Incorporation - Pros & Cons

To be or not to be … an incorporated CDAT?

This is a perennial question faced by CDATs.  The frequency with which it has arisen over the years, has meant that the CDAT Project Officers and others from Population Health & Community Engagement have researched the matter in some detail.

While most CDATs administer funds through an incorporated organisation, some CDATs are looking to incorporate themselves.

The advantages of CDAT incorporation are:

• There is no need to go through an auspice agency to manage your funds.  This means that you do not have to pay an auspice body for their services and that you have direct access to your funds and to information about your accounts.  It also means that should your CDAT wish to apply for funds from other agencies it does not need to source and enter into an agreement with an auspice agency.
• Your CDAT becomes an independent legal entity.  This means that it may enter into enforceable contracts including the buying and selling of property and that it can sue and be sued.  This may assist the CDAT because it provides external bodies with a level of protection if they want to trade and enter into contracts with the incorporated CDAT.  Note, however, that unincorporated CDATs are still able to enter into contracts via their auspice agency.
• Incorporation provides members of incorporated bodies with some level of limited liability.  Yet, ultimate liability lies with the members of the board or committee of management.  An incorporated body can purchase comprehensive insurance so as to safeguard against this. 
• Your CDAT may gain a stronger sense of identity from the recognition that it is an independent legal entity. 

However, the list of disadvantages is both far longer and far more significant. 

The main disadvantages for CDAT incorporation are:

Liability

Board/committee members of incorporated bodies are personally liable for the financial and legal consequences of the activities of their incorporated body.  When a legal or financial claim is made against an independent entity, it is made against that entity rather than against the individual members. However, as the members of the committee or board of management have ultimate responsibility for the independent entity, any liabilities against the entity eventually lie with the members of the committee or board of management.  

Incorporation allows the entity to purchase insurance to offset this risk.  Although it is not compulsory for incorporated bodies to be insured, it is strongly recommended that they take out comprehensive insurance.

Although this is an expensive exercise and will make a large dent into the funds of the CDAT, it is preferable to board or committee members personally accepting liability for their incorporated CDAT. 

To find out more about the liability of board / committee members of incorporated bodies, and for general information about incorporation of community groups, refer to Graham Wheeler’s publication Incorporations: an explanation of the Associations Incorporation Act 2002, available from the NCOSS website www.ncoss.org.au

Insurance

NSW Health provides non-incorporated CDATs with a blanket insurance policy that covers public and professional liability, property, vehicle and miscellaneous coverage, including voluntary workers.  NSW Health is able to do this because non-incorporated CDATs are recognised as sub committees of NSW Health.  Once a CDAT incorporates they become an independent entity and are no longer able to access the benefits of belonging to NSW Health, such as our insurance coverage.

The disadvantages of not being able to access NSW Health insurance are significant:

• Purchasing comprehensive insurance coverage is expensive – it is likely to be several thousand dollars annually.  This figure will vary depending on the activities, assets, types of insurance and amount of desired coverage for each individual incorporated CDAT.  To find out more information about insurance for community groups visit the NCOSS website www.ncoss.org.au
• CDATs will usually need to provide evidence of insurance coverage for many reasons, such as to hire venues for events and to apply for funds, including funds from NSW Health. 
• Comprehensive insurance is needed to protect members from potential liabilities against the CDAT.

Incorporation costs

There are a great many additional expenses that an incorporated body needs to cover.  These include:

• Incorporation fees – approx $145
  $40 Name registration, $105 Incorporation fee plus some additional costs for special circumstances.
• Annual fees for lodgement of Annual Statement
  $45 – $72 for lodgement of Annual Statement.  Depending on the size of the incorporated CDAT’s budget this may also involve audit fees.  The Annual Statement includes an Annual Report with detailed accounting records and minutes of the Annual General Meeting.
• Other fees for various situations such as Alteration of rules $45
• Volunteer or paid labour to do bookkeeping and administration sufficient to satisfy the requirements of the Office of Fair Trading – and an auditor if required - funding bodies and any trading partners.  This involves a considerable amount of work and could be an onerous responsibility for a volunteer to take on.

To find out more about the costs and responsibilities associated with incorporation visit the website for the Office of Fair Trading www.fairtrading.nsw.gov.au/Cooperatives_and_associations/Associations.html

Other Costs

There are various other costs that may be incurred by an incorporated CDAT.  These include:

• Legal fees which may arise for a variety of reasons such as the settling of disputes, suing or being sued, development of contracts, etc.
• If the incorporated CDAT grows then there will be costs associated with employment, accommodation, publicity, etc.

Continuation of the incorporated body

Incorporated bodies continue, regardless of whether or not their membership stays the same.  This provides the incorporated body with a level of permanency that offers security to those that deal with it.  The work and the liabilities of an incorporated body continue until it is dissolved.  This means that incorporated bodies don’t have the option of being dormant for a few months or years, in the way that non incorporated CDATs do. 

Ensuring that an incorporated body maintains its responsibilities is not an extraordinarily difficult job but it is, none the less, considerably more work than that required by unincorporated CDATs.  For community volunteers and workers with other jobs, it is a lot of work and responsibility to take on.   Our experience has shown that in general, even the most enthusiastic of CDATs are likely to go through a period when there just isn’t enough support to even manage the responsibilities of an unincorporated CDAT.  In this situation an incorporated CDAT would have to formally dissolve and if it did not do that, the members of its board or committee of management would be in a very vulnerable situation.  They could face fines for late lodgement of returns or more serious liabilities.

In conclusion

NSW Health has set up CDATs as sub committees of Health so that CDAT members do not have to go through the rigors of incorporation.  Incorporation may provide CDATs with more disadvantages than benefits.  For small community groups, without sufficient funds to employ staff, incorporation is an onerous responsibility.

Non-incorporated CDATs are highly functioning groups and benefit by being aligned to NSW Health.  They operate with a high level of flexibility and support from their Project Officers.  When it comes to incorporation, examine carefully whether this is really the best pathway for you.