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If you’re setting up as a not-for-profit but have a company structure, you can set up as a not-for-profit company.
So, where do you even begin?
In this article, we’ll answer the following questions about not-for-profit companies:
- What legal structures are available for not-for-profits?
- What actually is a not-for-profit company?
- Is a not-for-profit company the right legal structure to choose for your venture?
- How does a not-for-profit company differ from a company limited by guarantee?
Choosing The Right Legal Structure For Your Not-For-Profit
As with any organisation, you want to make sure you set up your not-for-profit correctly.
Choosing the right legal structure can be tricky, especially for NFPs! Unlike other countries, Australia doesn’t have a one-size-fits-all approach with a NFP structure.
There are various NFP structures, and the one you choose will really depend on what you’re doing as an organisation. For example, if you’re setting up a traditional NFP or charity, we’ve written about the most common options here.
Or, if you’re doing something new, and you’re setting up a social enterprise, we’ve written about how to navigate that space here.
When choosing the right structure for your NFP, you might want to ask yourself:
- Will I be running the organisation with a charitable purpose?
- What is my current budget?
- How much admin am I prepared to do for my structure?
- What am I trying to achieve with the structure?
- Where do I see my organisation in the future?
If none of the traditional or common structures really suit you, it might be worth considering setting up a NFP company.
What Is A NFP Company?
This type of structure isn’t too common, so we’ll break down how it works.
Among the various types of structures available to organisations, one of them is a private (Pty Ltd) company.
This effectively means you set up a new private entity that is limited by shares. You’ll have shareholders and directors, and the main purpose of that organisation is to make a profit (that is, pay dividends to your shareholders).
It’s one of the most popular options because you have limited liability. This means your entity becomes separate to you and your founders, and will avoid you becoming personally liable from any company debts.
But it can be quite expensive. On top of the initial registration fees, you’ll have annual renewal fees and reporting obligations to the Australian Securities and Investments Commission (ASIC).
However, the Corporations Act does allow you to set up this company as a special purpose company. There are various ‘special purpose’ companies allowed by the Corporations Act, where your company isn’t just set up for general business, but for a special purpose.
One of the ‘special purposes’ is a NFP company—that is, a company set up for charitable purposes only, which means your organisation must be operating for a charitable purpose and a charitable purpose alone.
Typically, this means that:
- any income you make should be directed towards promoting your charitable purposes
- you cannot pay dividends to your members
- you cannot pay fees to your directors
- directors have to approve any other payments made to them
Is A NFP Company Right For Me?
To decide whether a NFP company is right for you, you need to ask yourself whether you are truly operating for a charitable purpose.
You should also consider whether you want to pay your members or directors. Under the NFP company structure, you won’t be allowed to do this.
For example, you cannot pay fees to your directors for their services. They may, however, be able to claim reimbursements for costs such as travel expenses. And you can still employ your directors and pay them as employees.
So, if the requirements of a NFP company are inconsistent with your plans for your organisation, this might not be the right structure for you.
Otherwise, if you’re keen to move ahead with setting this up, you need to understand the requirements involved.
In any case, it’s a really good idea to speak with a lawyer to help you understand your options and what’s right for you.
How Is A NFP Company Different To A Company Limited by Guarantee?
Perhaps the most common structure for any organisation with a charitable structure is a Public Company Limited by Guarantee (CLG).
So, how is a CLG different from a NFP company? And why is it more common?
Going back to the basics, the main difference is that a NFP company is private whereas a CLG is public. This means that a NFP company can only attract private funding, while a CLG can attract public funding.
Additionally, there’s a difference when it comes to liability:
- A Pty Ltd company is limited by shares – this means that the members’ liability are only limited by how many shares they have in the company.
- In a CLG, the members are limited by their guarantee—this is typically a nominal amount (between $10 to $100) that members guarantee to pay if the company needs to wind up.
In practice, however, setting up a CLG is more common for organisations that want to set up as a charity organisation. This is because, often, they will apply to the Australian Charities and Not-for-profits Commission (ACNC) and, if successful, the ASIC reporting obligations and annual review fees are waived. Instead, ACNC will be the main regulator that applies to you and you will be reporting to them.
On the other hand, special purpose companies have traditionally been used as corporate trustees for ancillary funds. For example, you might already be running a private company and you want to set up a foundation or another entity to receive and distribute donations. For that purpose, it’s quite common to set up a NFP company for tax reasons.
In any case, you can set up as either of these entities to run your NFP organisation (and both can be eligible for ACNC registration as a charity, too)—as long as you understand the different requirements and features of each structure, and whether it suits your organisation.
What Are The Benefits Of A NFP Company?
You might be asking yourself why anyone would register as a NFP company if it’s just as easy to register as a company limited by guarantee (especially if a CLG is more common for NFPs and charities).
There are 3 main benefits of registering a NFP company as opposed to a CLG.
1. A NFP company is essentially a private company. This means that you can obtain private funding from your shareholders (as opposed to a CLG, where you can only obtain funding from the public).
2. Because it is a private company, you can have shareholders. Though those shareholders aren’t allowed to be paid any dividends, you can still have several classes of shares that divide shareholders by their voting rights. For example, you can have a class with Founding Shareholders that ultimately make the important decisions in the company. Then, you can have ordinary classes of shares for other silent members. This structure helps you control the decisions of the company, and will typically be set out in a Shareholders Agreement.
3. You will have reduced annual review fees. If you qualify to be a NFP company, you’ll be able to save lots of $$ on ASIC annual review fees. For example, CLGs typically attract an annual review fee of $1,267 per annum. However, if you qualify as a NFP company, your annual review fees will be reduced down to $55 per annum.
As such, a NFP company structure might be right for you if you’re looking to keep your annual fees low and reap any of the above benefits. However, it’s still important to be aware of the strict requirements (for example, you cannot redistribute the company’s assets to the shareholders if the company winds up).
How Do I Set Up A NFP company?
If you’d like to set up a special purpose NFP company, you need to make sure you do it right.
When setting up a NFP company, there are two specific things you need to do.
- Draft a tailored Company Constitution
- Submit a NFP Declaration to ASIC
For Step 1, there are specific regulations that apply to these special purpose companies. Specifically, it’s required that your Constitution reflects that:
- You will only use the company’s income for a charitable purpose
- You won’t pay any fees to your members or directors
- Any fees (such as travel-related expenses) must be approved by all directors
After you do this, you also have to complete a declaration that confirms the above. You approach a lawyer to make sure you’re doing this right.
What’s Next?
Now that you’ve set up your NFP company, there are other administrative tasks you’d typically have to do as a business. We always suggest speaking to an accountant to make sure you’re set up on that side of things. For example, we would suggest thinking about:
- A company bank account
- Tax file number
- PAYG
- Insurance
And, if you’re thinking about going down the charity route, you need to apply to ACNC to be a registered charity. If successful, ACNC will be the main regulatory body you’ll be reporting to (and most ASIC fees will be waived). However, you’ll need to speak to an accountant about tax implications such as obtaining Deductible Gift Recipient (DGR) status.
Speak To A Lawyer
If you need help understanding your options, or would like assistance with setting up your structure, we’re here to help!
It’s always a good idea to speak with an experienced lawyer who can walk you through your options and the various implications of a structure—especially if you want to get it right from the start.
You can reach out to our friendly team on 1800 730 617 or at team@sprintlaw.com.au for a free, no-obligations consultation.
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