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.
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.
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:
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.
Article written by Matthew Bradford (Partner) and Glen Rolley (Associate).
"The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication."