Stating a Not-for-Profit Organisation: Five Key Legal Issues

Anna Lyons, manager of advice at Justice Connect, is an expert in not-for-profit legal issues. In the following article, she outlines some key considerations for anyone looking to start a not-for-profit organisation.

Lyons is a presenter in Pro Bono Australia’s upcoming webinar on the legal and tax obligations of NFPs, to be held on 15 March. Book your spot here. This is the second in the two-part webinar series on starting and running a not-for-profit organisation. You can buy the eBook and webinar materials from the first session here.

Starting a not-for-profit organisation can be rewarding and create great benefit for the community, but it also takes time, energy and resources. Thinking about legal issues from the outset is crucial to ensuring sustainability and success.

Motivations for starting a not for profit vary. Some groups incorporate to formalise their activities and tap into new funding sources. Others identify emerging needs in the community and want to respond. Increasingly, social enterprises are addressing social issues using market-based strategies. In all cases, there are key legal issues that should be considered.

1. Can your group work with another organisation?

With an estimated 600,000 not for profits and more than 54,000 registered charities in Australia, working with an existing organisation can be a simpler, cost effective way to pilot a project, test an idea or run a one-off event or fundraiser.

Both groups should have the same expectations; a written agreement or memorandum of understanding is often recommended. One option is an ‘auspicing’ arrangement, whereby an existing organisation agrees to manage a grant, and your group delivers a project on their behalf, with agreed terms around reporting and use of funds.

2. Should the group incorporate?

Some groups run their activities without incorporating as a separate legal entity. However, as an unincorporated group, it can be difficult to access funding, enter into contracts, open a bank account and obtain insurance.

Incorporation, on the other hand, makes it much easier to do those things and, most importantly, creates limited liability for the group, which can help to minimise risk for the individual members. Once incorporated, a group must report to government and comply with a range of laws, so it’s important to understand these obligations before you get started.

3. Should the group be not for profit?

Operating as a not-for-profit organisation requires that any profit made is only used to further the aims of the organisation. This is a requirement of obtaining tax concessions that apply to charities and some other community groups.

This issue is particularly important for groups looking at starting a social enterprise (an organisation designed to achieve a particular social outcome, using market-based strategies such as trading in goods and services). While not-for-profit social enterprises must direct all of their profits towards their mission, a for-profit social enterprise can make distributions to shareholders or investors.

4. What structure is appropriate for your group?

There are several legal structures appropriate for not-for-profit organisations in Australia; some involve registration with and regulation by state and territory governments, and others are incorporated under Commonwealth law. Whether the group is not-for-profit and the location of its activities will help to determine the most appropriate structure.

5. Does your group want to be a charity or deductible gift recipient?

To be a charity, a group must be meet be registered with the Australian Charities and Not-for-profits Commission. In order to receive tax deductible donations, or access funding from certain philanthropic funders, endorsement as a deductible gift recipient by the Australian Taxation Office is also required. If being a charity or receiving tax deductible donations or philanthropic funding is essential to your group’s strategic plans, you may need legal advice regarding eligibility and the drafting of your group’s rules or constitution.

Not-for-profit Law has a range of freely available resources on our Information Hub at www.nfplaw.org.au/gettingstarted, including the Getting Started Decision Framework, an online tool that will help you work through the issues outlined above.

The information in this article is general information in summary form, current at the time of publication, for informational purposes only. It is not intended to be a substitute for legal or other professional advice.