registered with the Australian Securities and Investments Commission (ASIC) and can operate across all Australian states and territories, making them suitable for organisations with a broad geographic reach.
• Limited Liability: Members’ liability is limited to the amount they guarantee, protecting personal assets from organisational debts.
• Governance Framework: CLGs have directors and members, with directors responsible for managing the company. They must comply with the Corporations Act 2001 (Cth), which imposes governance, reporting, and compliance obligations similar to those for for-profit companies, but tailored to not-for-profit entities.
• Regulatory Oversight: Registered charities that are CLGs report to the Australian Charities and Not-for-profits Commission (ACNC), which oversees governance and compliance. Non-registered CLGs still lodge financial statements with ASIC.

Reporting and audit requirements for CLGs are tiered based on the organisation’s size:

• Large charities (revenue over $1 million) require full audits.
• Medium charities (revenue between $250,000 and $1 million) may have a review instead of a full audit.
• Small charities (revenue under $250,000) can choose whether to submit financial statements, with no audit or review required.

All CLGs must lodge an Annual Information Statement with the ACNC.

CLGs are often chosen by larger NFPs, those operating in multiple states, or organisations that require a robust governance framework to attract funding and manage complex activities. Additionally, organisations initially established as incorporated associations may restructure into a CLG as they grow or expand operations. This transition requires member approval, ASIC consent, and may have tax implications.

Choosing between an incorporated association and a CLG depends largely on the organisation’s size, operational scope, and future aspirations. Incorporated associations suit smaller, local groups, while CLGs provide a more formal structure for larger, multi-jurisdictional organisations seeking greater governance and funding opportunities. Consulting a qualified NFP legal advisor is recommended to determine the best fit for your organisation’s specific circumstances.

Other Not-for-Profit Business Structure Options in Australia

Understanding Charitable Trusts & Their Purpose

A charitable trust is a distinct legal structure available to NFP organisations in Australia, primarily designed to hold and manage assets for specific charitable purposes. This type of trust functions by having trustees manage assets or property, ensuring these are used strictly for the public benefit.

Key charitable purposes include:

• Advancing education
• Relieving poverty
• Promoting religion

For instance, a private or public ancillary fund is a common example of a trust structure an organisation might choose.

The governance of a charitable trust is dictated by a trust deed, a critical document that outlines the trust’s objectives, how it will be managed, and the rules for distributing its assets. This legal structure is particularly relevant for an NFP organisation focused on the dedicated management of assets for a particular cause.

The transparent management and preservation of assets for their intended charitable aims are key features of this business structure. However, establishing a trust requires careful drafting of the trust deed and adherence to state-based legal requirements.

Exploring Co-operatives as a Not-for-Profit Legal Structure

Co-operatives represent another legal structure that certain NFP organisations in Australia might consider, especially when the primary aim is to benefit their members directly. For a co-operative to be a suitable NFP business structure, its rules must explicitly prevent any surplus or profits from being distributed to its members; these are often referred to as non-distributing or non-trading co-operatives.

Typically, the name of such an organisation will include “Co-operative” and often “Limited” or “Ltd”.

The regulatory framework for co-operatives is largely uniform across Australia due to the Co-operatives National Law, although specific requirements can vary by state or territory. These jurisdictions also provide model rules that co-operatives can adopt for their governance.

This community-focused model can be an effective choice for organisations where member benefit and participation are central to their mission.

Indigenous Corporations: A Specific Australian Legal Structure

A specific legal structure available for Aboriginal and Torres Strait Islander organisations is the Indigenous corporation, registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth). These corporations are a unique feature of the Australian NFP landscape, designed to support and benefit Indigenous communities.

An organisation registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) will usually have a name like ‘XYZ Aboriginal Corporation’.

The Office of the Registrar of Indigenous Corporations (ORIC) is the dedicated regulatory body that oversees these corporations. The primary purpose of this business structure is to advance the interests and improve conditions for Aboriginal and Torres Strait Islander peoples, particularly those in remote areas.

Choosing this legal structure is appropriate for groups whose mission is specifically focused on these community benefits.

Proprietary Limited Companies: When This Business Structure Might Suit an Not-for-Profit

While generally associated with for-profit ventures, a proprietary limited company (Pty Ltd) can, in limited circumstances, be an appropriate legal structure for an NFP organisation. Typically, the Pty Ltd structure is not suitable because charities must be not-for-profit, and this structure usually allows for private benefits to shareholders, such as dividend payments or proceeds from share sales.

An organisation of this type is identifiable by ‘Pty Ltd’ at the end of its name.

However, there are specific scenarios where this business structure might be viable for an NFP:

• When it is wholly owned by another registered charity, effectively acting as a subsidiary to support the parent charity’s objectives (this can be useful for a social enterprise arm)
• When it serves as a corporate trustee for a charitable trust

In such cases, profits generated are typically reinvested into the NFP’s charitable activities. Careful management of governance and regulatory obligations under the Corporations Act 2001 (Cth) is essential if considering this structure.

Unincorporated Legal Structures: A Brief Look for Your Organisation

Unincorporated Associations & Their Informal Nature

An unincorporated association is a type of legal structure where a group of people act together as an organisation without possessing a legally recognised status separate from its members. This business structure is generally more informal than incorporated associations and is often chosen by smaller NFP groups with minimal assets.

