Should we incorporate?

Posted by: Australian Centre for Philanthropy and Nonprofit Studies
Queensland University of Technology

ost believe that you can only operate as an association if you legally incorporate. This is not so. Incorporation is not compulsory or obligatory it is a voluntary choice of the group. The information below gives you some information about incorporation including the advantages and some of the drawbacks. It is a good idea to weigh up the pros and cons of incorporation to make sure it is right for you.

What is incorporation?

Incorporation is a voluntary means of creating a legal identity. Through incorporation the association becomes in the eyes of the law a legal body which allows the group to:

Continue to exist regardless of the change to the membership;
Take legal action in its own name and also allows others to sue the association rather than individual members
Buy, sell and own property
Borrow money
Enter into contracts
Apply for government grants
Accept gifts and legacies under a Will
Limits the liability of members

Further details of what this means is listed below in the Pro‟s and Con‟s of incorporation section.

Do we have to incorporate?

Incorporation is not obligatory or compulsory. Many unincorporated groups and clubs operate in the community and function very well. But there are risks and disadvantages to remaining unincorporated.

Pro’s and con’s of incorporation

Advantages

Generally, once the group starts to accumulate money and assets and starts to become active in the community, it should seriously consider incorporating in a way that separates the individual person (member) from the entity. The benefits of incorporating your association include:

Simplifies and clarifies the management and ownership of the money and other assets of the body. Bank accounts are held in the name of the association. Assets are purchased and owned by the association. The association can enter into contracts.
Provides some legal and financial protection for the management committee of the association who otherwise might be liable for damages and contractual obligations arising from the activities of the association. Without incorporation, a group has no separate legal existence. Incorporation protects committee members from most personal liability but leaves them with the responsibility to act honestly and prudently.
Clarifies and formalises the objectives of the association. To become incorporated, associations need to state clearly the purposes for which they are being formed. The purposes, frequently known as the objects of the association, are fixed in the rules of the association (also known as the constitution). The regulating body must be advised of any changes.
Sets out regulations about how the association shall operate. These regulations are designed to ensure that the association operates fairly, responsibly and accountably to its members. They also protect against dishonesty and manage matters such as conflict of interest. Being incorporated also requires that some information is regularly made available to the regulating body and to the public about the affairs and operations of the association.
Allows organisations to apply for a much wider range of public and private funding. Many government and philanthropic organisations make it a basic requirement that applicants for funding are incorporated.
Allows some incorporated bodies to enjoy tax advantages. Considering the benefits incorporation provides within this Act, the cost for incorporation is a worthwhile investment.

Once incorporated, there are some regular compliance tasks required such as the keeping of records, holding of elections and submitting of returns.

Disadvantages

Incorporation whether as an Incorporated association or as a company limited by guarantee requires regular and ongoing compliance with Government regulation. There is a cost in fulfilling each of the requirements in both time and money. Incorporation also means being open to publicly scrutiny. Matters to consider prior to looking at incorporating are:

Being prepared to forgo total privacy of the association‟s financial matters and accept that there will be public scrutiny of the association‟s activities.
Being prepared to follow the regulations as set down by government. This may not give you the total flexibility that your group has now.
Weigh up the risk associated with being incorporated against the benefits of incorporation.
most incorporated associations will be required to have compulsory public liability insurance
proper membership records and minutes must be kept

The Caxton Street Incorporated Association Manual set out the following rough checklist which you may find helpful.

PRECEDENTS

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ROUGH CHECKLIST TO WHETHER AN INCORPORATED ASSOCIATION STRUCTURE IS SUITABLE FOR YOUR ASSOCIATION

If you answer “yes” or “not applicable” or “does not matter” to the following questions an incorporated association may be appropriate. If you answer “no”, consideration ought to be given to whether an incorporated association is really the most appropriate structure for your organisation.

Do your committee members require limited liability as far as the possible debts and liabilities of the association are concerned?
Does your association need to borrow money from a financial institution?
Does your association intend to buy or lease land?
Does your association intend to enter into contracts to buy property (other than land) or services?
Could your association be left a gift under a will?
Will your association be given grants by a government department or local council?
Can your association function along democratic lines?Will it make any difference to the public or members of the association if the word “inc” or “incorporated” must form part of its name?
Can your association (if over $100,000 in revenue or assets) afford to have its accounts prepared and audited properly each year or find volunteers to do this task?
Does your committee meet at least once in every four months in the year?
Can your association afford the incorporation fees?
Can your association afford the premiums for public liability insurance if the association owns or leases land?Will the association‟s members be willing not to receive any distributions of money from the association?
Has your association at least three committee members and at least 7 members?
Will all the committee members be adults?
Do the members of the association mind if their annual report and financial statements are made public?
Will the association exist for the foreseeable future?
Is the association prepared to keep accurate minutes of its decisions and a register of members?
Is the income and property of the association to be used solely in promotion of its objects?
Will your association conduct art unions, raffles or bingo?

What are the obligations of being incorporated?

While there are benefits to incorporation (for example limited liability) being an incorporated group also comes with obligations. These include:

Have to have a name ( which generally must have the words „incorporated‟ or “inc”or “limited‟ or „Ltd” after it);
Have to have a written constitution or set of rules that the group agrees to operate by;
Having to pay registration fees and annual fees to government
Having to keep the public register which includes the name and address of the contact person up to date
Have to hold meetings and keep certain records.

NB: The requirements for initial incorporation and the ongoing obligations and reporting requirements vary depending on the type of incorporated legal structure your group chooses. It will also depend on the income and operations of your organisation. See the next to pages for further details.

Although these obligations must be done they are not too onerous once you get started. However you do need to have people in the group ready, willing and able to take on the tasks required.

Legislation

Queensland Associations Incorporation Act 1981
www.legislation.qld.gov.au/LEGISLTN/CURRENT/A/AssocIncorpA81.pdf

Queensland Associations Incorporation regulations
www.legislation.qld.gov.au/LEGISLTN/CURRENT/A/AssocIncorpR99.pdf

Australian Securities and Investments Commission for details about companies limited by guarantee
www.asic.gov.au

Developing your Organisation is an online wiki from QUT's Centre for Philanthropic and Non-profit Studies.

Incorporated Associations website (Queensland Office of Fair Trading) provides information to support organisations incorporated under the Associations

Incorporations Act 1981. This website also includes a simplified guide to Queensland's Associations Incorporation Act 1981 and Associations Incorporation Regulation 1999.

Caxton Street Legal centre
www.caxton.org.au