Choosing the Right Business Structure: a Closer Look at NFP Options


Choosing the Right Business Structure: a Closer Look at NFP Options

In order to choose the right structure for your enterprise, it’s important to develop it beyond the concept stage and into something that can be described in a degree of detail.

You don’t need to have a process or system in place for ‘every’ aspect of your proposed activities, but at the very least you should have a clear understanding of its purpose, its income stream and how profits will be used.

In a wonderful age where business owners are attuned to the difference they can make in the lives of others, it’s even more important to be clear about what your enterprise seeks to achieve. If your main objective is to provide an income for you and your family that also supports social and environmental issues, or helps a range of other deserving causes, then you can likely achieve that as a sole trader, partnership or company.

If, however, your altruistic objectives are your core purpose and all profits go back into the enterprise, then take a closer look at the options available for not-for-profit (NFP) organisations.

What is a NFP?

Primarily, a not-for-profit organisation is one where any surplus or profit is not distributed to its members. Instead, the profits are directed back to achieving the objectives and overall purpose. Some NFP’s have a charitable purpose like assisting those in financial hardship, organising housing or educational projects, while others have a purely functional existence like sporting clubs or political organisations.

Those with a charitable purpose who want to take advantage of tax concessions can register as a charity with the Australian Charities and Not-For-Profits Commission (ACNC). In order to receive tax deductible donations a charity must have Deductible Gift Recipient (DGR) status, and in order to fundraise they will need a permit obtainable through The Department of Fair Trading.

While NFP’s with a noncharitable purpose can still fundraise, they will also need a fundraising permit. The laws governing fundraising vary from state to state so be sure to check your local requirements.

What types of structures can NFP’s have?

As with any business venture, there is the choice between incorporated and unincorporated structures.

  • Incorporated organisations become a separate legal entity and can enter contracts, own assets, and be named in legal proceedings just as an individual could.
  • Unincorporated structures require its members to enter contracts on its behalf, and those members remain liable for debts and losses.

Incorporated options include Incorporated Associations, Companies limited by guarantee, or Cooperatives. The additional establishment costs and annual fees are offset by the financial protection incorporation offers, and will suit more complex operations who have a greater level of financial risk.

Unincorporated options include Unincorporated Associations, Clubs, Trusts or Societies. These are relatively easy to establish and are best suited to small groups and organisations with a low level of financial risk whose operations are relatively simple.

What questions do I need to consider?

Each structure will meet a particular type of circumstances, so start by asking yourself questions that help define the purpose and objectives of your enterprise:

  • How big do I want my NFP to be in terms of membership and scope?
  • Will it need to own property or lease premises?
  • Will it operate in New South Wales, nationwide or overseas?
  • Will it employ staff or rely on volunteers?
  • Will it generate income from sales, donations or government grants?

The answers to each of these questions (as a start) will guide you as you look more closely into each structure. Gather information from reliable sources like the ATO information on Charity Tax Concessions, the ACNC and the Department of Fair Trading before returning to your questions and seeing if you need to make adjustments. For example, your desire to provide financial relief to jurisdictions beyond Australia might come with obligations you aren’t able to meet, but redefining your focus to localised efforts may provide you with more manageable options.

As with each of the articles I’ve written recently on business structures, I can’t recommend personal advice more highly. A focused conversation with a solicitor and accountant can answer those nagging questions that are unique to your circumstances and save you dollars in the long run.

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