Incorporated structures

Contributed by Wendy Lamotte and Gosnells Community Legal Centre and current to 1 September 2005

WHAT IS AN INCORPORATED STRUCTURE?

An incorporated structure is an organisation that has separate legal status as a body corporate or company.

WHY INCORPORATE?

Unincorporated organisations are simply the sum of all the individual members – the organisation itself does not exist as a separate legal entity. This means the organisation must rely on its members to exercise legal powers on its behalf. Members of unincorporated organisations are responsible for any liabilities the organisation may incur as a result of any of its activities.

When an organisation is incorporated it becomes a legal person, separate from its members. Consequently the organisation has the legal powers and capacity of an individual and is able to:

• own property in its own name without having to appoint its members as trustees;

• sue or be sued in its own name;

• enter into contracts in its own name; and

• do most other activities that an individual can do.

As a distinct legal entity, a corporate body is also responsible for its own debts and liabilities. So, any claims against the organisation would be primarily enforceable against the corporate body, not the members personally – unless a claim can also be made against a member because the member has, for example, breached his or her duties as a director or committee member of the corporate entity, or given a personal guarantee. This protection for members is a significant benefit of incorporation.

Bodies are incorporated under state or federal statutory law. Although incorporation is voluntary, once it has been incorporated the organisation must comply with the requirements of the relevant incorporation statute.

TYPES OF INCORPORATED STRUCTURES

If members of a group decide that they wish to incorporate as a separate legal entity then there are a number of options available depending upon the purpose, objectives, nature and structure of the group. Advice should be sought on whether, in the group’s particular circumstances, the group should incorporate and, if so, which corporate structure best suits its needs and objectives.

The following are examples of incorporated structures:

• Incorporated association

• Incorporated company

• Co-operative company

• Aboriginal association

Incorporated associations and co-operatives are registered under state laws, while Aboriginal associations and companies are registered under federal laws.

Incorporation under the _Associations Incorporation Act_

For most not-for-profit, non-commercial organisations wanting to operate only within Western Australia the most suitable form of incorporation is as an incorporated association under the Associations Incorporation Act 1987 (WA) (“the Act”).

Registering as an incorporated association is a popular and suitable option for many community and charitable groups because this structure is specifically designed for not-for-profit organisations and is simple and cost effective.

The Act describes which groups are eligible for incorporation and prescribes the structure, basic procedures and reporting obligations of incorporated associations. Administration of the Act is carried out by the Department of Consumer and Employment Protection (DOCEP) through the Commissioner for Fair Trading. DOCEP’s website contains useful information on how to apply for incorporation under the Act: see www.docep.wa.gov.au.

The Act provides that the rules of an association (including any amendments) as well as every other document which is required by the Act to be lodged with the Commissioner are to be available to members of the public upon request and payment of a prescribed fee.

To become an incorporated association, the organisation must be not-for-profit. This refers to the membership, purpose and activity of the association. This means if any trading is conducted by the association it must be ancillary to the main purpose and not substantial in volume in relation to the other activities of the association; and any profit made by the association must be used for the purpose of the association, not to provide financial gain to members.

However, the restrictions in the Act on trading and profit making do not prevent incorporated associations from:

• making a profit by, for example, fundraising – as long as members do not receive the profit;

• employing people (including members) and paying them wages or salary;

• allowing members to derive a monetary profit from the association in circumstances where the member would be equally entitled to the benefit if he or she was not a member, for example, members of housing associations being housed;

• regulating a trade, business or industry that members are involved in, as long as the association itself does not participate in the trade, business or industry, for example professional associations;

• commercially trading, as long as the trading is secondary and not substantial in volume to the main activities of the association (such as a community organisation selling publications while their main function is to provide a counselling service);

• charging admission fees to events organised for the promotion of the association’s objectives;

• arranging competitions between members for prizes and trophies, other than money prizes; or

• providing facilities or services for members.

Incorporation under the _Corporations Act_

An organisation that wishes to operate for profit or wants to conduct its activities anywhere in Australia would need to incorporate as an Australian company under the Corporations Act 2001 (Cth).

Organisations can incorporate as either a public or private company. Private companies (proprietary companies) cannot have more than 50 members and are not able to attract investment from the general public. On the other hand, public companies can raise capital by offering shares to the public and there is no restriction on the number of members (shareholders). For these reasons public companies are subject to more stringent disclosure and reporting requirements under the Corporations Act than proprietary companies.

There are 4 types of companies:

• Public no liability company
No liability companies can only be used for mining purposes.

• Unlimited company with share capital
Unlimited companies with share capital can be public or proprietary. This type of company is often used for pooled investments because it is easier for members to withdraw their investment capital from this type of structure. The disadvantage is that members have unlimited liability.

• Company limited by shares
A company limited by shares can be public or proprietary and is often used for business purposes. Members’ personal liability is limited to any unpaid subscription price for their own shares in the company.

• Public company limited by guarantee
A company limited by guarantee must be a public company and is therefore subject to the more stringent disclosure and reporting requirements for public companies under the Corporations Act. Companies limited by guarantee cannot issue shares. This is an advantage for not-for-profit organisations with a fluctuating membership because members do not have to buy shares in the company. Like a company limited by shares, this company structure limits liability of members but instead of being limited to the amount payable for shares issued, liability is limited to the amount agreed to in a guarantee (for example, the membership fee). However, members only need to contribute the guaranteed amount if the company is wound up. The company must include ‘Limited’ or ‘Ltd’ at the end of its name, but this requirement may be waived for a not-for-profit organisation.

Another requirement is that as a public company, a company limited by guarantee must open its registered office for at least 3 hours each business day. If this requirement causes difficulty, arrangements could be made with a professional business (such as an accounting or law firm) to use their office as the company’s registered office.

In general, companies have greater scope than incorporated associations in the activities that they can undertake. The main concerns with becoming a company are that companies are more highly regulated than other entities and incorporation can also be expensive (at least $1,000) and involve higher ongoing costs.

Incorporation as a co-operative company

A co-operative is formed for the mutual benefit of its members. The Income Tax Assessment 1936 (Cth) defines a co-operative as a corporate structure which conducts at least 90% of its business with one or more of the following objects:

• the acquisition of animals or commodities for disposal or distribution among its shareholders;

• the acquisition of animals or commodities from its shareholders for disposal or distribution;

• the storage, marketing, packing or processing of commodities of its shareholders;

• the rendering of services to its shareholders;

• the obtaining of funds from its shareholders for the purpose of making loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or for residence and business.

The Income Tax Assessment also provides limitations in relation to share capital ownership in co-operatives. The number of shares to be held by any one member is limited and shares cannot be listed on a stock exchange or sold to the public in any other manner. Alternatively, the co-operative can have no share capital.

In Western Australia, most co-operatives are established under the Companies (Cooperative) Act 1943 (WA). Co-operatives can be very complex to set up and you should seek legal advice if you want to establish this type of company.

Incorporation under the _Aboriginal Councils and Associations Act 1976_

The Aboriginal Councils and Associations Act 1976 (Cth) provides a simple way for Aboriginal groups to incorporate. This process is outlined in NATIVE TITLE AND ABORIGINAL LAND AND HERITAGE.

Remaining an unincorporated association

Although there are many benefits to becoming incorporated, some community groups may still choose to remain unincorporated. Even if a group remains unincorporated they should still seek advice about the organisation’s compliance requirements in relation to matters such as tax, WorkSafe and employment issues.