Are you a not-for-profit group deciding whether to incorporate? Let’s look at the pros and cons

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Not-for-profit groups can incorporate as an ‘incorporated society’ under the Incorporated Societies Act 2022 (Act). The decision to incorporate can seem like a daunting one, and many groups are left wondering ‘is it worth it?’.

The idea of incorporation is to become a distinct legal entity, rather than an unincorporated group of individuals.  In comparison, an unincorporated group of individuals will be personally liable for the activities of the group, and there will be no legal entity to do things like open a bank account, enter into contracts, or seek funding. 

This article considers the key pros and cons of becoming an incorporated society, so that your group can be better informed when deciding whether incorporation is right for you.

Pros of incorporation:

  • Provides legal structure and statutory safeguards:
    One of the key benefits that comes with incorporating as an incorporated society is the legal structure provided by the Act.  Being subject to the Act provides statutory safeguards including removing personal liability for members.  It also introduces processes to facilitate smoother administration and greater transparency for members.
  • Separate legal identity
    Once incorporated an incorporated society has its own legal identity separate from that of its members.  This enables the incorporated society to (among other things) have its own bank account, hold debts, and take out leases in its name.

    Incorporation ensures that assets are held by the incorporated society not individual members, which prevents any member taking personal advantage or undue gain from the incorporated society. 

  • Members can come and go without affecting the society’s status
    An incorporated society’s incorporation is registered on the Register of Incorporated Societies.  Once incorporated, members can come and go without impacting the ability of the incorporated society to carry out its purposes.

    Compliance with the Act also means that specific processes and methods for the running of the incorporated society are codified in its constitution, which further protects against the loss of core institutional knowledge.

  • Ensures accountability and member oversight
    The legal safeguards required by the Act mean that an incorporated society must undertake financial reporting.  This ensures accountability to members, and to the Registrar of Incorporated Societies.

    Incorporation also embeds democratic measures in the running of the incorporated society, which ensures that members have an ongoing say.

    The officers of an incorporated society are held accountable to members for their decisions and must act in accordance with their legal duties as officers.

  • Protects the name of the society
    Incorporation provides legal recognition to the name of an incorporated society.  This prevents another incorporated society taking the same name, and helps an incorporated society establish a recognised identity. Being visible on the Register affirms the legitimacy of an incorporated society when seeking sponsorship and other support.

Cons of incorporation:

  • Additional legal requirements
    The flip side of the protections and safeguards of incorporation under the Act is the requirement to meet the obligations set out in both the Act and in the incorporated society’s own constitution.

    A constitution needs to be drafted to ensure that it can and will be complied with.  Any breaches of the constitution or applicable legal requirements could risk the status of the incorporated society, its credibility, and even could impose liability on the officers in breach.

  • Minimum 10 members
    To incorporate, a group must have at least ten members.  That minimum number needs to be maintained, or the incorporated society risks de-registration.  A 10-member minimum requirement can make incorporation less practical for small groups with limited membership.

  • Constitutional limitations
    The Act requires specific processes and procedures to be set out in an incorporated society’s constitution, including:
    • A procedure for how a person becomes, and consents to becoming, a member, and how they cease to be a member;
    • The composition, roles, functions, powers, and procedures of the governing committee;
    • How the incorporated society will control and manage its finances;
    • Procedures for resolving disputes which must be consistent with the principles of natural justice;
    • Arrangements for general meetings;
    • Processes for dealing with officer conflicts of interest;
    • Incorporated societies must keep a register of members, and a register of officer interests; and
    • How surplus assets will be distributed to another not-for-profit entity if the incorporated society is wound up.

An incorporated society’s constitution must meet the above requirements, which also need to be complied with in practice.  That can impact the flexibility of an incorporated society’s approach to achieving its purposes and operating as a member-led organisation. The requirements for reporting and being accountable to members may also lead to inefficiency of decision making and create delays.

  • Provisions for surplus assets
    Incorporation requires that an incorporated society nominate a specific not-for-profit entity or class of not-for-profit entities to which the society’s surplus assets will be distributed when the incorporated society winds up.

    While that is beneficial in preventing private financial gain by individual members, it may mean that many NFPs are not suited to being incorporated, if there is an intention for the members to receive surplus assets themselves when the group winds up.

    Any group motivated to incorporate as an incorporated society will need to make sure they have the minimum number of members (10), at least three committee members, and a constitution that meets the legal requirements for registration.  If your group is considering incorporation, or has decided to go ahead and incorporate, our team of specialist not-for-profit lawyers can help you with the next steps including drafting your constitution.

    If you have any questions about the content of this article or would like further information, please contact a member of our not-for-profits & incorporated societies team

    Special thanks to Special Counsel Louisa Joblin for preparing this article. 

    Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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