The legal life jacket

The Legal Life Jacket

Sometimes even the most experienced swimmers, in the calmest waters, have need of a life jacket – when the weather changes or the swimmer becomes overwhelmed or incapacitated.

The same is true of not-for-profits and formal legal arrangements. In recent times, we have seen this in two key areas:

1.       Legal Structures; and

2.       Relationships with Key Individuals.

 1. Legal Structures

We strongly advocate for not-for-profits to resist the temptation to overcomplicate their legal arrangements and we have seen all too many not-for-profit clients who have been “over-lawyered”. However, when it comes to the legal structure of an organisation, there are clear advantages to incorporating – whether as a state-based incorporated association, or a company limited by guarantee. An incorporated entity has legal personality, which means that amongst other things, it can hold property, enter into contracts and commence proceedings in its own name. An incorporated entity also has limited liability, which provides a layer of protection to its members and board members, notwithstanding that board members have various duties to the incorporated entity. We have worked with many board members of unincorporated entities who are surprised to learn that they can be held personally liable for the debts and liabilities of the unincorporated entity that they represent.

We cannot overstate the advantage of an incorporated entity being able to hold property in its own name, in perpetuity. Where a not-for-profit is unincorporated, individuals are often relied upon to hold property in their own name on behalf of the unincorporated body. This can leave an unincorporated body exposed to the elements if a dispute arises with the trusted individual/s and having to displace the legal ownership of the person. Having an incorporated entity also avoids the need to transfer property when the person holding the property dies or ceases to perform their function.

 2. Relationships with Key Individuals

Not-for-profits often have informal arrangements in place with key individuals such as employees, founders and board members. Although we caution against harming relationships by adopting a legalistic approach, board members should consider whether formal documents should be put in place, even with the most loyal servants of their not-for-profit, such as more comprehensive constitutions, employment contracts, leases or licences for the use of land and transfers of intellectual property. Having formal documents in place can create a smoother process when there is a dispute or disagreement such as providing for a dispute resolution process consistent with the not-for-profit’s objects and values. Formal documents can also prevent disputes altogether by minimising the risks of misinterpretation and disagreement over ambiguous terms.

We therefore encourage not-for-profits to look beyond what is currently working and think about the potential issues that might arise in the future, and adopt legal structures that will minimise future risk. Does your not-for-profit have stormy weather safeguards in place?

 For more information please contact %87t%AD%E8%B1%D7U%97%B1%E9%B6t.