I'm setting up an NFP. Which structure should I use?

I’m setting up a not-for-profit organisation. What’s the best structure to use?

We are commonly asked what’s the best structure to use when setting up a new charity or other ‘not-for-profit’ (NFP) organisation.  While incorporated associations and public companies limited by guarantee are often suitable, they are not the only options, and there is no easy ‘one size fits all’ answer.

Before deciding which structure to use, you should first consider some key questions:

  • Where will your organisation operate?  Will your activities be confined to one State, or do you intend to expand to other States or nationally?
  • What is the main purpose or mission of your organisation?  Are you providing direct services to the needy, or just collecting and directing funds to existing services?
  • How will your organisation be funded?  Do you intend to rely on public donations, grants, income through trading activities or some other source?
  • Who will be involved in running your organisation?  Will you rely mainly on a small group of unpaid volunteers, or will you have full-time staff and professional Board members?

The answers to these questions will help shape your decision and make sure you end up with a ‘best fit’ structure.

We can explain the different structures that are available to your organisation, and help you find the ‘best fit’.  If you would like to discuss, please call Simone on 1300 654 590.

Is not-for-profit the best choice for you?

In some circumstances a pure ‘not-for-profit’ (NFP) structure may not be the best choice for your organisation.  Just because you are serving a need in the community does not necessarily mean that you must adopt a not-for-profit structure.

When considering adopting a not-for-profit structure, it is important to note the following main limitations:

1. An NFP can only undertake activities that are consistent with its ‘Objects’

When you set up an NFP, you will need to approve a governing document for the organisation.  This is most commonly referred to as the ‘constitution’ (but could also be known as the ‘articles’ or ‘trust deed’).  This document is the ‘rule book’ for the organisation.

In the document you need to specify exactly what the main purpose or mission of your organisation is, and the activities it intends to undertake to achieve those goals.  This list is known as the organisation’s ‘Objects’.   Often an organisation’s Objects will be quite specific and limited, especially if it is seeking endorsement for particular funding sources, tax concessions and/or registered charity status.

Once an organisation has adopted these Objects, it is bound by them, and can not venture beyond their scope unless it first changes the governing document.  This can be a lengthy process, and may need the prior approval of the organisation’s members, the ACNC, the ATO and/or the State business services office.

If your organisation is going to undertake a range of activities that may evolve over time you may need to reconsider whether a pure not-for-profit structure is best for you, (if only in the short term while you get established and settled).

2. NFPs can not provide profits and financial benefits to members

A ‘for-profit’ entity is ultimately controlled by its shareholders that can vote on important decisions that affect the entity.    Shareholders ‘invest’ in the entity, and when the entity makes a profit, the shareholders receive a return on their investment through the payment of dividends or distributions.

NFPs operate differently.

NFPs are usually controlled by members rather than shareholders.   While the members may contribute funds or services to the NFP, an NFP is generally prohibited from distributing profits and providing financial benefits back to their members (with some exceptions).  This is where the term ‘not-for-profit’ originates.  The term is commonly misunderstood to mean that the organisation never makes a profit.  This is incorrect.  In fact, many NFPs regularly make a profit, (in fact many make very large profits).  Rather, it means that the organisation is not for the profit of its members.

This is a very significant limitation of a not-for-profit structure. 

If you are looking to fund your activities through private investment, then a pure NFP structure will be unsuitable.

Many social enterprises have a mixed for-profit/not-for-profit (‘hybrid’) structure.  These structures can offer the best of both worlds if done properly, where profitable commercial activities can be used to support charitable causes in a sustainable and ongoing way. We have experience designing and implementing these structures.

3. Profits are ‘locked up’ in the NFP

So if profits can not be distributed to members, where do they go?

They are continually re-invested into the NFP so that it can continue to pursue its objects.  This means that profits are effectively ‘locked up’ within the NFP structure.

Sometimes the members of the NFP may decide to distribute funds to another organisation and this is usually fine, so long as that other organisation is also an NFP and has similar objects.

The notion of funds being ‘locked up’ continues right through the lifespan of the NFP.  Even when the organisation decides to cease operating (‘wind up’), it will usually need to distribute all of its remaining assets to another NFP that has similar Objects, rather than its members.

This limitation may influence your decision about how assets are contributed and held within the structure.  Again, it could be that a hybrid structure may be more suitable for your particular goals.

We can help you decide whether a ‘not-for-profit’ structure is suitable for your organisation.  If you would like to discuss, please call us on 1300 654 590.

Do you even need a new structure?

Before setting up a whole new structure, we encourage our clients to first look at the organisations that are already established and potentially fulfilling the needs or mission that the new organisation would serve.

It is surprising how many people overlook this step.

There are many creative ways that you can engage and collaborate with existing NFPs.   This doesn’t necessarily mean that you need to sacrifice control or the identity of your unique mission or project.  An existing NFP may be prepared to form a joint venture with you, or apply for funding on your behalf (this type of arrangement is often referred to as ‘auspicing‘).

Rather than setting up a whole new structure, you may be able to achieve the same outcomes through a relatively simple agreement with an existing NFP.  Even if your long term goal is to establish your own NFP, this option gives you the opportunity to give your idea a ‘test run’ before investing significant time, energy and money.

We can help you to collaborate with an existing NFP in a formal and organised way so that your original idea, project or mission is not compromised.  If you would like to discuss, please call us on 1300 654 590.