Incorporation and Civil Liability Protection

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Whether an organisation is incorporated will determine its exposure to civil liability (that is, being sued).

Some groups may remain unincorporated, which means that if something goes wrong, an individual representing the organisation will need to be prepared to accept legal responsibility for anything the group does (or fails to do).  

However if you establish a formal structure (incorporate), this creates an artificial ‘legal person’.

Incorporated 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 ‘Getting Started’ section of 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 group organising the work in some circumstances.

Incorporating as a registered not-for-profit 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. Whether an organisation is a ‘not-for-profit’ organisation is determined by what it does with any profit it makes. Not-for-profit does not mean that the organisation is not allowed to make a profit but rather that the profits it makes are not distributed to the individual members of the organisation while the organisation is in operation or when it ends. Instead, any profit that the organisation makes must be used to further the purposes of the organisation.

The three most common forms of incorporation for non-profit groups are:

  • Co-operative
  • Incorporated association
  • Company limited by guarantee

These legal structures are discussed in more detail below. For further details on the different types of non-profit legal structures, check out the ‘Getting Started’ and ‘Choosing the right incorporated legal structure’ section of the PilchConnect website.

Co-operatives are organisations concerned with providing for the common needs of their members. They operate in Victoria under the Co-operatives Act 1996(Vic) (the Act) and the Commonwealth Corporations Law and are regulated by Consumer Affairs Victoria (CAV). CAV keeps a public register of co-operatives, authorises registration and enforces the Act. A group incorporated under the Act can operate (that is, carry on its activities) in Victoria

A co-operative is an organisation that is concerned with providing for the needs of its members. It is run according to the co-operative principle of one member, one vote and is set up for the mutual benefit of members.  

Co-operative values include:

  • All co-operative members have equal status – that is, 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

A co-operative may be either a trading or non-trading co-operative:

  • A trading co-operative must 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-operative must have at least five active members, but must not distribute any surplus to members. It may or may not issue shares to members

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 familiarise themselves with the Co-operatives Principles, as outlined in the Co-operatives Act 1996 (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, unlike a company, the main purpose is not to generate profit for its members, but to advance the co-operative’s activities.  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. 

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.

Detailed information about running a co-operative and the rules by which different types of co-operatives can operate can be obtained on the CAV website.  

Note: A nationally uniform set of laws for co-operatives has been developed for all states and territories. The law must be adopted by each jurisdiction before it can operate there. Victoria has passed legislation, the Co-operatives National Law Application Act 2013 (Vic), which is yet to commence. It is expected to come into operation in Victoria around May 2014.

Non-profit associations can be incorporated as ‘incorporated associations’ under legislation in each state.  In Victoria, incorporated associations are governed by the Association Incorporation Reform Act 2012 (Vic) and regulated by Consumer Affairs Victoria.

Incorporated associations are usually small bodies of people, clubs, etc that wish to gain legal status (in order to purchase property in the name of the club, enter into contracts, sue and be sued, etc). Incorporation offers some protection for the organisation’s office holders from the debt and liabilities incurred by the association (except where an officeholder acts in breach of his or her legal duties). Incorporation is voluntary, and once incorporated the Associations Incorporation Reform Act provides a standard for operation.

The rules of an incorporated association have to conform to minimum legal requirements about membership, management, meetings etc in line with the Associations Incorporation Reform Act and Regulations.

At least five people are necessary to form an incorporated association. The advantages of incorporated associations are:

  • Simplicity – incorporation requires authorisation by its members, and application for registration by a representative
  • Model Rules – model rules maintained by Consumer Affairs Victoria can, with care, be adopted without the trouble of drafting your own rules, 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 Reform Act 2012 (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 ASIC as an Australian Registered Business under the Corporations Act 2001 (Cth) – or you may wish to change the structure to a Company Limited by Guarantee (see below). It may also be required to obtain separate fundraising registration if it conducts fundraising activities.

For further information on Victorian incorporated associations, including details on how to set one up, contact Consumer Affairs Victoria or check out the ‘Getting Started’ and ‘Incorporating as an Incorporated Association’ sections of the PilchConnect website.

A company limited by guarantee (CLG) is another type of incorporated legal structure formed under the Corporations Act 2001 (Cth).

Almost all not-for-profit companies are companies limited by guarantee. Their members guarantee to pay a small amount (say, up to $100) towards the debts of the company on its winding up. A CLG can operate anywhere in Australia and must have at least three directors

The main features of a CLG 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
  • The company name and Australian Company Number or its Australian Business Number should appear on all public documents (eg. letters, invoices, orders, notices and cheques)
  • It must use the word ‘Limited’ or ‘Ltd’ after its name (although charities with unpaid directors can apply for an exemption from this requirement
  • Directors have legal governance duties they must comply with (set out in the Corporations Act or the Australian Charity and Not-for-profit Commission Act for directors of charities)

Generally speaking, the regime for incorporated associations under the Victorian Associations Incorporation Reform Act is more straightforward than the regime for CLGs under the Commonwealth Corporations Act. However, recent changes to the laws for both incorporated associations and CLGs registered as charities mean that the arguments for choosing to incorporate as an association over a CLG are no longer as compelling.

Despite this, it is crucial that a group which is going to incorporate as a CLG understands, and is able to comply with, the law and timeframes for lodging various documents with ASIC (and the ACNC for charities). The Corporations Act that governs CLGs is long and complex. If you wish to incorporate as a CLG, your group will need help from a person who has a good understanding of running a company, or access to professional legal or accounting advice. There are some basic fact sheets and resources published by ASIC and through PilchConnect.

CLGs that are registered as charities have different and less complex obligations under the Australian Charities and Not-for-profit Commission Act(ACNC Act), and reporting fees are also lower (waived entirely in many cases) than were previously required to be paid to ASIC, which has made it a more attractive structure. 

For more information about becoming a charity see the information on charitable status below or go to the ACNC website. For more information about CLGs, visit the ASIC website, or check out the ‘Getting Started’ and ‘Incorporating as a CLG’ sections of the PilchConnect website. 

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 without incorporating under legislation, or falling within the definition of a partnership. 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)

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 it’s 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 check out the ‘Getting Started’ section of the PilchConnect website.

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Incorporation and Civil Liability Protection

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