A key characteristic of this legal structure is its lack of a separate legal identity. This has several important implications for the organisation and its members:

• Contractual Liability: The organisation itself cannot enter into contracts. Consequently, individual members typically must do so on behalf of the group, potentially exposing them to direct legal obligations.
• Personal Liability: Members may face unlimited personal liability for the organisation’s debts and obligations. This means personal assets could be at risk if the association incurs debt or faces legal action.
• Operational Limitations: Due to these factors, this structure is usually most suitable for smaller, less formal community groups where the scale of operations and financial risk is minimal.

Trusts as Unincorporated Structures & Key Features

Trusts represent another form of unincorporated legal structure that organisations in Australia might consider. A trust is essentially a legal relationship where a person or organisation, known as the trustee, holds and manages assets for the benefit of others, the beneficiaries, often for specific charitable purposes. For example, a private or public ancillary fund is a type of trust an organisation might use.

The operation and governance of a trust are dictated by a crucial document known as a trust deed. This document is fundamental as it outlines:

• The trust’s specific objectives and the charitable purposes it aims to fulfil.
• The rules and procedures for how the trustees are to manage the trust’s assets.
• The guidelines detailing how assets and any income generated are to be distributed to beneficiaries or applied towards the charitable purposes.

While this business structure can offer a degree of flexibility and simplicity, particularly when the organisation’s objectives are narrowly and clearly defined, establishing and managing a trust requires careful attention to detail. Key considerations include:

• The meticulous drafting of the trust deed to accurately reflect the trust’s intentions
• Strict adherence to relevant state-based legal requirements
• The need for ongoing, diligent oversight by the trustees to ensure the trust’s objectives are consistently pursued and met

Key Factors for Your Not-for-Profit When Deciding on an Australian Legal Structure

Considering Your Organisation’s Size, Operational Scope & Future Aspirations

When choosing the right legal structure for your NFP organisation, it is essential to assess its current size and project its future growth. The complexity of your organisation’s activities and its available resources, both financial and human, will significantly influence which business structure is most suitable.

The geographical reach of your NFP is another critical factor in determining the legal structure you should choose. Consider whether your organisation will operate locally, within a single state or territory, across multiple Australian states, or even internationally.

Key aspects to evaluate include:

• Local or State-Based Operations: An incorporated association might be appropriate if your NFP is only operating in one state and is not considered large. This type of legal structure is often simpler to manage for community-based groups.
• National or International Operations: If your organisation plans to operate across Australia or has international ambitions, a CLG may be a more fitting business structure. This structure is designed to handle larger operations and more complex regulatory requirements.
• Future Development: Your chosen legal structure should not only meet current needs but also allow for future development and potential restructure if your organisation’s scope or complexity changes significantly.

Understanding these elements will assist your NFP in selecting a legal framework that supports its mission and long-term strategic goals, including any social enterprise activities.

Evaluating Reporting, Compliance & Administrative Burdens of Different Legal Structures

Different legal structures for NFP organisations in Australia come with varying levels of reporting, compliance, and administrative responsibilities. It is important to evaluate these burdens to ensure the chosen business structure aligns with your organisation’s capacity and resources.

The kind and level of information your organisation must provide often depend on its legal structure and size. For example:

• Incorporated Associations (IAs): These are regulated at the state or territory level, such as under the Associations Incorporation Act 1981 (QLD) in Queensland. Reporting requirements are often tiered based on revenue or assets. IAs that are also registered charities may face dual reporting obligations to both the state regulator and the ACNC.
• CLGs: These entities must comply with the Corporations Act 2001 (Cth). If registered as charities, CLGs report to the ACNC, with reporting and audit requirements tiered by size (small, medium, large). Non-charity CLGs may still need to lodge financial statements with ASIC.

Choosing the right legal structure involves understanding these different legal requirements to ensure your NFP can meet its ongoing compliance duties effectively.

The Importance of a Governing Document & Seeking Professional Advice for Your Business Structure

A crucial aspect of establishing your NFP organisation is its governing document, which could be a constitution, rules, or a trust deed. This document is fundamental as it outlines the organisation’s purpose, how it will be managed, and its operational guidelines, and it must be appropriate for the chosen legal structure and meet ACNC registration requirements if applicable.

Given the complexities involved in choosing the right legal structure and drafting an appropriate governing document, seeking professional advice is highly recommended.

Consider the following:

• Early Legal Counsel: Obtaining legal and other professional advice early in the process can help your organisation select a business structure that is specific to its situation and future aspirations. This is particularly important when deciding between different legal structures.
• Drafting Assistance: Professional advisors can also assist in preparing your charity’s governing document to ensure it complies with all necessary legal requirements and accurately reflects your organisation’s objectives.
• Restructure Considerations: If your NFP is considering a restructure, consulting a qualified legal advisor is vital to understand the implications and ensure a smooth transition.

Making an informed decision about your organisation’s legal structure, supported by professional guidance, is a key step towards its long-term success and sustainability.

Conclusion

Choosing the right legal structure is a critical decision for any NFP organisation in Australia, impacting everything from governance and liability to funding and compliance. Understanding the different legal structures available, such as incorporated associations, CLGs, trusts, and others, alongside key factors like your organisation’s size, operational scope, and reporting obligations, is essential for establishing a solid foundation for your NFP’s mission, including any social enterprise ambitions.

If you are considering which legal structure should you choose for your NFP or require assistance with your existing business structure, contact LawBridge today for trusted expertise. Our specialists in not-for-profit legal services can provide tailored advice to ensure your organisation in Australia is set up for success and compliance.

Frequently Asked Questions About Not-for-Profit Legal Structures in Australia