Last updated 24 May 2017
What is incorporation?
Incorporation is the creation of a unique legal entity. On incorporation, an association of persons becomes a separate body in the eyes of the law, with rights and liabilities separate from those of its members. The incorporation certificate of an association is like an association’s birth certificate. Similarly, when an association is terminated or wound up, the legal entity ceases to exist.
Incorporated associations can do most things that individuals can do, such as hold property, make contracts, sue and be sued and be left property under a will. For example, anyone wishing to sell goods to an unincorporated club would not contract with the club, because in the eyes of the law the club does not exist. The contract would probably be with all of the members, the committee of the club or a trustee. In many cases, the government will not give a licence or a financial grant to an organisation unless it is incorporated.
Organisations that can incorporate
The Associations Incorporation Act 1981 (Qld) (Associations Incorporation Act) restricts the type of association that may incorporate. An association that seeks to incorporate must:
- be formed and carried on for a lawful object or purpose
- have at least seven (7) members
- not exist for the financial gain of its members. Financial gain is defined extensively in s 4 of the Associations Incorporation Act. The activities listed in ss 4(1) (a)–(h) will not of themselves constitute financial gain to the members of the association. For example, the mere fact that a member is employed by an association and receives a wage does not mean that the association is carried on for the gain of its members. Similarly, an association that supplies services or facilities to its members, allows its members to compete for trophies or prizes, or makes a surplus of income over expenditure is not necessarily carried on for the gain of its members.
Particular note should be taken of ss 4(1)(d)–(f), which deal with the trading activities of the association with its members or the public. A gain made as a result of these activities is not financial gain if:
- the trading is ancillary to the principal purpose of the association
- the public trading is not substantial in volume in relation to the other activities of the association.
Organisations that cannot incorporate
Section 5 of the Associations Incorporation Act defines those bodies that cannot incorporate. They include:
- associations with less than seven (7) members
- a partnership or company
- an organisation under the Industrial Relations Act 2016 (Qld) that is incorporated because of the application of s 611 (i.e. an employer or employee association)
- a school council or parents and citizens association formed under the Education (General Provisions) Act 2006 (Qld)
- a body formed or carried on for the purpose of providing financial gain for its members
- a body that raises money by subscription and lends that money to its members
- an association that is controlled by a special act of parliament
- an association whose principal purpose is to hold property that the association’s members may divide among themselves, dispose of their interest, or distribute income or the use of the property among members or nominees of the member.
To incorporate or not to incorporate?
Before a decision to incorporate is made, the committee of an association should carefully consider whether the interests of the association would be served by such a step, as it may be a very expensive and time-consuming exercise to change the adopted legal structure to a more suitable one. Factors to be considered include the:
- legal problems faced by unincorporated associations, which is really just a group of persons. The main difficulties are in owning land and other property, leasing an office, making contracts, being awarded government grants, suing or being sued, receiving gifts made in wills and, most importantly, the liability of the officials, committee or trustees of the association for the debts of the association. Courts have often decided that a contract between the members of an unincorporated association and another party or parties was not made by the members but by the officials or management committee of the association, however, those officials or committee members may be personally liable for any debts owing under the contract or any injury caused. In some associations, the liability may be burdensome and the members of the committee may face losing all of their possessions to satisfy the association’s liabilities
- limitation of personal liability of committee members through incorporation
- possible entitlement of members to a pecuniary interest in the association (share of assets in a winding up of the association) that will be lost if it is incorporated
- cost of incorporation (e. g. ongoing government fees, and accounting and auditing fees especially for associations with assets or revenue over $100 000)
- public scrutiny of incorporated associations’ accounts
- higher degree of regulation that applies to incorporated associations (e.g. incorporated associations must include ‘Inc.’ or ‘Incorporated’ as part of the association’s name and be noted on a public register)
- constitution required by an incorporated body, which may not suit some associations (e.g. incorporated associations are required to have a fairly democratic structure)
- restrictions on the activities that an incorporated association can carry on
- requirement for an incorporated association to have an annual meeting and a quarterly committee meeting at which proper minutes must be kept
- need for public liability insurance in most incorporated associations
- need to keep proper records of members of incorporated associations
- difficulty and expense involved in terminating an incorporated association.
Other incorporation solutions
The most common alternative is incorporation under the Corporations Act 2001 (Cth) as a company limited by guarantee or as an Indigenous corporation under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth).
Other Acts exist to incorporate or facilitate certain special types of associations:
- the Education (General Provisions) Act 2006 (Qld) under which a parents and citizens association can be formed
- Hospitals Foundations Act 1982 (Qld)
- Cooperatives Act 1997 (Qld)
- Roman Catholic Church (Incorporation of Church Entities) Act 1994 (Qld)
- Industrial Relations Act 2016 (Qld) under which employer and employee associations can be formed.