Introduction
For many not-for-profits (NFPs) and charitable organisations in Australia which have been established under State or Territory-based incorporated association laws, growth and expansion often bring about a pivotal decision – whether to make the transition from an incorporated association (IA) to a company limited by guarantee (CLG). While this move can bring new opportunities and a broader operational scope, it is a journey that requires careful navigation through various legalities, compliance requirements, and strategic considerations.
In this article, we delve into the process of transitioning from an IA to a CLG, shedding light on the legal implications, the continuity of rights and obligations, and the changes in governance and reporting duties that accompany this strategic shift. We aim to equip organisations with the knowledge to manage this transition effectively, ensuring they can continue their vital work on a larger scale, under a structure that provides greater flexibility and credibility. Understanding the nuances of this transition is crucial in steering an organisation towards a successful and compliant future, and we are here to assist by offering expert insights and practical advice.
What is an IA?
The IA structure was developed to provide a simple corporate structure for small, locally operating community-based groups, such as community or sporting clubs. An IA is a membership-based entity that operates on a NFP basis in furtherance of a specific purpose (NFP means that the entity cannot make distributions to members. It does not mean 'do not make profits', but rather that the entity is about creating public value, rather than private benefits).
As an 'incorporated entity', the legal status of an IA allows the entity to hold property, enter into contracts, sue and be sued, and provides a degree of limited liability to its members. It also provides a legal personality with perpetual succession, meaning it does not 'die' unless it is wound up as a result of insolvency or the members determining to do so. With each Australian state and territory having its own legislation for IAs, the rules can vary significantly across jurisdictions. Despite these differences, the overarching principle remains that IAs are designed to serve their community rather than to distribute profits to members.
An IA is only an appropriate structure for organisations that operate within a single state or territory, as the legislation is not designed for entities that carry on business across state or territorial borders. Having the flexibility to operate on a national scale as an organisation grows is a key reason why many organisations choose to transition (to become a CLG – please see below) or register as a Registered Australian Body under the Corporations Act 2001 (Cth) (Corporations Act).
What is a CLG?
A CLG is a type of public company designed specifically for NFP organisations in Australia. Unlike corporations with shareholders, CLGs are member-based and do not have share capital or issue shares (which represent an ownership interest). There is no 'ownership' and the assets are used to achieve a mission or set of objects specified in the CLG's constitution, aligning with its NFP status. Members, serving more as custodians of the company's ethos, do not 'own' the company in the traditional sense, but do have a say in its mission and governance (including in appointing the board that manages the company). Importantly, the financial liability of members is capped at the 'guarantee' amount (which is often nominal) that they agree to contribute if the company is subsequently wound up.
CLGs are crafted to serve a purpose rather than generate profit (although they need to be profitable to be sustainable), so are 'for-purpose' rather than 'for-profit' vehicles. CLGs are incorporated with the Australian Securities and Investments Commission (ASIC) and governed by the Corporations Act, but CLGs registered with the Australian Charities and Not-for-profits Commission (ACNC) have the ACNC, rather than ASIC, as their primary regulator and are not subject to certain provisions in the Corporations Act that are 'switched off' for registered charities. This results in a CLG being a streamlined and capital efficient structure for registered charities, enabling more resources to be used for achieving impact, rather than managing complex regulatory requirements (including the dual reporting and/or notification requirements that some charitable IAs are subject to).
Circumstances where an IA may transition to a CLG
As the IA structure is intended to be used for small and locally operating NFP organisations, the legislation in most states and territories provides the regulator with broad discretion to direct an IA to transition where they consider the IA's size, complexity and/or nature of activities exceed what is appropriate for the simple IA framework. Some regulators have published guidelines on the threshold at which they will request that an IA transition to a more robust framework. For example, according to guidelines published by NSW Fair Trading, NSW registered IAs will be directed to transition where the IA's income and/or assets exceed $5 million or its assets exceed $2 million. Where an IA receives a regulator direction to transition, it is generally given a certain period of time in which to change its registration to a more appropriate framework (such as the Corporations Act).
IAs may also decide to proactively transition for a range of reasons depending on strategic objectives. Common reasons include:
- Growth and flexibility: Greater flexibility and scalability provided by a CLG structure.
