Sporting clubs and organisations are often set up without much thought as to the best legal structure to use. It then often becomes a thought process that it would be too much work and would be too costly to alter the structure. This article provides some information in relation to the common structures utilized by sporting clubs and organisations to assist in determining what would be the best structure to use. It also provides some information in relation to changing structures.
Incorporated Associations and Company Limited by Guarantee
An incorporated association (‘IA’) and a company limited by guarantee are both a type of incorporated legal structure. An incorporated association is set up in accordance with, and is governed by, the Associations Incorporation Act 1981 (Qld) (‘Associations Act’), while a company limited by guarantee (‘CLG’) is set up in accordance with, and is governed by, the Corporations Act 2001 (Cth) (‘Corporations Act’). Sporting clubs and organisations can suitably operate under either legal structure, and despite common belief, a voluntary “transfer” can be made between the two structures, whilst still maintaining the legal identity throughout the process.
Prior to 2011, the process to transfer between structures was a costly and complex one, involving the setting up of an entirely new entity. Importantly under the current process, transfer duty and capital gains tax are not payable due to the fact that the assets of the association continue to be owned by the same body, despite the corporate status change.
Why Consider the Change?
Often clubs and organisations are set up as IAs by default, where CLGs may be a more appropriate structure. In order to determine whether a transfer from IA to CLG is a good idea, the organisation needs to consider the size, scope and nature of the current and proposed activities.
An IA is more suited to small organisations that depend on volunteers, operating in one state only and with no intentions to expand in the short to medium term, while a CLG is more suited to a much larger range of organisations.
In summary, if a sporting club or organisation intends to operate on a larger scale, undertaking a broad range of activities, with numerous employees and with assets, income or expenditure in excess of $2 million (or has one or more of these attributes), a CLG may be the more appropriate structure. Furthermore, if the organisation has any intention to operate across states, a CLG is a more suitable structure, as IAs can only operate in the state or territory in which they are incorporated, and while an organisation may choose to establish separate associations in each state or territory, a more suitable and organised approach may be to establish a CLG at a federal level and establish branches for each state through delegated authority, reference documents or company policies and procedures. Each branch may even be incorporated as an independent but related corporate entity.
Directors and Committee Members
With slight variation across states/territories, an IA is required to have a management committee consisting of at least two or three committee members, for example a president and vice-president etc, whereas a CLG is traditionally governed by a board of directors, where there must be at least three directors, with a minimum of two that reside in Australia.
Under legislation, there are also slight differences in the role of a committee member of an IA and director of a CLG. Unlike the Associations Act, the Corporations Act uses language that makes clearer the wide responsibilities of directors. For example, a director must (among other duties):
- Act in good faith, in the best interest of the company and for a proper purpose;
- Not make improper use of position and information;
- Act with care and diligence; and
- Disclose any material personal interest in matters relating to the affairs of the company.
While the Associations Act may not be as prescriptive, it is commonly accepted that similar duties are imposed on committee members.
In terms of liability, committee members of an IA in any jurisdiction owe further common law and equitable duties which law and equity have similarly imposed on company directors. Furthermore, in a CLG, directors owe the same duties as directors of a company with a share capital (for-profit) and similarly may face personal liability for breaches of these duties in certain circumstances.
Members of IAs and CLGs
Incorporation of IAs and CLGs allows general members of IAs and CLGs immunity from personal liability at the suit of a third party. The potential liability for members in either legal structure is limited, usually to membership and subscription fees for an IA and the amount that that member has ‘guaranteed’ to pay under the CLG’s memorandum of association.