How to start a not-for-profit entity

Starting a business

In this presentation, learn the 10 key steps to consider when looking to launch a not-for-profit organisation.

Key learning outcomes:

  • What is a not-for-profit?
  • Most common structure types
  • Registering a charity
  • Registrations, Licences and Insurance
  • Record keeping and accounting
  • Developing a strategic business plan

How to start a not-for-profit entity

How to start a not-for-profit entity

Good morning. My name's Diane Brown. I'm a chartered accountant and business advisor with SRJ Walker Wayland. Today, I'll be taking you through the 10 key steps to start a successful not-for-profit organisation.

We will first go through each of the 10 steps, and then at the end of the presentation, you will see that I have a detailed list of resources that I would suggest you go through and make yourself familiar with before you start establishing your not-for-profit entity.

What is a not-for-profit?

Before we start on the 10 key steps, let's talk about what a not for profit actually is.

A not-for-profit organisation is simply an entity that doesn't operate for profit, personal gain, or the benefit of its members. It doesn't necessarily mean that you can't make a profit. In fact, you want to make a profit. Rather that profit is simply reinvested to further the aims of the organisation and ensure its success and longevity.

Two types of not-for-profit organisations

1. Charity

The first category is a charity, which has registered under the charities act 2013 and governed under the Australian charities and not-for-profit commission, which we refer to as the ACNC

2. Other

The second category are other not for profits that aren't members of ACNC or registered charities. These are things like sporting and recreational clubs, community, and other service organisations.

Social Enterprise

As well as not-for-profit we hear about the term ‘social enterprise’. I have a lot of people that come to me and say, they want to set up a social enterprise. But what is it they really mean?

It's important to understand that a social enterprise is not a legally recognised classification. It's simply a business that is designed to achieve a particular social outcome through commercial means, such as selling their goods or services. The social outcomes that the social enterprise want to achieve might be economic, social, cultural, or environmental, but their outcomes are consistent with the public interest.

A social enterprise can actually be both a not-for-profit, or a for-profit entity. The general rule with respect to social enterprises is that they reinvest a minimum of 50% of the profit towards achieving their identified social purpose.

And there are some examples of social enterprises in actions. There are a lot of trading cooperatives and there are organisations that deliver or distribute profit to particular social causes.

1. Do your research

So before you start a not-for-profit organisation, you need to do your research and you need to firstly, consider, do you want to be a formal or an informal organisation? And when you're considering these approaches, you need to be asking yourself, what is the core purpose of your group? What is the focus of the work that you will actually be undertaking through that particular organisation or group? And are there any other existing community groups that do the same work as you? Bearing in mind that currently in Australia, there are over 700,000 registered community groups that are in action as we speak.

You need to make sure that you are engaging with the peak bodies that cover your area of interest. Once you've done that, you need to define what your group will look like. Is it simply a group of volunteers, in which case you'll still need to consider the organisation of the volunteers and the management. Or do you want to be a more formal organisation and have paid staff?

You need to think about the activities that your group will actually undertake, and what resources you're actually going to need to be able to perform the service that you want to do.

Structure type

I can't stress enough how important it is to seek professional advice early in establishing a not-for-profit to ensure that you have your structure, and your set up, correct from day one.

In terms of structure, you need to consider whether you are going to be an unincorporated or an incorporated organisation.

Unincorporated association

An unincorporated association is not a separate legal entity from its members. What that means is that every member in that organisation has legal liability for any of the actions that are conducted by the group, and any debts that are incurred by that group.

An unincorporated association has set up for a common purpose. It cannot enter contracts in its own name, which means it can't employ staff. It can't lease premises in its own right. It can still register as a charity (if it's conducting charitable acts) and some strong examples of this are usually religious communities, animal welfare groups, and cultural welfare groups.

2. Decide if you want to incorporate

Advantages of incorporating

If you decide to think about incorporating, there are some advantages associated with that. If you are an incorporated not-for-profit, and there are a number of different ways you can go about incorporating. I'll come to those in a minute. The key advantages of incorporating your not-for-profit entity are that it gives you limited legal liability, because the incorporated entity is seen as a separate legal entity.

