Making the switch – Part 1: pros and cons of a Company Limited by Guarantee

As featured in the October/November edition of Clubs Queensland’s Club Insight magazine.

One question we get asked quite often by clubs is whether they should make the switch from an Incorporated Association (“Association”) to a Company Limited by Guarantee (“CLG”). As most of you would be aware, Associations are registered under the Associations Incorporation Act 1981 (Qld) (“AI Act”), whereas CLGs are registered under the Corporations Act 2001 (Cth) (“Corporations Act”).

And with recent changes to the AI Act, the question of making the switch seems to be top of mind for many Associations.

Given the influx of enquiries relating to this topic, we are doing a ‘Making the Switch’ series over two editions of Club Insight. In this article, I examine some of the pros and cons of switching to a CLG and in the next edition, I will walk through the process of making that switch, should you decide it is the best fit for your club.

So, why make the switch?

Associations and CLGs have a lot in common. Both have “legal personality” meaning they can own property, sue and be sued, and enter into contracts in their own name, while shielding members from liability to third parties. Both must also be established as non-profit entities, whereby profits or dividends cannot be paid to members, and assets cannot be distributed to members on winding up.

Generally speaking though, Associations are designed as a simple, low cost way for community or sporting groups to achieve the benefits of legal personality, whereas companies registered under the Corporations Act (including CLGs) are intended to operate businesses and more complex organisations, so are more heavily regulated.

Some of the benefits of a CLG compared to an Association are outlined below.

1. The board of directors of a CLG can appoint additional directors, which can help to fill skills gaps on the board. By contrast, all committee members in an Association must be elected at a general meeting of the members.
2. Changes to the CLG constitution take effect immediately upon a special resolution being passed to effect the change, as opposed to changes to an Association’s constitution which must first be approved by and registered with the Office of Fair Trading.
3. Once a CLG is registered, it can operate anywhere in Australia. Associations on the other hand, cannot operate outside of Queensland unless they either set up another Association in the other States where they intend to operate, or register as an “Australian Registered Body” under the Corporations Act, in which case the Association must comply with obligations under both the IA Act and the Corporations Act.
4. Members of a CLG have greater rights that are protected by law, including the right to appoint a proxy to vote at meetings, which is not mandatory under the AI Act. Five percent of members of a CLG can also call a general meeting; this is not mandatory under the AI Act but there is often a similar right for members to call general meetings set out in an Association’s constitution.
5. As noted below, CLGs are traditionally subject to more onerous laws in relation to management and governance. On the one hand this may be seen as a disadvantage, but on the other hand, these more onerous requirements should not only result in improved governance and accountability within CLGs, but also a perception amongst third parties (e.g. banks, landlords, authorities and other stakeholders) that CLGs are more credible organisations.
6. Under new changes to the AI Act, management committee members will be required to disclose any remuneration paid to them, their family, or senior staff. By comparison, while the directors of CLGs must disclose conflicts of interest, they are not specifically required to disclose their salary or the salaries of other staff.

Potential drawbacks – what to consider before making the switch

Traditionally, one of the big points of difference between a CLG and an Association has been that the directors of a CLG have owed more onerous duties towards their organisation and its members compared to committee members of an Association. In particular, although directors of a CLG and committee members of an Association both owe duties to act in good faith in the interests of their organisation, to act for a proper purpose and to give proper consideration to their decisions, the statutory duty for directors to avoid insolvent trading has always been unique to CLGs.

This is set to change from 30 June 2021, when the AI Act will be amended so that an Association’s committee members can be fined up to $8,007 if the Association engages in insolvent trading while the committee members have reasonable grounds to expect that the association is insolvent, or would become insolvent by incurring a debt.

Other potential disadvantages of a CLG compared to an Association are:

• as above, more onerous requirements in terms of administration and regulatory compliance;
• unlike Associations, CLGs do not have the same ability to amalgamate with other companies or Associations – though the amalgamation provisions in the AI Act are not used very often anyway;
• greater audit and reporting requirements – but not so much greater as to be prohibitive; and
• higher annual fees ($1,267 for a CLG versus $57.60 for an Association).

To switch or not to switch

Deciding whether to operate your organisation through an Association or a CLG structure is a complex decision, and what works best for one organisation will not necessarily apply to others. The above provides only a brief snapshot of some of the factors that may be relevant to your decision, and there are many other legal and tax considerations that you will need to take into account. If your club is thinking of making the switch from an Association to a CLG, I would be happy to guide you through those considerations in more detail, to help you decide on the structure that is most suited to the needs of your organisation. If I can help you with this, please do not hesitate to contact me on 3224 0353.