Have you been wondering whether being an incorporated association is still the best type of entity for your organisation? Or maybe your organisation’s local regulator has sent you a letter that says your organisation is now too big to remain as it is and it must transfer incorporation? Whatever the reason, this article will help you better understand what is involved when converting from an incorporated association under State or Territory laws to a company under Commonwealth laws. For the purpose of this article, we will focus on conversion to a company limited by guarantee, which is a well-known and understood entity in the context of charities and not-for-profit organisations.
It is natural for the strategic and operational aims of a not-for-profit organisation to evolve over time and for its activities to expand (potentially even across state borders). As part of this evolution, it is helpful to consider whether the current governance and entity type continues to be the best fit for the organisation or whether a different model would better serve the organisation into the future.
This is a particularly relevant consideration for incorporated associations who are planning for, or have already experienced, expansion of their operations or growth in their revenues. This is because the incorporated association model was created primarily for use by small not-for-profit organisations operating at the community level or perhaps within the confines of a single State or Territory. In many cases, organisations that operate across two or more States and Territories or have significant revenues will not be eligible for incorporation as an association.
For example, the incorporated associations regime in New South Wales is described by the regulator as providing a simple, low cost legal structure for small, non-commercial, not-for-profit organisations. Its policy sets an upper limit of $2 million in income and / or total assets for the registration of an association in New South Wales. Incorporated associations operating above this threshold would not be permitted to become an incorporated association if applying for the first time, and may therefore be asked to convert to a different entity type if the organisation exceeds this threshold over time.
While there are various options available for organisations that become too large for an incorporated association model, or wish to expand their operations outside their jurisdiction of incorporation, one common solution is to convert from an incorporated association to a public company limited by guarantee.
Conversion does not affect the identity of the organisation. Instead, like the metamorphosis of a caterpillar into a butterfly, the organisation remains the same and simply takes on a new form. This means there is no need to formally transfer the assets and liabilities of the organisation to a new entity.
The process for conversion is fairly similar across the different States and Territories. However, given there are differences, it is important that an organisation consults with the relevant regulator, seeks legal advice and / or considers the legal requirements in its relevant jurisdiction before and during the conversion journey.
The high-level steps an organisation will need to go through for a conversion
1. Conduct an initial board meeting
The board (that is the governing body of the organisation, which may be known as a management committee or by another similar name) should meet and resolve that the organisation convert from an incorporated association to a company limited by guarantee and that it take steps to commence this process.
2. Prepare new constitution
Given companies limited by guarantee are governed by different laws to incorporated associations, a new constitution / governing document will need to be adopted. While template governing documents may be available, these will not necessarily represent the best fit for the organisation and may not appropriately protect any current charity registration or associated tax concessions.
Conversion can also be a good opportunity to review the governance of the organisation and consider matters such as:
- membership structure, including eligibility and classes (if applicable);
- board structure including number, eligibility and terms of office;
- purpose and future direction, including purpose statement, current registrations and endorsements; and
- transition, in particular board transition and how current and historic terms of office are to be addressed.
Depending on the size of the organisation and the scope and nature of the governance reform being undertaken as part of the conversion process, it is sometimes advisable to ensure the organisation’s members are engaged in some way prior to finalising the constitution and calling the meeting to consider the necessary resolutions to give effect to the conversion and to adopt the new constitution. This may include preparing explanatory materials for members to explain the changes being proposed, conducting information sessions, making opportunity for member questions to be answered or similar.
3. Conduct a board meeting
The board should meet to consider and, if they decide to do so, resolve to pass a number of resolutions, including that:
- subject to member approval, the organisation will convert from an incorporated association to a company limited by guarantee;
- subject to member approval, from the date of the conversion, the new constitution will be adopted as the constitution of the organisation in full replacement of its current constitution;
- subject to member approval, from the date of the conversion, the name of the organisation be changed (note: the conversion process can be a good opportunity to change the organisation’s name, if desired. In any event, the name of the organisation will be changed to remove the word ‘Inc.’ or ‘Incorporated’ and add the word ‘Ltd’ or ‘Limited’. For completeness, it is suggested a change of name resolution be passed even if it is only for this slight update);
- subject to member approval, once the conversion has been completed, the registration of the organisation as an incorporated association be cancelled (note: it is the organisation’s registration as an incorporated association that is being cancelled, not the organisation itself. Remember, your organisation still exists, just in a new form; it has transformed from a caterpillar into a butterfly); and
- an annual general meeting or special general meeting of the organisation (as appropriate) be convened and the notice of annual / special general meeting and accompanying materials be approved and circulated to members of the organisation.
