What is incorporation and why do it?

22 Apr 2020

If you are reading this article, chances are you, or someone you know, are thinking of setting up a not-for-profit (NFP) organisation or a charity of some kind.

Or perhaps you belong to a NFP or charity that started off as a small group of people that has grown over time.

And now you are thinking about whether you should be incorporated. Or maybe someone has suggested this to you.

Regardless of why you are thinking about incorporation, good on you for doing it. It is definitely a good thing to be thinking about, even if you ultimately decide not to!

The decision on whether to incorporate will depend on all number of things. We explore the key ones below.

Please keep reading though, all the way to the end, as there is one last consideration that is very important and that most people don't know about.

What does it mean to become incorporated?

An individual, just like you, has all kinds of legal powers. Assuming you are over 18 of course!

For example, you can sign contracts and be bound by them. You can own land, goods and other things. You can sue others and can in turn be sued.

This is because, according to law, you are a legal entity.

Incorporation is, in simple terms, a way of giving all these same powers to an entity that is separate from you and separate from others in your group. The common incorporated entity types used by not-for-profit and charitable organisations include companies, incorporated associations, and cooperatives.

You can learn more about the different types of incorporated entities in our article coming soon!

Importantly, you need to know that for as long as your NFP or charity is unincorporated, there is no separate legal entity with the types of powers described above – meaning that one or more of the individuals in your group will need to take on the legal role and responsibilities personally.

Is incorporation for you?

OK, now that you have a better idea about what incorporation means, is incorporation for you?

The decision about whether you should incorporate your not-for-profit or charitable organisation depends on a number of factors. The key ones are:

The decision about whether you should incorporate your not-for-profit or charitable organisation depends on a number of factors. The key ones are:

  • your organisation's purpose, mission and vision;
  • the scope, nature and size of your organisation's activities;
  • the geographic coverage (eg local community, state-based, nation-wide) of your organisation now and for the mid-term;
  • the number of members you have;
  • whether you wish to receive government grants and/or gifts from philanthropic donors;
  • the type and amount of property, money and other assets your organisation has;
  • the length of time you will be operating the organisation;
  • whether there is a desire to limit the liability of those involved;
  • the time and skill needed for administration and to ensure legal and regulatory compliance; and
  • the experience, commitment and enthusiasm of those involved.

For example, an organisation operating across all of Australia, that wishes to receive government funding, holds property and assets (which could include intellectual property), expects to be around for a long time, wishes to build up a large membership base and is involved in the direct provision of services would almost certainly benefit from incorporation.

On the flip side, a group of people wishing to operate within a specific town or suburb, that will depend entirely on volunteers and only intends to operate for 6 months would probably find the administration and legal compliance associated with incorporation a bit of a burden, particularly considering the process required to wind up (or dissolve) it when the time comes to close the doors.

What can an unincorporated organisation do?

An unincorporated organisation is, through its individual members, permitted to do many things including:

  • acquire assets;
  • engage in business dealings;
  • hire staff; and
  • generally carry on its activities and pursue its goals as it pleases.
What are the risks of being an unincorporated association?

There are risks associated with being involved in and running an unincorporated organisation that arise primarily because the unincorporated organisation is not an independent legal entity.

Difficulties may arise because:

  • an unincorporated organisation cannot sue or be sued in its own right, meaning that if any legal action arises it will be one or more of the individuals involved that are on the hook and could be dragged into court;
  • property and other assets must be held by one or more of the individuals on behalf of the organisation (held on trust), and cannot be held by the organisation in its own right – which can result in disputes and for some, temptation;
  • while the general members of an unincorporated organisation may only be liable for the membership fees, those members of the organisation who are responsible for the decision making and running of the unincorporated organisation (often referred to as the 'executive committee' or 'management committee') have no such limitation on their personal liability and could find that their own assets are vulnerable; or
  • grant-giving bodies, banks, government and other external agencies may refuse to deal with an unincorporated entity directly – though they may be comfortable working with an incorporated entity for your benefit (sometimes called an auspicing arrangement).
One last thing to note ...

There is one important factor you should be aware of. And this little thing doesn't seem to be all that well-known.

One of the key things to assess right up front is the number of people involved, or to be involved, in your organisation, and the type of activity you are engaged in.

This is because the law says that you are not allowed to participate in the formation of an unincorporated association if it:

  • has more than 20 members; and
  • has, as an object, gain for itself or for any of its members.

While the last thing we want to do is stress you out or cause you problems, when applying the requirements listed above, it is important to note the concept of 'gain' is quite broad and includes something acquired or obtained and is not limited just to monetary gain.

The round up
Deciding whether to incorporate at all and, if so, which type is best suited for you, can be a tricky business. While there is some scope to change your type of incorporated entity down the track, it really is best to start things on the right foot.

Feel free to reach out to us if you would like some help.

Meanwhile, you may like to check out our comprehensive course on establishing a not for profit organsiation or charity in Australia. 

Or read our article on different types of incorporated entities (coming soon!).

If you would like to learn about registering your unincorporated association as a charity with the Australian Charities and Not-for-profits Commission (ACNC) or check out the ACNC's template rules for an unincorporated association, you can visit the ACNC's factsheet named 'Unincorporated associations and ACNC registration'.

And it wouldn't be a post without comments, so please do let us know why you chose to incorporate or why you chose not to below.

Author: Darren Fittler
Darren Fittler is one of Australia's leading lawyers specialising in serving charity and not-for-profit organisations for more than 15 years.

You can find out more about Darren Fittler here.