LEGALLY SPEAKING - PAUL SUGDEN

Non-profit Organisations and their Boards

The publisher of this magazine, The Australian Forum for Textile Arts, Ltd. (TAFTA) is a non-profit company, limited by guarantee with a Board of Directors - see page 4 each issue. What does it all mean?

Non-profit organisations come in two forms: an incorporated association, or a company limited by guarantee like TAFTA. Perhaps you've been on the Board of Directors, or Management Committee of such an organisation - or are pondering the legalities of running for a position as a Director. Don't stop reading now, muttering, "They are only going to tell me all the liability issues and that I should not be on a Board."

Yes, there are liability issues, but when you consider that in Queensland alone there are about 18,000 incorporated voluntary associations - and about 100,000 companies limited by guarantee in Australia - and few if any actions against board members are reported, the statistics are in your favour.

The major reason for using one of the set forms of non-profit organisations is to provide a method of limiting the liability of members, and committee or board members for any debts of the organisation - otherwise nobody would be willing to participate on any board. The aim of this article is to introduce you to the reasons why an organisation would choose one form of non-profit structure over another and then to consider the liability of directors, and the duties and responsibilities of the board.

So what are the differences between an incorporated association and a company limited by guarantee? The major difference is that an incorporated association is organised under state legislation (Associations Incorporation Act 1981) and companies are under federal legislation (The Corporations Act 1989).

A non-profit organisation would choose an incorporated association structure if its activities are to be confined to one state and there is no trading or activities outside the boundaries of one state. This is because the state legislation is bound to its boundaries. If an incorporated association wants to trade to incorporate in that state or register under the Corporations Law Pt 4.1.

If the organisation is trading and raising funds for charitable purposes outside the boundaries of one state, like TAFTA it is preferable to register with the Australian Securities Commission as a company limited by guarantee, thereby gaining a national system of administration. The company can do business anywhere in Australia without further registration.

The cost of registering an incorporated association is $85.30 whilst registering a company limited by guarantee is $250 to $300 (at present). An incorporated association is governed by its Rules of Association; these set out the purpose for the organisation and its membership.

A company limited by guarantee is governed by its Memorandum, and Articles of Association and these state the purpose of the company.

In the Articles of Association it will state that the liability of members is limited in the case of a winding up to a set figure of about $10 on average (in TAFTA's case it is $15 per person).

Annual returns are required for both forms of non-profit organisation, but the costs and reporting requirements for a company are generally more extensive and the filing fees slightly more costly.

In an incorporated association, as in a company limited by guarantee, the members do not pay money as capital. Members pay membership fees to the organisation but do not purchase a share in the organisation. A company is run by the board of directors and an incorporated association is run by the management committee.

These are the major differences and similarities between the different forms of non-profit organisations, and as can be seen, the form of structure is often determined by the territory in which the organisation wishes to operate and the costs to be involved.

So what does it mean to be a board member of a non-profit organisation? In the case of a non-profit operation, as a company limited by guarantee a board member is a director of the company and has the duties and responsibilities of a director under the Corporations Law. Board members are in a higher position to the organisation than those in general business and are there to run the organisation for the benefit of the members.

In the case of an incorporated association the member of the board is a member of the management committee. The board of directors and the management committee have the same general functions:

1. To appoint a chief executive to organise the everyday running of the operations of the company
2. To set goals, formulate strategy and approve business plans for the company
3. To approve annual budgets and key management decisions (such as major capital expenditure)
4. To monitor management performance and business results
5. To conform with the statutory requirements for reporting to the relevant authority any financial information and changes in the board's composition

Individual members of the board have duties that:

As mentioned, a board member owes a higher duty to the organisation to act in the organisation's interests and not their own. This is reflected in the additional duties of a member of the board which include:

• The duty to act with due care, skill and diligence
• To act in good faith to the company and to act in the interests of the organisation, not their own personal interest
• To act honestly
• Not to fetter their discretion in matters relating to the organisation
• Not to contravene the organisation's constitution.

If members of a board follow these duties generally, there will be no complaints about their behaviour and they can rectify problems and resolve financial obligations without there being any distress or personal liability for the activities of the organisation.

The DON'Ts: a board member would not allow the organisation to contract with a company related to them unless there has been full disclosure of their interest in the deal. They should not receive secret profits from other bodies wanting to do business with their organisation. Generally these duties do not get breached by board members as most members of non profit organisations act in a professional business meaner to their role, therefore not becoming personally liable for the debts of the organisation.

If an individual board member allows the organisation to continue trading when they know the organisation cannot pay its debts from monies available to it (it is insolvent) then that board member can be personally liable for any debts incurred after the realisation that the organisation is insolvent, but the debtor must prove that the board member knew at the time that the debt was incurred, that the organisation was insolvent, and the board member knew or ought to have known of the insolvency.