Recently Priority Business Lawyers was approached by not 1, not 2, but 3 not for profit associations wanting to convert to companies limited by guarantee to bring their organisations into the 21st century and take advantage of the opportunity to incorporate in anticipation of the Federal Government’s initiative to create structures necessary to make the not-for-profit sector more commercially viable, stronger and less bureaucratic.
The reason for this flurry of activity basically arises as a result of both Federal Government re-structuring of the sector and limits on the rights and powers of the not-for-profit sector is to continue to operate in the form of an association.
In Australia the not-for-profit sector is made up of over 600,000 entities which contribute apparently around $43 billion to the economy. The sector employs over 8% of all employees in Australia and has an additional 4.6 million volunteers working in it. The federal government circulated a paper entitled “Strength, innovation and growth. The future of Australia’s not-for-profit sector” in July 2012 which makes interesting reading.
Key features of the government’s plan to modernise the not-for-profit sector include the following:
- The creation of a national compact “working together” to create a shared vision on how the Australian government and the not-for-profit sector will work in partnership. Apparently all government departments had been signed up to this compact and in addition in excess of 800 not-for-profit have signed voluntarily. The government has established an office for the not-for-profit sector in 2010 in anticipation of this fresh innovation.
- The establishment from 3 December this year of the Australian Charities and Not-for-profit Commission (ACNC) as an independent statutory office to provide regulatory support for the sector. This will mean that the Commonwealth will be responsible for regulation of not-for-profit and not the States. To avoid further complex regulation, the government proposes that this commission provides a streamlined reporting requirement for each particular organisation.
- The introduction of standardised contracts for grants and procurement activities below $80,000.
The ACNC will be invested with significant resources and will be responsible for regulating the sector and determining the legal status of organisations seeking charitable and public benevolent institution status. Initially it will only regulate charities but in the future look to regulate other organisations but not before 2014. Because of the uncertainty as to what constitutes “a charity” the government will endeavour to bring clarity and certainty by providing a statutory definition of “charity” with a view to unravelling over 400 years of common law complexity.
In addition, legislation relating to tax concessions which affect the sector are being reformed. In doing so, the government will look to apply particular standards and special conditions to ensure the proper operation of the organisations , use of donation funds and the protection of assets.
Further, the government will undertake a review of company limited by guarantee structures which may result in further reform. This should be to the benefit of the sector in that the government is seeking to ensure that these structures are appropriate for every entity in the not-for-profit sector.
The government has set out a time frame for achieving all of those objectives which is available at the website www.not-for-profit.gov.au.
The other factor affecting the not-for-profit organisation’s decision to convert to companies limited by guarantee is because of the general policy of the Office of Fair Trading in each individual State to limit the threshold whereby an organisation can be incorporated as an association as distinct from a company. In New South Wales this limit is $2 million in income and/or total assets.
Many not-for-profit are taking advantage of the new reform package and seeking to merge with other not-for-profit organisations in an endeavour to add power and strength to their overall operation. In doing so, the assets and/or income often exceed the threshold set by the Office of Fair Trading.
Furthermore, many not-for-profits are now looking to add an “profitable” arm to their operations and turned to a business model which falls outside the relevant requirements that need to be met to register as an association.
The benefits of converting to a company limited by guarantee are numerous but include the following:
- They are not subject to scrutiny by the Office of Fair Trading which can adopt a fairly proscriptive and restrictive practice in dealing with such organisations.
- Companies limited by guarantee who do not pay the directors any remuneration will qualify as “special-purpose companies”.
- A company limited by guarantee can operate throughout and across Australia rather than be limited to one particular State. Associations will need to register in each and every State.
- Generally speaking, ASIC , which is the regulator will approve an application for incorporation of such a company within 48 hours of the application being lodged.
- The Company is not required to have a constitution whereas generally speaking an association will have to have a set of model rules. Notwithstanding this fact, it’s probably in the interests of companies limited by guarantee to have a streamlined constitution to assist in governance.
- Companies limited by guarantee have no maximum membership numbers and therefore are more flexible.
- General speaking such a company will be able to operate their business for profit provided that it does not alter or override the substantial not-for-profit objects of the entity.
There are some disadvantages including the costs of setting the company limited by guarantee up in the first place but these are not prohibitive.
At Priory Business Lawyers we are regularly instructed in matters involving the not-for-profit sector. We have a lawyer who specialises in this space.
If you have a query or would like more information, we suggest that you consult with us on 4305 3500