Should you use a private company or not
Putting your club into a company structure is a matter entirely for your choice. There is no legal obligation either way. There are advantages and disadvantages whether you use a company or just stay as a group of like-minded people.
Are you a group, a club, an association?
In case you worry, we will say up front that what you do in your club or association is not relevant. Either you work through a limited company, with your framework provided by the Australia Corporations Act or you are something else. “Something else” is usually referred to as an unincorporated association. This definition is rather negative because there really is no better word to describe a group of people who get together from time to time for a common interest.
You could be any group with any interest. Sports clubs are very common, but you could be philatelists, particle physicists or a political pressure group. We will call you a club for now, to save space. The bottom line is that the law recognises you only as individuals. The fact that you have a common interest is irrelevant. Your togetherness is not recognised in law.
That leaves you free to decide everything - as long as it is lawful. You can make your own rules, as formally or informally as you like. You can even have no rules at all. It is the same with your name. As long as you are not in business, and subject to copyright, you can take whatever name you like. Intriguingly, if you make a profit, you still have to pay tax.
What is incorporation?
Incorporation is just the legal word for using a company. In this context, that means accepting the advantages and suffering the disadvantages of registering the required information so that your group or club or association becomes a “person” in law.
About a company
- A company must play by the rules set by the Corporations Act. Within that picture frame is a smaller one - the constitution of the company. So the rules that you make provide a third an smaller framework for your management.
- As everyone knows, a company can sue and be sued. So if you decide to do something and it does not work out, the offended party can sue your club but cannot sue you. So your house and all your other assets are safe. If you are unincorporated, what you do is usually regarded by a court as done by the committee or other group in control. So each of those people could lose his shirt as a result of an unforseen and accidental event.
- You may also find that you can take out a suitable insurance policy more easily through a company than if each of six people try to do so separately. In fact you may find your company is compelled to take out insurance against certain risks. Of course, the management still have obligations to act honestly and properly.
- Your company could be limited by guarantee or by shares. There is little difference in this context, but limited by shares is likely to have a particular advantage. You can have any number of shares. A shareholder can buy and sell subject to whatever rules you want to make in the constitution of your company. That makes it a lot easier to buy / sell or give away ownership of a part of the association. It also means that if someone dies, his partial ownership does not disappear. His shares are still around - to be picked in whatever way the constitution dictates.
The advantages and disadvantages of both forms
- An unincorporated association cannot buy or sell or make any contract, so one or more of your members has to do that on behalf of all of you. It could be any of you. You can work to strict rules - makes life easier - or you can have no rules at all.
- Because a company has a legal identity, it can make contracts in its own name. Of course everyone knows that, but it is certainly more convenient for a company to buy and sell what you need for it than to control the money and the bank account operated by a number of individuals. We will add that it also follows that a company can own real estate and borrow money.
- If publicity is important to you, consider that it may be easier to promote a company. The name gets used. The same name is used by many people, so there is no confusion. Someone selling to you or buying from you - even members - can confidently know who they are dealing with.
- In a club, it is harder to control publicity. One member might say things that others disagree with. There is no company, so no company policy.
- It is often said that having a constitution under the Corporations Act provides a more solid basis for operating than being unincorporated. That is not so. A constitution can be written just as well for an unincorporated body and can be far more flexible. The big mistake would be to see your club membership grow and wait for a crisis to make clear that you need a properly written constitution.
- One area where an unincorporated association scores most highly is privacy. You have no obligation to anyone to give away information about membership, what you do or how you do it. The affairs of a company are not entirely disclosed but certainly, far more information is available to the public.
- It costs money to run a company. Compliance with the law costs money and sometimes professional fees. More time is spent by committee members in many elements of administration that would be needed for your club.
- If you make a profit - intentionally or not, you are subject to tax. It is likely that the rate will be lower for a company and certainly, there can be no argument over who pays what share. The company pays all of it.
- If you start on day one with a company, it is difficult and expensive to get rid of it. Of course, when you formed it, you had no thought to the possibility of substantial change. Later you may see that it would have been wiser to keep things simple for the first few years. A good club constitution will replace the set of documents a company will need while giving you grater freedom to set down procedures and rules which can be few or extensive. If you want to know what is actually in the document you need, there is an article on How to manage your club or association. If you follow that advice, there is not much left as an advantage for the corporate route.
Whether to choose incorporation or not often relates to size. The advantages of operating through a company become more important and relevant as the number of members increases and the breadth of activities spreads. Members of a small, local cricket club would be most unlikely to want to incorporate, but ten years later, when you are ready to win the Goldfield Ashes or the Gold Coast Sixes, the business side will certainly justify forming a company.