In other words the members aren't individually liable. It can enter into contracts in its own right e.g. purchase assets, borrow funds, and lease premises. It can employ staff. It can apply for grant funding. It can also achieve deductible gift recipient status, which is tax benefits available to people who donate to that relevant organisation. And it allows for perpetual succession, whereby if your membership base changes, the entity still exists.

Issues to consider when incorporating

Issues you need to consider when deciding whether to incorporate or not.

  • Costs and time: If you are going to incorporate, there is a requirement to have formal meetings, and maintain proper financial records
  • Public information: which is available through various means.
  • Likely activities: You need to think about the risk of the activities that you are actually considering to be undertaking, and any other future activities that you're going to undertake.
  • Certain regulated activities must be incorporated e.g. housing, aged cars, native title activities

3. Determine the most appropriate Incorporated Structure

If you decide to go down the incorporated route, there are full different structures you can consider.

  • Incorporate association
  • Company limited by guarantee
  • Non-trading (or non-distributing) cooperative
  • Indigenous cooperative

The most common of these incorporated not-for-profit entities are the first two, so we will focus mainly on those areas. Although I will do a quick recap on the other types of entities as well.

Incorporated association

The first entity we look at is an incorporated association. An incorporated association is governed by the Associations Incorporation Act 1981 (Qld)

A couple of key things to bear in mind:

  • It is a separate legal entity
  • Must have a minimum of seven members
  • Each State/Territory has its own laws (because these are state-based legislation, it can make it difficult if you’re considering trading outside of Queensland)
  • You can still register with ASIC, under the corporations act or the relevant associations incorporation act in other States you're considering trading
  • They have model rules that you must follow, which are referred to as the Association's Constitution
  • Must have a management committee with a minimum three members
  • Financial statements must be adopted at an annual general meeting and they may require audit or further verification, depending on the size of the entity
  • Annual return must also be lodged with the Office of Fair Trading

Advantages/Disadvantages of Incorporated Association

More importantly, let's look at some of the advantages and disadvantages of becoming an incorporated association.

Suitable for:

  • If you are a local, Queensland focused not-for-profit, or community group, you might want to consider this entity
  • Groups with limited capacity to meet more extensive reporting obligations and costs of some other structures

Not suitable for:

  • Groups with fewer than seven members
  • Groups considering operating nationally, or across other States or territories.

Company Limited by Guarantee (Ltd)

The second top of most commonly used organisation in the not-for-profit world is a Company Limited by Guarantee (Ltd).

This one is governed by the Corporations Act 2001, so there are much more stringent reporting and compliance requirements if you set up or establish this particular entity.

  • Regulated by ASIC unless registered charity
  • Can operate anywhere in Australia
  • Limited liability
  • 3 tiers or reporting
  1. Small <$250k (no audit)
  2. Medium $250k - $1 million (financial report + audit or review)
  3. Large >$1 million (financial report + full audit)
  • If registered charity report to ACNC
  • If DGR status – all tiers require financial reports and audits
  • Must have a Company constitution
  • Penalties for non-compliance with reporting requirements and directors duties are higher and more strictly enforced

Suitable for:

  • Organisations that want to operate nationally

Not suitable for:

  • Non-ACNC registered groups without resources to comply with ASIC and ACNC more extensive and costly operational and reporting requirements

Co-Operative (co-op)

The third type is what we call a cooperative organisation, which has governed under the Cooperatives National Act 2020 (Qld)

  • Regulated by Queensland Office of Fair Trading
  • If registered charity, also reports to ACNC
  • Two different types: distributing (trading) or non-distributing co-ops
  • Principles are set out in the Act regarding your membership, control, economy participation, autonomy & independence, education, training and information, cooperation and concern for the community
  • Constitution: information contained in that Act that you need to comply with.
  • Trading Co-ops generally operate in agricultural, retail, transport, water and wholesale trade industries
  • Non-trading Co-ops generally in accommodation & hospitality, arts & recreation, education, training, health care, housing & social service industries

Suitable for:

  • Groups servicing their members where each member is willing to share in the investment and operational risks (e.g. owned art co-op, ski lodge, childcare group providing services to its members)
  • Groups the wish to follow the co-op principles

Not suitable for:

  • Groups that want different classes of members (i.e. levels of membership) for different voting rights
  • Groups that want to benefit a wider range of people than the members

Indigenous Corporation

The final structure that you can have as a not-for-profit is for an indigenous corporation. There are some specific rules around this. You're governed under the Corporations (Aboriginal and Torres Strait Islander) Act 2006.

