Deciding whether to operate as a for-profit organisation or a not-for-profit organisation for a community group is essential, especially once it is clear about its activities, membership and aims.
This distinction is important because of the following reasons:
- When it comes to for-profit organisations and not-for-profit organisations, there are different legal structures, and as a result, different laws apply to them.
- A not-for-profit organisation also has certain benefits.
- You will have to be clear with the public, donor, government and the ones involved in your group regarding what the organisation does and how the money is used.
If you ever wish to help people, a NFP (not-for-profit) organisation might be the right way to provide support to people in need. Along with this, not-for-profit organisations in Australia are also a great business idea.
However, you will have to be aware of specific obligations when starting a business. So here’s a guide to give you an overview of the necessary elements you will require to start your not-for-profit organisation.
Difference between for-profit and not-for-profit
First, let us understand what a profit is.
Profit is basically an organisation’s financial gain. It is the extra money the organisation makes from its revenue that remains after all the business expenses are accounted for.
A not-for-organisation does not operate for personal gain, profit or other benefit of the people who run it, members or any other people.
Instead, the profit made is utilised to further the aims of the organisation. In simpler terms, the profits received are put back into the organisation so that it can pay for its activities and achieve its mission.
These profits can be used for multiple purposes. For instance, these can help the organisation to advance its aims by starting a new project or employing additional staff. Keeping a reserve amount from the profits received also helps with the sustainability of the organisation.
There are two broad categories of a not-for-profit organisation:
- not-for-profit organisations that are not charities
To know more about different kinds of not-for-profit organisations, reach out to the official website of the Australian Taxation Office.
Charities have to be registered with the ACNC or Australian Charities and Not-for-profit Commission. Only the registered charities can be endorsed by the ATO for tax concessions or apply for specific categories of DGR (deductible gift recipient) status.
Other organisations that are not charities can self-assess whether they are income tax exempt or taxable, and they will have access to other tax concessions.
Such organisations will have to be endorsed by the ATO to obtain DGR status.
A for-profit organisation, as the name suggests, is set up with the aim of making a profit for the people involved, i.e., members, shareholders or owners. The profits can be distributed when the organisation is in operation or it ends.
Now, what surprises people the most is the fact that a number of for-profit organisations operate in the community sector, such as in aged care and childcare. The following two points are what make a for-profit organisation different from a not-for-profit:
In a for-profit organisation, the profit may be distributed to the owners or to the shareholders or individual members, whereas no such thing happens in a not-for-profit organisation.
People involved in for-profit organisations are entitled to receive a personal benefit from the organisation’s profits (for instance, a payment directly from the profit, receiving dividends or receiving money when they sell their shares)
Starting a not-for-profit organisation
Even before establishing a business plan for your not-for-profit, doing effective research will help you set a solid foundation for the organisation in the initial state. So here are the steps you should consider before you get into starting an NFP organisation:
Cost is the first factor to be considered. To ensure the viability of your idea, managing your finances as a NFP organisation will be critical. For this, you will have to take the following into consideration:
- What resources will you require?
- How do you want to help people?
- How will your idea be executed?
Develop a not-for-profit organisation plan
Having a formal organisation plan will help you address your organisational needs. This plan should include:
- Organisation objectives and goals: these will define how far you wish to take the business, the right goals and the strategies you will adopt to achieve them.
- Target Market: Who is your ideal customer or target audience?
- Marketing strategy: the promotional strategy for your business.
You can always reach out to a professional accountant if you need assistance with the business plan. Along with this, make sure to review your organisation plan on a regular basis.
Find the right name
Although it may not sound like an important step, having the right name is crucial. You also need to check the availability of the name you have chosen for your organisation. If it is available, you should register the organisation as a trademark. It will provide you with exclusive rights to your business name throughout the nation.
Determining the Legal Structure
When you apply to the ACNC (Australian Charities and Not-for-profit Commission), you will be required to choose your structure.
Different types of not-for-profit legal structures include:
Having a formal structure allows you to do things, for instance, borrow money, rent an office, take out insurance or apply for government grants in the name of an organisation rather than a person’s name.
You will need to consider which legal structure will suit your business goals the best. You will also have to pay attention to the legal complications of each structure, along with how the legal structure will affect the operations.
The legal structure of your organisation will affect the following things:
- The legal identity
- The governance structure
- Who will be liable for debts and specific responsibilities?
- The reporting or other compliance obligations
Registering your not-for-profit organisation
You will have to register for a couple of things to make your not-for-profit official. Such as,
- An organisation name
- An ABN (Australian Business Number) to help the ATO and customers identify your business.
- If you wish to benefit from limited liability, it would be a good practice to register your business as a company (ACN).
- Registering your Tax requirements
- Make sure that the relevant licences or permits are valid.
To register your not-for-profit organisation, you should follow the following steps:
- Determine your legal structure.
- Determine if you are a not-for-profit.
- Register the organisation with the Australian government to get an Australian Business Number (ABN). (You may also need to register for other things as mentioned above.)
- Determine if you need a director ID (director identification number)
About tax concessions
Depending upon the type of NFP (not-for-profit) organisation, different tax concessions are there. The processes of accessing these concessions vary.
The tax concessions not-for-profits may be entitled to access are:
- FBT (fringe benefits tax) exemption or rebate
- DGR or deductible gift recipient endorsement
- GST (goods and services) tax concessions
- Income tax exemption
- Refund of franking credits
To comply with the organisation’s tax obligations and access numerous concessions, your NFP organisation needs to register for ABN (Australian Business Number), FBT, GST, fuel tax credits, PAYG (pay as you go) withholding or other taxes.
Along with tax registration, the organisation may require other licences, permits or other registration to operate.
Does your NFP (not-for-profit) have a charitable purpose?
When it comes to charity, the majority of your activities need to be for charitable purposes. However, it does not mean that the charity can’t turn a profit.
It needs to be in alignment with the reason for your NFP set-up, with the exception of purposes that are ‘ancillary or incidental’ to the overarching charitable purpose.
As per the Charities Act 2013 (Cth), there are 12 charitable purposes your NFP needs to fit within. These are:
- Advancing education
- Advancing health
- Advancing religion
- Advancing culture
- Promoting social or public welfare
- Promoting or protecting human rights
- Promoting mutual respect, reconciliation and tolerance between groups of individuals in Australia
- Preventing or relieving the suffering of animals
- Advancing the safety or security of the Australian public or the country
- Opposing or promoting a change to a matter established by police, law or practice in the commonwealth, a territory, a state or another country
- Advancing the natural environment
- Other similar purposes that are ‘beneficial to the general public’.
How Clear Tax can help
Clear Tax has worked with a number of different not-for-profit, charity and volunteer organisations. Thanks to this wide range of experience, we are able to have an understanding and insight into the way not-for-profits operate, along with the unique challenges they have to face.
So, if you need any help with your NFP, contact Clear Tax Accountants today.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.