When establishing a not-for-profit organisation, there are several entity types you could choose from, however the two most common entity types are incorporated associations and companies limited by guarantee. It is useful to compare the differences between these two types to see which one of them is more suited to your needs. If your existing organisation was established as an incorporated association and on review of your organisation’s current circumstances you conclude that it would be more appropriate for your organisation’s activities to be carried out by a company limited by guarantee, then the Associations Incorporations Act 1985 (SA) provides a streamlined mechanism to convert your organisation from an incorporated association to a company limited by guarantee. (Each other State and Territory have similar legislation for conversion).
Prior to the establishment of the Australian Charities and Not-for-profits Commission (‘ACNC’) in December 2012, it was often the case that the decision about the best entity type was based on the record keeping, reporting and auditing requirements and so there was a preference for people to opt for the less rigorous requirements of the incorporated association model over a company limited by guarantee. However, since the introduction of the ACNC, if your organisation is a registered charity then regardless of whether your organisation operates as an incorporated association or a company limited by guarantee, its financial reporting obligations are now the same.
Differences between incorporated association and company limited by guarantee
The attached Table below provides a breakdown of the differences between the two entity types.
Changing from an incorporated association to a company limited by guarantee
In most States and Territories, where the organisation wishes for its legal identity to remain unchanged, the law that governs incorporated associations provides for the smooth transition from an incorporated association to a company limited by guarantee. In South Australia the relevant part of the Associations Incorporations Act 1985 (SA) that provides for the transfer of incorporation is section 42. The transfer would typically involve the following steps and/or considerations:
- The preparation of a constitution for a company limited by guarantee.
- Approval from the members of the incorporated association to transfer the activities and undertakings of the association to a company limited by guarantee.
- The incorporation of a new company through ASIC.
- A request to the Commissioner of Consumer and Business Services seeking consent for the transfer. If the Commissioner provides his or her consent, a notice is sent to the association and the association then has 3 months to formally transfer its activities and undertakings to the newly established company.
- Once the transfer has been effected, the incorporated association is dissolved; the property of the association becomes the property of the company; and the rights and liabilities of the association become rights and liabilities of the company and the assets of the association are vested in the company without attracting stamp duty.
- The organisation’s ABN will remain the same and provided the organisation’s objects and purposes haven’t changed as a consequence of the transfer, any tax concessions it previously had when it operated as an incorporated association will be transferred to the company.
- If the organisation is a charity that is registered with the ACNC, it will need to advise the ACNC of the change, or if the organisation is endorsed as a deductible gift recipient, it will need to advise the Australian Taxation Office of the changes to its legal structure and constitution.
Prior to the recent changes to the laws that govern registered charities, it was generally recognised that incorporated associations were less expensive to establish and simpler to run by comparison to a company limited by guarantee. Following the recent changes, the arguments for choosing the structure of an incorporated association over a company limited by guarantee are no longer as compelling. Whichever structure you choose, make sure you weigh up the differences by asking yourself what it is that you are hoping to achieve in terms of the activities that are undertaken by your organisation now and in the short to medium term and what it is that you think you can manage in terms of the initial set up costs, ongoing fees and legal compliance.
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This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.