Setting up a new entity – what are my options?

Three friends who had a mutual interest in art wanted to set up a legal entity to receive funds from grants and run events for those interested in art.  They all wanted to be involved in decision-making for the entity, but were not putting any personal funds into the venture so wanted to avoid personal liability if at all possible.  The had also heard that it was a good thing to be ‘charitable’ if you wanted to receive grants, but were not aware of what kind of entity could be registered as charitable.

Below is a summary of the key features of various common governance structures for organisations (both charitable and non-charitable).

Charitable Trusts

Key features:

• Must be set up for a charitable purpose, being the advancement of religion, education, the relief of poverty and other purposes that benefit the community.
• Governed by trustees, who generally have limited liability provided they act prudently and not for personal gain.
• Registered with the Register of Incorporated Societies (and Charities Services in some cases).
• Trustees can incorporate as a Charitable Trust Board to allow the Board to contract on its own, otherwise the trustees contract in their own names on behalf of the Trust.
• Governing document is its trust deed, which is registered with the Registrar of Incorporated Societies and publically available.
• The trustees run the trust to benefit the beneficiaries and to further the charitable purpose.

Companies

Key features:

• Governed by directors, who generally have ‘limited liability’.
• Shareholders own the shares in the company and have voting rights and rights to receive dividends.
• Governing document is its constitution, which is registered with the Companies Office and publically available.  If there is no constitution, then the Companies Act governs the company instead.
• You can enter into a shareholders’ agreement (which is a private agreement between the shareholders which covers things like what happens if a shareholder passes away), but this is not compulsory.
• Can be registered as charitable if it has charitable purposes (as above).

Incorporated Societies

Key features:

• Suited to not for profit organisations where members have a common interest.
• Can have a charitable purpose and be registered as charitable.
• There is a minimum number of members (15).
• Governed by a set of rules, which are registered with the Registrar of Incorporated Societies and publically available.
• Decisions are made by members at general meetings or by a committee.
• Surplus assets are generally distributed among members or to other societies (unless charitable).
• The legislation that covers these is currently under review.

Limited Partnerships

Key features:

• There is one “General Partner” and at least one “Limited Partner”.  The General Partner is in control of management of the partnership.
• Governing document is a partnership agreement, which is registered with the Companies Office and publically available.
• The Limited Partner must not take part in management of the Limited Partnership.
• Can be registered as charitable if its purposes are charitable.

Make sure you take advice from your lawyer and accountant if you are unsure about what entity is best for your situation, to ensure you obtain the maximum benefit the different entities can provide.