  • You must comply with the Register Indigenous Corporations (ORIC)
  • Can operate anywhere in Australia
  • It is a separate legal entity
  • Can be a not-for-profit or a for-profit organisation.
  • If a not-for-profit, it must have the “rule book” that prevents profit being distributed to members
  • “rule book” will incorporate your Indigenous customs and traditions.

Suitable for:

  • Aboriginal and Torres Strait Islander Groups
  • Must be used by those holding or managing native title under Native Title Act 1993

Not Suitable for:

  • Non-Indigenous Groups

In the not-for-profit world, as I said at the beginning, the most common types of organisations you might want to consider will be an incorporated association or a company limited by guarantee.

4. Determine if you want to register as a Charity

Once you've decided on whether you're going to be an incorporated, or an unincorporated association, you need to determine whether you want to register as a charity. If you register as a charity, you’re governed under the charities act. Not everyone can register although it is pretty broad.

There are 12 charitable acts, or charitable purposes, which are broken down into three key areas.

  • 12 Charitable purposes:
  1. Advancing health, education, religion, culture or social or public welfare
  2. Promoting or Protecting Human Rights
  3. Other purposes beneficial to the public
  • There are a further 14 charity sub-types that exist within these charitable purposes
  • Must comply with ACNC Governance Standards & Reporting Requirements
  • Must lodge Annual Information Statement
  • Eligible for tax concessions
  • May be eligible for Deductible Gift Recipient (DGR) Status
  • Constitution must have specific Charitable Purpose Clause and
  • If DGR Status must have DGR Revocation Clause

So let's look at some of the reasons that you might want to get registered a charity.

Benefits:

  • Access to more tax concessions, and therefore access to incentives and, in some cases, extra funding
  • Reputation and standing in the community and ability to use the ACNC charity ‘tick’ logo
  • Simpler reporting for companies limited by guarantee

Extra Obligations

  • State incorporated structures like incorporated associations and trusts not previously required to report may have extra or duplicated reporting obligations
  • Requirement to comply with the ACNC’s governance standards
  • Need for ‘responsible persons’ and listing on public register of ‘responsible persons’

So determine whether you want to go down, both the charity and the deductible gift recipient status. And you can do one or the other. You don't have to do both. And in fact, a lot of charities will simply become registered charities with ACNC without going to that next step of becoming a deductible gift recipient status organisation through the Australian taxation office.

5. Governance and Directors Duties

Once you've decided on, in, on your charity registration, you need to ensure that you are aware of your governance and director duty requirements.

There are four main legal duties for your committee members that you need to comply with.

  1. Duty to act in good faith in the best interests of the organisation and for a proper purpose
  2. Duty to act with reasonable care, skill and diligence (including to duty to prevent insolvent trading)
  3. Duty not to improperly use information or position
  4. Duty to disclose and manage conflicts of interest

They are four key duties that you need to understand and be familiar with if you're considering being a committee member of a not-for-profit organisation.

Other legal duties include:

  • Record keeping
  • Meetings – including AGM
  • Reporting requirements

And comply with additional laws including:

  • Workplace Health & Safety
  • Anti-discrimination
  • Fundraising Laws
  • Working with Children Laws
  • Privacy Laws
  • Negligence and Defamation Laws

There is a raft of laws that, regardless of what type of not-for-profit you're considering setting up, you should be getting yourself familiar with.

6. Obtain appropriate Registrations, Licences and Insurance

Then you need to ensure you have appropriate registrations licenses and insurances.

  • ABN and TFN (at the very least), and GST registered if turnover is more than $150,000
  • If employing staff:
  1. Pay as you go Withholding (PAYGW)
  2. Superannuation
  3. WH&S
  • Business Name Registration
  • Consider trade mark registration
  • Any other IP considerations

Obtain appropriate insurance

Then you need to think about what level of insurance do you want or need.