The above process and requirements will vary depending on the jurisdiction. In many cases, additional resolutions may also be required. For example, the board may need to make certain declarations regarding the financial position of the organisation.
While there will be opportunity later, the board may also use the meeting to resolve who the directors of the newly converted entity will be or determine how the directors will be identified – remembering that the new constitution may well include specific ‘transition’ provisions covering the directors during the transition. Director appointment should be subject to the receipt of properly completed and signed consents.
4. Conduct a members’ meeting
The organisation must hold a meeting of its members. The requirements for providing notice of the meeting to members (including how many days before the meeting the notice must be sent) will normally be set out in the constitution of the organisation and the specific associations incorporation legislation relevant to your State or Territory. The notice should generally:
- state the date, time and place for the meeting;
- include text of the proposed special resolutions;
- be sure to state that the resolutions are to be passed as ‘special resolutions’; and
- attach a copy of the proposed constitution and any other relevant documents such as any explanatory memorandum.
A quorum of members must be present at the meeting. What constitutes a quorum should be described in your constitution.
For a special resolution to be passed, at least three-quarters of the votes cast by members present and who are entitled to vote on the proposed resolution must be in favour of the proposed resolution. It is important to note that your constitution could require a higher threshold than 75% for a special resolution. Your constitution may also include important guidance on whether proxy voting is to be permitted and, if so, how proxies are to be managed.
At the meeting the members should be asked to consider, and if thought fit, pass a number of special resolutions (as set out in the notice of meeting), including that:
- the organisation will convert from an incorporated association to a company limited by guarantee;
- from the date of the conversion, the new constitution will be adopted as the constitution of the organisation in full replacement of its current constitution;
- from the date of the conversion, the name of the organisation be changed; and
- once the conversion has been completed, the registration of the organisation as an incorporated association be cancelled.
An ordinary resolution should also be put to the members authorising each of the board members (or a delegate) to do all things necessary to give effect to the resolutions passed including, but not limited to, completing and lodging all required forms with the appropriate regulators.
5. Lodge application with State or Territory regulator
Assuming all of the resolutions are passed, the organisation must apply to the relevant State or Territory regulator for approval of the transfer. This will often involve completion of a transfer form, submission of the special resolutions passed, provision of other supporting documentation and payment of a fee.
6. Lodge application with ASIC
Once the transfer is approved by the relevant State or Territory regulator, the organisation must apply to the Australian Securities and Investments Commission (ASIC) using Form 202: Application for registration of a body corporate as an Australian company. Various documents will need to be submitted with the application, along with payment of a fee.
7. Notify State or Territory regulator
In some cases, once ASIC has registered the organisation as a public company limited by guarantee it may be necessary to notify the State or Territory regulator and provide certain documentation (such as the certificate of incorporation from ASIC). At this point, the regulator will generally remove the organisation from the relevant register of incorporated associations and the conversion will be complete.
8. Notify others about the conversion
Various other parties may need to be notified about the conversion. This may include the Australian Charities and Not-for-profits Commission, the Australian Taxation Office, other regulators (such as the relevant State or Territory regulator if the organisation has a fundraising authority), WorkCover and other insurers, superannuation funds, funding bodies, suppliers, companies the organisation leases property or equipment from and titles office in relation to real estate. The organisation will need to carefully coordinate this process to ensure all appropriate notifications are made within the required timeframes. While in many cases notification will occur post-conversion, in some cases, it may be necessary to provide notifications or seek approvals before the conversion takes place.
While the steps are generally reflective of the process in the various States and Territories, the process is not a uniform one and care should be taken to ensure the appropriate steps are followed depending on the organisation’s place of incorporation.
If you are considering a conversion, get in touch with our Charities + Social Sector Group who can guide you through the process and ensure your organisation’s governance is ready for the future.