Corporate Governance - Incorporation

The advantages of incorporation
Who should incorporate?
The disadvantages of not incorporating your association
Name and nature of activities
Interstate operations
Directors and officers

This information reviews the legal ramifications of incorporation and in particular the provisions of the Associations Incorporations Act 1984 (NSW) ("the Act").

The Advantages of Incorporation

The most obvious advantage of incorporation is that the club or association itself has a legal existence. This means it can as an entity:

• sue and be sued,
  
• own land and chattels,
  
• enter into tenancy or lease agreements,
  
• enter into contractual agreements,
  
• receive a bequest or gift from a will, and
  
• perpetually exist, that is, remain in existence no matter who is a member until it is disbanded by operation of the law. top of page

Further, the office bearers and members are not personally liable for the debts of the association, nor the negligent acts or omissions of other office bearers and members, unless the rules specifically provide otherwise.

Liability of members to contribute towards the payment of the debts and liabilities of the association or the costs and expenses of winding up the association is limited to a sum provided in the rules.

However, incorporation does not protect the individual from liability for his/her own negligence.

An incorporated association may not be formed for the purposes of trading or earning profit for members. If the association earns a profit from commercial activity, this profit may not be distributed amongst the members.

It must be used for activities carried on by the association.

In most cases, the advantages of incorporation far out weigh the disadvantages. top of page

Who should incorporate?

Incorporation is advisable if the association:

• owns land or chattels,
  
• enters into contracts, including employment contracts,
  
• conducts public events and matches where other people are invited to participate,
  
• seeks to hold a liquor licence or permit,
  
• has a reasonable turnover of money,
  
• is likely to borrow money,
  
• conducts any sort of business, whether charitable or non-charitable, and
  
• charges fees to outsiders to see or participate in its activities.

One or more of the above would apply to most sport and recreation associations. top of page

The disadvantages of not incorporating your association

An unincorporated association consists of a group of individuals who join together to form an association to pursue similar interests. The legal disadvantages of an unincorporated association arise because an unincorporated association has no legal existence separate from that of its members.

Another disadvantage is that incorporation or a formal legal structure may be a pre-requisite to obtain a grant from a State or the Federal Government.

The most serious problem is the potential liability of the committee and the members of the unincorporated association. Personal liability attaches to the committee members of an unincorporated club and, in certain circumstances may also extend to the members. The committee members may therefore be sued for the debts of the club and the negligence of any of its members. top of page

Name and nature of activities

An association incorporated under the Act must include the word "incorporated" or its abbreviation "Inc" at the end, and as part of, its name.

Part 9 section 66 of the Act provides that an incorporated association shall not trade or secure pecuniary gain for its members.

Part 1 section 4(2) of the Act provides that an association will not be deemed to trade or secure pecuniary gain for its members or to be formed or carried on for the object of trading or securing pecuniary gain for its members. top of page

Interstate operations

The principal limitation of incorporation under the Act is that there is no reciprocal statutory arrangements under the associations incorporation legislation whereby incorporation in one state or territory confers corporate status in another.

An association incorporated under the Act which proposes to carry on business in another Australian jurisdiction will have two alternatives.

It could incorporate as another legal entity under the equivalent associations incorporation legislation in the other jurisdiction.

In that situation some confusion would arise because Australian associations incorporation legislation is not uniform, members and committee members in each jurisdiction would have different rights, remedies, liabilities and obligations. Documentary and lodging requirements would be duplicated.

Alternatively, it could register as a registered Australian body under the Corporations Law. In that case copies of the certificate of incorporation, constituent documents, a list of committee members and the address of the registered office and principal office would have to be lodged with the Australian Securities and Investment Commission.

The association would be allocated an "Australian registered body number" ("ARBN").

If an incorporated association does carry on business outside its jurisdiction of incorporation and is allocated an ARBN, it must set out its ARBN on every "public document" and "negotiable instruments" signed or published by it outside its jurisdiction of incorporation.

In addition it must set out on every such "public document" its name, the jurisdiction of incorporation and notice of the fact that its members' liability is limited.

It is good practice for incorporated associations to also include its registration number on the public documents of the association. top of page

Directors and officers

A major concern of sporting organisations is the potential liability of committee members and officers of an incorporated association or an unincorporated association.

The liability of members (including members who are committee members) is limited to amounts due by way of subscriptions, joining fees or other amounts payable under the constituent documents of the incorporated body.

The committee members of an incorporated (or unincorporated) association owe analogous common law fiduciary duties to the association and its members as are imposed on company directors.

Those fiduciary duties require them to act honestly, in good faith and in what they consider to be the best interests of the incorporated association. If they fail in any of those duties, they may be liable to compensate members (or the association) who suffer any loss.

Nevertheless, although the common law fiduciary duties of the committee members are similar to those of company directors, the statutory duties imposed on directors by the Corporations Law (and certain other legislation) are generally more extensive.

For example, the Corporations Law also imposes primary liability on directors and other officers of a company with respect to compliance of the various accounting and audit requirements of the Corporations Law. Similar duties are also imposed by the Act.

Under Division 3 section 38 of the Act, a penalty of up to $5,000 or 1 year imprisonment or both, may be imposed on committee members who incur debts where there are reasonable grounds to expect that the association was insolvent (unable to pay all its debts as and when they become due) at the time the debt was incurred or where the association becomes insolvent as a result of incurring the debt.

Other examples of the types of areas which may legally affect an association include:

• loss or damage suffered by a member or third party as a result of relying on incorrect advice given by the association;
  
• harm suffered by a member or other person whilst on premises occupied by, or the responsibility of, the association.

Despite the possibility of personal liability for directors or committee members of incorporated bodies, except in an extraordinary case, the "veil" of incorporation will not be lifted so as to expose a body's members or its directors or committee members to personal liability in relation to contracts made by the body or other acts or dealings carried out on behalf of the body. top of page