- National operation capacity: A CLG structure enables the expansion of operations beyond the state or territory of incorporation to Australia wide.
- Robust framework: The Corporations Act provides a more robust statutory framework for the establishment, operation and governance of a for-purpose entity when compared to the simple IA legislation.
- Third party contracting: The use of a CLG structure may increase commercial collaboration and financial opportunities as some third parties prefer to deal with organisations using a more robust legal structure.
- Credibility and optics: Funders and other stakeholders may perceive a CLG as being subject to higher levels of accountability, due to operating under the widely understood Corporations Act framework, which in turn may improve credibility and optics for entities structured as CLGs.
Transition process
As the IA legislation is state and territory based, the transition process varies depending on the state or territory of registration. However, the transition process generally involves the following steps.
- Resolution: Pass a board resolution resolving, subject to member approval, to convert from an IA to a CLG.
- Constitution: Prepare a company constitution. This provides an opportunity for an entity to undertake an overall review of its governance design, to ensure the company constitution will be fit for purpose and reflect the strategic objectives going forward. An entity's name will also be changed as part of the transition process to include 'Ltd' or 'Limited' rather than 'Inc' or 'Incorporated', and so some organisations may make a broader change to the name as part of the transition process.
- Members meeting: Conduct a member's meeting at which members can resolve by special resolution to transition to a CLG, adopt the company constitution from the date of registration as a CLG and approve the name change.
- Regulator: Lodge an application for approval of the transfer with the relevant state or territory regulator.
- ASIC: Lodge an application for registration with ASIC.
- Notification: Notify and record the transfer of registration (following ASIC approval), with the relevant state or territory regulator – at which point the entity should be removed from the relevant IA database.
- Other:
a. Notify other relevant regulators or stakeholders, including but not limited to, the ACNC, ATO, Australian Business Register, insurers, and any other relevant stakeholders of the change.
b. Update all relevant documents, accounts, records and websites/ social media accounts to reflect the new name.
c. Prepare a member's register for the CLG within 14 days of registration as a CLG.
d. Prepare a minute book within one month of registration as a CLG.
Effect of transition
It is a common misconception that the transition to a CLG creates a new legal entity and that the existing property, rights or obligations of the IA need to be transferred to a new entity. In reality, the Corporations Act states that, where the transfer process is properly undertaken, the legal identity of the entity and its existing property, rights and obligations are not affected by the transition. Although there are some practical matters that need to be addressed as part of a transition (including, as explored above, notifying relevant regulators and other third parties of the change and updating the Australian Business Register to ensure the same ABN can be retained), these are to reflect the entity's new legal structure and name and do not impact the continuity of the entity's legal identity. The specific matters that need to be addressed will vary based on the state or territory in which the IA is registered, the size of the IA and nature of the property held.
How we can assist
Transitioning from an IA to a CLG is a significant move that requires thorough planning, consultation with legal experts, and careful consideration of the governance and strategic goals of the organisation. For organisations looking towards expansion, this transition can be a pivotal step in their growth journey. MinterEllison frequently assists entities to transition from an IA to CLG, and has experience advising on the structuring and transition process required for IAs registered in each state and territory throughout Australia.
MinterEllison also has extensive experience in the NFP and social impact sector more broadly, supporting more than 200 social enterprises, charities and Indigenous businesses with the full spectrum of legal advice, from structuring advice, start-up entity formation and charity registration through to governance, compliance, financing, contracting, property, risk management, insurance, franchising, M&A and restructuring support – building teams dependant on identified legal needs and priorities.
MinterEllison is uniquely embedded in the social enterprise and for-purpose sector, having supported the state, territory and national social enterprise peak bodies, and working with certifying bodies (including Social Traders and Supply Nation), funds (including Social Enterprise Finance Australia and First Australians Capital) and intermediaries (such as Social Ventures Australia, Social Impact Hub and White Box Enterprises).
MinterEllison also works alongside Government and corporate clients to amplify social impact through shared values partnering and supports Government and corporate clients looking to operate in the social impact space, including by establishing a charitable foundation or considering how to embed social enterprises, Indigenous businesses or other for-purpose organisations into supply chains to facilitate strong ESG performance.
Please reach out if you have any questions regarding structuring, governance or the IA to CLG transition process.