Consider:

  • Public Liability Insurance
  • Workers Compensation Insurance
  • Volunteer Personal Accident Insurance
  • Professional Liability Insurance
  • Directors and officers or management association liability insurance
  • Asset/MV Insurance

I recommend that you seek help early to ensure that you have yourself protected in terms of insurance coverage.

7. Set up your Record Keeping and Accounting System

You need to ensure that you've got your record-keeping and your accounting system set up correctly.

Your ATO requirements are that you keep your records preferably in electronic format for five years, starting from when the record was obtained or the transaction is completed - whichever date occurs first. ACNC, however, requires you to keep records of your financial and operational systems for seven years. So you need to use the seven years in this situation.

Set up your integrated systems. So get a cloud-based accounting software program that can link into all of your other relevant modules. Xero and MYOB are two fantastic ones. They can be linked to something like Receipt Bank, which will allow you to simply take photos of all of your expenses and your receipts and have uploaded directly into your Xero accounting file. So it's a great system.

You need to be thinking about a customer relationship management system (CRM) or a volunteer management system, and how that will integrate with your relevant accounting system.

One of the other things that's really important as a not-for-profit is that you develop and document your systems and processes and policies. There's some great templates that are available on the ACNC website to assist you with doing that. And I've put a link (downloadable presentation) up there for you to consider.

There's also a free, fantastic Queensland-based service called Injury Prevention and Management Program (IPM) which is run by the state government. It's a free system that's available to assist you to get your workplace health and safety systems in place. I would suggest you make use of that program in the initial setup phase to help you ensure that you're covered with what you need to do to comply with your WH&S rules. Certainly here in Queensland.

8. Develop your strategic business plan

Finally, you need to develop your strategic business plan. So your plan needs to be the process that provides your business direction. You need to be identifying what the goals are for your organisation, and breaking those goals down into strategies and detailed action items.

Your plan will allocate responsibilities and timelines, and have the management committee ensure that it keeps each other accountable to achieving those actions, to work towards achieving your organisation goals.

Your strategic business plan needs to be an evolving document that you need to be revisiting and updating on a regular basis. You need to see that plan as the blueprint for your business success.

As a not-for-profit if you are going for some larger grant funding programs, at a minimum they will require a business plan supported by financial forecasts.

Consider these steps for your business plan:

  • Define your purpose
  • Define your product/service
  • Clarify your sustainable competitive advantage
  • Complete a strategic SWOT analysis
  • Develop your path to market
  • Define your goals (SMART)
  • Develop action plan
  • Be accountable

9. Plan your finances

Supporting all of this though, and I can't stress how critical this is, plan your finances. Develop a startup budget. Determine your initial 12 month to 24 month capital commitment, and map that out in the form of forecast profit and loss, balance sheet, and more importantly, cashflow statements for that critical first 12 months of trading.

Calculate your breakeven point. So what's your breakeven point? It's that point in which you must earn an income level, just to cover all of your associated expenses and you don't start making a profit until such point in time is when your income exceeds that. So know what that break even point is.

Identify and monitor your financial and operational key performance indicators (KPIs).

More learning resources

There's some fantastic, additional learning modules that are also available through Business Moreton Bay region that I would suggest you familiarise yourself with. And they include things like small business accounting 101, financial management for business owners or understanding financial literacy, planning for business success.

All of those, whilst they are business-related topics, still apply to the not-for-profit world, a not-for-profit organisation to be successful and sustainable needs to run with business like objectives in mind. So please go and make use of those additional resources.

Finally, think about how you're going to launch your not-for-profit. How? Where? Who are you going to invite? Who are your key stakeholders? Who are your key suppliers? Who are your key industry groups? Who are your potential key clients? How are they going to get there? Who's going to be involved in organising it?

10. Launch

So for anybody considering starting up a not-for-profit just to remember to follow the ten 10 key steps to start a small business or a small not-for-profit entity, and I wish you all the best and good luck in your successful endeavors.

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Resources

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How to start a not-for-profit (download presentation)
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