4. Legal Status of Schools
Notwithstanding that schools operate on a not-for-profit basis and are not engaged in what would normally be considered as commercial activities, they are in fact quite sizeable businesses and they engage in a broad range of commercial activities. Therefore, it is important for schools to adopt best practice corporate governance standards to ensure limited liability, perpetual succession, ownership of property, to be able to contract in their own right and to facilitate operations in accordance with well-established and understood commercial procedures.
Most schools fall into one of the following categories:
Companies Limited by Guarantee
The most common legal structure for schools (and other not-for-profit entities) is a company limited by guarantee incorporated pursuant to the Corporations Act 2001 (‘the Act’). It is a separate legal entity distinct from its members.
A company limited by guarantee has no share capital and there is no sharing of profits. Companies limited by guarantee are able to indemnify their office holders in certain circumstances.
Companies limited by guarantee are required to comply with the reporting and disclosure obligations of public companies. The obligations of Board Members (directors) are reasonably well defined by the Act and Board Members should familiarise themselves with the appropriate sections within the Act.
In the case of companies limited by guarantee that are established on a not-for-profit basis, the constitution is required to include a provision that, in the event of the winding-up of the company, any surplus assets may not be distributed to the members. In the case of such companies, the members of the company do not own the assets but act in a stewardship capacity.
If, on the winding up of a company limited by guarantee, the assets are insufficient to cover the debts, the liability of members is limited to a nominal amount that is stipulated in the School’s constitution (usually $100 or less).
The incorporated association is a more simple and less expensive alternative to registration as a company. It is primarily intended for use by sporting clubs and other similar non-profit organisations and may, possibly, be suitable for small schools or kindergartens.
The complex nature of schools means that operating as an incorporated association can be ineffective as it often is a very informal structure, lacking clear rules and procedures. It is generally considered not to have the sophistication required for most schools.
Incorporated associations are established under State legislation –in Victoria, this is the Associations Incorporation Reform Act 2012 (Vic). The main benefits of an incorporated association stem largely from its status as a separate legal entity and limited liability for members. These benefits generally come at a lower initial and continuing cost than incorporation as a company. For new schools, it may be appropriate to incorporate as an association during the establishment phase to protect the liability of the proponents before incorporation as a company.
An unincorporated association is a group operating without the benefit of an incorporated entity. It is not recommended under any circumstances. Unincorporated associations do not have the protection of limited liability for members or any of the advantages associated with perpetual succession, the ability to contract or the ability to own property. Unincorporated associations must operate through individual members who may become personally liable for the activities of the organisation.
Trusts and Foundations
Trusts and foundations are usually created by a trust deed, which sets out the purposes of the trust and the powers and duties of the trustees, being those charged with the responsibility of administering the trust. Trusts are complex structures predominantly governed by common law and equity.
Trusts are usually associated with individual benefactors.
Trustees are not personally liable provided that they make it clear that they act in the capacity of trustee, within the powers and solely for the purposes specified in the trust deed.
We have not considered in the handbook alternative structures which may, for example, be used by schools established under religious or cannon teachings.
Each structure has its pros and cons and there are various legal and legislative requirements which must be adhered to in each case. Each situation needs to be considered on its merits.