A not for profit (or non-profit) organisation is an organisation that applies its profits to further the objectives of the organisation. It is not operating for the profit or gain of its individual members, either during its operation or when it winds up. On the other hand, a for profit organisation can distribute its profit to its individual members, investors or shareholders, during its operation or when it winds up.
Where a not for profit organisation derives its profit from can be from a variety of sources, for example from donations, charging members for public services, selling or leasing property, State or Commonwealth funding, etc. It can use the profit to employ staff, carry out programs, enhance infrastructure,etc provided that it is directed to furthering the objectives of the organisation, rather than distribute.
Some of the legal benefits of a not for profit structure include:
state and federal tax exemptions, concessions and benefits
the availability of some legal structures only to not for profit organisation, e.g. incorporated associations
access to State and Commonwealth funding
access to private philanthropic bodies
ability to conduct fundraising activities
Some organisations (i.e social enterprises) which seek to achieve a particular social outcome and trade in goods and services to achieve that outcome can choose to be either a not for profit social enterprise or a for profit social enterprise. The difference being, as mentioned above, that the not for profit social enterprise applies all of its profits to achieve the social outcome, rather than distributing to members, investors or shareholders. For further information on social enterprises please see our Social Enterprises Resources page.
When you set up a not for profit organisation, it is important that you choose an appropriate legal structure for your organisations needs.
CHOOSING A LEGAL STRUCTURE
The legal structure that you choose when setting up your not for profit organisation will affect, amongst other things, the way you hold meetings, the minimum number of members, reporting requirements, tax obligations and costs. It is important to understand the statutory requriements that go with the structure that you choose.
An overview of legal structures commonly used by not for profit organisation is provided below.
An incorporated association is a legal entity distinct from its individual members that can operate in the State/Territory in which it is registered.
For many incorporated associations they originate from a group of people who agree to act together as an organisation (i.e. an unincorporated association). The advantage of being an informal group there are few legal responsibilities. There is no statutory requirements on they way the group is organised nor does the group have to follow any particular procedures. At its simplest, the group has the obligation to act as a trustee for the association’s purposes.
The disadvantage is that if anything goes wrong, for example, if someone falls over and injures themselves and sues – it’s possible that as the lessee and as a committee member you may be held personally liable. In that case if the association does not have enough money to cover the payout you may have to pay for it yourself. If you stop being a member of the association but your name is still on the contracts there may be difficulties transferring your responsibilities.
Furthermore, most foundations and most government departments will only fund organisations that are legal entities distinct from its individual members.
To overcome these disadvantages, the unincorporated association may decide to incorporate and become an incorporated association (see below ‘incorporating an unincorporated association‘). ‘Incorporation’ is the system of Federal and State Governments to register an organisation as a distinct legal entity.
Incorporated associations are incorporated under the relevant State-based incorporated associations legislation and are regulated by the relevant State-based authority.
Suitable for: locally-focused community groups with limited capacity to meet reporting obligations and limited funds and resources
Not suitable for: groups with fewer members than prescribed by the relevant State-based associations law or for wholly owned subsidiaries of parent organisations
Companies limited by Guarantee
A company limited by guarantee is a legal entity distinct from its individual members that can operate anywhere in Australia.
In a company limited by guarantee, the members of the company have limited liability. The members agree in writing (‘guarantee’) to pay a nominal amount (usually $10-$100) to the property of the company. If the company is wound up, the liability of the members is limited to the nominal amount that they have guaranteed.
Some of the benefits of this structure include:
it is facilitative of not-for-profit status
as a public company it has the extra scrutiny, transparency and accountability that is required of such companies, giving it a level of credibility and independence that will give confidence to funders and members alike
it can be established as a ‘special purpose’ company
it is a straight forward structure familiar to organisations wish to provide funding or be involved
it provides operational flexibility
the liability of members is limited to a fixed amount, being the sum of the guarantee
it allows for perpetual succession
the company has capacity to enter into and enforce contracts
the company has the capacity to sue and be sued
it has all the benefits of corporate status
the activities of the organisation may be carried out throughout Australia
Companies limited by guarantee are incorporated under the Corporations Act 2001 (Cth) and are regulated by the Australian Securities and Investments Commission.
