Corporate Governance - Incorporation
The advantages of incorporation
Who should incorporate?
The disadvantages of not incorporating
Name and nature of activities
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
- 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
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
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
- 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,
- 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
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
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
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
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
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
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
- 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
Sporting and recreation organisations should consider:
1. registration under the Act (or similar legislation under
other State legislation);
2. whether the organisation conducts business in other states
or territories. If so, the organisation may be required to
obtain an ARBN;
3. other means to protect committee members from person liability,
such as appropriate insurance to minimise the risk.