NOTE: for companies limited by guarantee registered as charities they will also be regulated by the Australian charities and Not for profit Commission (ACNC). For further information on charities please see our NFP Resources – Charities page.
Suitable for: groups wanting to operate nationally, charities registered with the ACNC, wholly owned subsidiaries of parent organisations
Not suitable for: groups with limited capacity to meet reporting obligations and limited funds and resources
The structure of an indigenous corporations is similar to a company limited by guarantee. Indigenous corporations can, but do not have to be not of profit. However, if an indigenous corporation is a not for profit it must have a rule book which prevents surpluses or profits from being distributed to its individual members.
The benefits of registering as an Indigenous corporation include:
Some of the benefits of this structure include:
the members can choose, when they register the corporation, not to be liable for the debts of the corporation;
the rule book that governs how the corporation is run can take into account Aboriginal or Torres Strait Islander customs and traditions;
operate nationally—they are not limited to the state or territory in which they are registered;
it is free to register as an Aboriginal and Torres Strait Islander corporation;
in some cases corporations may be exempted from annual reports;
profits of the corporation can be distributed to members if the rule book allows for this; and
access client assistance, support, and information and training programs, offered by ORIC.
Indigenous corporations are incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) and are regulated by the Office of the Registrar of Indigenous Corporations (ORIC).
Suitable for: Aboriginal and Torres Strait Island groups or corporations holding or managing native title
Not suitable for: non- Aboriginal and Torres Strait Island groups or Aboriginal and Torres Strait Island groups that prefer to be regulated by a State regulator or ASIC.
A co-operative is a form of not for profit organisation which is member-owned. A co-operative must have at least five members. The fact that they are member-owned means that co-operatives allow for a more democratic style of work, pooling of resources to be more competitive, and sharing of skills. Co-operatives supply goods and services to their members or to the general public.
Cooperatives are regulated by the relevant state or territory office of fair trading or consumer affairs. A non-trading cooperative does not give returns to members, and may or may not have share capital, whereas, a trading cooperative has a share capital and gives returns to its members.
Some of the benefits of this structure include:
all shareholders have an equal vote at general meetings regardless of their shareholding or involvement in the cooperative
Shareholders, directors, managers and employees have no responsibility for debts of the cooperative unless those debts are caused recklessly, negligently or fraudulently
members, other than directors, can be under 18
a cooperative is member owned and controlled, rather than controlled by investors
all members and shareholders have to be active in the cooperative.
Changing between legal structures
Company Limited by Guarantee
Incorporating an unincorporated association
Suitable for: groups providing services to its members
Not suitable for: larger organisations or organisations wanting to have non-voting members
There are other structures available, for example charitable trusts, public ancillary funds, and private ancillary funds however these are not organisations.
If you need any further assistance, we can provide advice on which structure is most appropriate for you.
ESTABLISHING A NOT FOR PROFIT ORGANISATION
Once you have decided on the appropriate legal structure, the your can now establish your not for profit organisation. There are four main steps:
register (or incorporate) – the process is different for each type of legal structure and is determined by the requirements of the relevant legislation;
apply for an Australian Business Number (ABN) – this is a unique number which identifies your not for profit organisation to the Australian Taxation Office and other government department and agencies. It is not compulsory unless the organisation has has a goods and services tax turnover of $150,000 or more. However, if your not for profit organisation wishes to register as a charity with the ACNC or register a business name, it must have an ABN;
register a business name – you will only need to register your business name with ASIC if it is not your organisations name;
The following checklists can assist in establishing your not for profit organisation: