The proprietary limited (Pty Ltd) company structure is generally not suitable to charities.
This is because charities must be not-for-profit. A proprietary limited company is generally structured for businesses that operate for-profit purposes, with the structure usually allowing shareholders (referred to in this guidance as ‘members’) to receive private benefits.
Private benefits to members can be in the form of:
- dividend distributions and profits realised on the sale, transfer or forfeiture of shares
- distributions from the net assets of the company on winding up.
This guidance outlines key issues that proprietary limited companies should consider if they are thinking about registering as a charity, as well as how some common obstacles to registration may be addressed.
If you are considering establishing a proprietary limited entity structure, we strongly recommend you consider obtaining legal advice to discuss whether a proprietary limited entity structure is appropriate for your organisation.
You may wish to consider an alternative legal structure such as a company limited by guarantee (CLG). We have a template governing document for charitable CLGs that you can use.
Registering a proprietary limited company as a charity
To be registered as a charity, a Pty Ltd company must meet the legal meaning of charity, and our requirements for registration.
To be registered as a charity, a proprietary limited company must:
- be not-for-profit
- have only charitable purposes that are for the public benefit
- not have a disqualifying purpose
- not be a political party or a government entity.
It must also:
- have an Australian Business Number (ABN)
- comply with the ACNC Governance Standards
- comply with the ACNC External Conduct Standards if it operates outside Australia.
Many proprietary limited companies will be incorporated with a template or precedent governing document (also called a constitution or a memorandum and articles of association).
These template governing documents are not always designed for charities.
In fact, there are almost always many rules in the template proprietary limited governing document which are inconsistent with the first two requirements set out above – that the organisation is a not-for-profit and has only charitable purposes that are for the public benefit.
Problematic clauses in a template proprietary limited governing document are also likely to include clauses about calls on shares, prepayment of calls on shares, valuations of shares, payment of dividends and disposal of shares for value other than the issue price.
These clauses may need to be deleted or substantially amended to be suitable for a charity. To achieve this, the governing document must demonstrate:
- it has one or more charitable purposes
- it can only exercise its powers to carry out or in a manner consistent with its charitable purposes
- its not-for-profit nature while operating and on a winding up
- interpretation and entrenchment such that the charitable nature takes precedence and cannot be changed in the future.
It can be difficult to amend a proprietary limited governing document without expert support. The ACNC strongly recommends prospective applicants seek legal advice.
Charitable purposes
View the ACNC’s detailed information about charitable purposes, and our series of example charitable purpose clauses.
The ACNC registers charities with a ‘charity subtype’ that reflects its charitable purpose. There are 12 charitable purposes set out in the Charities Act 2013 (Cth).
A charitable purpose (also called a mission or object) is the reason a charity has been set up and what its activities work towards achieving. Charities can have one charitable purpose, or many charitable purposes.
It is essential for a proprietary limited company wishing to be registered as a charity to state its charitable purpose clause in its governing document, and of course this clause must be an accurate reflection of the charity’s actual purpose.
If a template proprietary limited governing document does not include a purpose clause, it must be amended to include a purpose clause so it is suitable for a charity.
It is also essential that the governing document includes a clause stating that the exercise of the powers of the proprietary limited company can only be exercised to further or carry out the charitable purpose or purposes of the company.
Be not-for-profit
View the ACNC’s guidance on the not-for-profit requirement for charities.
A proprietary limited company will not meet the requirement to be a not-for-profit if its governing rules allow it to:
- sell or transfer shares for value other than the issue price
- distribute profits in any way (including dividends) to members.
To be eligible for charity registration, a proprietary limited company must not be able to provide private benefits to its shareholders or members in their capacity as members – or because they are members – unless those members are charities only.
Governing document not-for-profit clause and winding-up clause
For a proprietary limited company to be eligible for registration as a charity, its governing document must also contain an appropriate ‘not-for-profit clause’ and an appropriate ‘winding-up clause’ (sometimes called a ‘dissolution clause’).
Not-for-profit clause
An appropriate not-for-profit clause states that the company’s assets and income:
- can only be used to further its stated purposes, and
- cannot be distributed to members in their capacity as members.
Not all company governing documents use the words ‘income’ and ‘assets’ – some use words like ‘property’, ‘surplus’, ‘money’ and ‘profits’.
Although a governing document does not have to use the words ‘income’ and ‘assets’, it must have the legal effect of ensuring that the company cannot provide the profits to its members because they are members of the company.
Using the words ‘assets’ and ‘income’ and the model clause featured in this guidance will have this effect.
For the company to be registered as a charity with the ACNC, its not-for-profit clause should state that:
- it applies to both income and assets, however described
- it requires resources to be applied solely to the stated objects or purposes, and
- the charity cannot distribute assets and income to members in their capacity as members.
Most importantly, the not-for-profit clause should also state that it overrides any other provision of the governing document (unless the other provisions relating to profits and distributions are deleted in the governing document) and that it cannot be amended in the future (that is, it is entrenched).
Refer to Point 1.4 of the model not-for-profit clause featured in this guidance.
Winding-up clause
A proprietary limited company’s governing document should also contain an appropriate ‘winding-up clause’.
This clause should state that, upon winding up, all the company’s remaining assets must be transferred to another entity (or entities) that:
- has charitable purposes similar to or inclusive of the purposes of the company, and
- prohibits distributing income and assets to members in their capacity as members.
For a proprietary limited company to be registered with the ACNC, its winding-up clause should state:
- that it applies to all remaining assets
- that the recipients of any assets or income must be charities, and
- that the recipients of any assets or income are not permitted to distribute income and assets to individual members.
Recommended not-for-profit and winding-up clauses
The ACNC has recommended not-for-profit and winding-up clauses that a proprietary limited company can use in its own governing document.
While it is not necessary that the governing document contains clauses with this exact wording, it is important that the governing document as a whole has the effect of meeting the requirements.
1. Not-for-profit
1.1 The company must not distribute any income or assets directly or indirectly to its members, except as provided in clauses 1.2 and 3.
1.2 The company must apply its income and assets solely in pursuit of the object(s) in clause [insert].
1.3 Clauses 1.1 and 1.2 do not stop the company from doing the following things, provided they are done in good faith:
- paying a member for goods or services they have provided or expenses they have properly incurred at fair and reasonable rates or rates more favourable to the company, or
- making a payment to a member in carrying out the company’s charitable purpose(s).
1.4 This clause shall override any other clause in this constitution and shall prevail to the extent of any inconsistency.
Winding up
2. Surplus assets not to be distributed to members
If the company is wound up, any surplus assets must not be distributed to a member or a former member of the company, unless that member or former member is a charity described in clause 3.1.
3. Distribution of surplus assets
3.1 Subject to the Corporations Act 2001 (Cth) and any other applicable Act, and any court order, any surplus assets that remain after the company is wound up must be distributed to one or more charities:
- with charitable purpose(s) similar to, or inclusive of, the object(s) in clause [insert], and
- which also prohibit the distribution of any profits and surplus assets to its members to at least the same extent as the company.
3.2 The decision as to the charity or charities to be given the surplus assets must be made by a special resolution of members at or before the time of winding up. If the members do not make this decision, the company may apply to the Supreme Court to make this decision.
3.3 This clause and the clause immediately preceding it shall override all other clauses in this governing document and shall prevail to the extent of any inconsistency.
Further tailoring of the wind-up clause, or the addition of a DGR revocation clause, would also be required if the proprietary limited company seeks endorsement as a deductible gift recipient.
Interpretation and entrenchment
A proprietary limited company wishing to register as a charity should ensure its
- purpose clause
- restriction of exercise of powers clause, and
- not-for-profit and winding-up clauses
take precedence over the rest of its governing document, and that the governing document includes a clause such as the following to ensure members cannot decide to change its charitable nature in the future:
- The company must not pass a special resolution altering the constitution, if, by doing so, the company would cease to be a charity.
- A resolution purporting to alter this rule, or this constitution in breach of this rule, will have no effect.
If a clause such as this is not included in the proprietary limited company’s governing document, the company is unlikely to be eligible for charity registration.
If the not-for-profit clause in a proprietary limited company’s governing document does not override any inconsistent provisions, the governing document must specify several things to ensure that the not-for-profit requirement is met.
These include that:
- shares cannot be transferred for value other than issue price
- shares cannot be redeemed for value other than issue price
- dividends or any other payments cannot be paid to members unless the payments are in furtherance of the company’s charitable purposes
- clauses regarding the issue of shares or share certificates do not allow the payment of dividends or any other payments to members including on winding up
- clauses regarding classes of shares do not allow the directors to determine rights to dividends or surplus assets upon winding up, for all classes or for certain classes, and
- clauses transmitting shares upon the death or disability of a member do not allow the payment of dividends or other financial benefits to the new member.
It is important that a proprietary limited company’s governing document makes it clear that the replaceable rules under the Corporations Act 2001 do not apply to the company.
If it is not clear that a proprietary limited company’s governing document ensures it operates on a not-for-profit basis, the ACNC will ask it to amend the governing document so it is eligible for registration as a charity.
Our approach to other issues specific to proprietary limited companies
Under corporations law, the directors of a wholly-owned subsidiary are generally taken to be acting in the subsidiary’s best interests where they act in good faith in the best interests of the holding company.
However, as it is the subsidiary seeking charity registration, it must meet ACNC registration requirements in its own right.
This includes meeting ACNC Governance Standard 5 – which requires a charity to take reasonable steps to ensure that its Responsible People act in the best interests of the charity.
This means that if an organisation seeking charity registration is a subsidiary of another company, its governing document must state that its directors may only act in the best interests of the holding company to the extent that this is consistent with the subsidiary company’s charitable purposes.
If the governing document does not state this, the proprietary limited company would not be eligible for charity registration because it would be in a situation where it is required to act in the interests of a non-charitable entity or for charitable purposes beyond or different to its charitable purposes.
Some proprietary limited companies include provisions in their governing document that allow directors to attend meetings or vote on a matter despite having a conflict of interest.
ACNC Governance Standard 5 requires a charity to take reasonable steps to ensure that its Responsible People:
- act in good faith
- act in the best interests of the charity, and
- that they disclose perceived or actual material conflicts of interest.
To be eligible for charity registration, a proprietary limited company should ensure its governing document does not allow directors with a conflict of interest to act without disclosing and appropriately managing that interest.
Some proprietary limited companies may have clauses in their governing document allowing for one of their directors to be appointed as a ‘managing director’.
For a company to be eligible for charity registration, any such clause should not be worded in a way that limits the obligations on directors. It should also ensure that the terms of such an appointment are agreed upon on an ‘arms-length’ commercial basis.
Any decision to appoint a managing director must be made in accordance with obligations to:
- act with due care and diligence, in the charity’s best interests and to further its purposes
- disclose conflicts of interest
- ensure the charity’s finances are managed responsibly.
Some proprietary limited companies may operate with a single individual as both the sole director and sole member of the company.
While this does not necessarily mean the proprietary limited company cannot be registered as a charity, it does mean that when the ACNC assesses entitlement to registration we may request information that demonstrates how the company intends to manage conflicts of interest and its other obligations as stated in the ACNC Governance Standards.
Proprietary limited companies should consider Commissioner’s Policy Statement 2019/01: Number of Responsible People in a registered charity.
Governing documents for proprietary limited companies sometimes include a clause allowing for the payment of brokerage or commission to a person for agreeing to take up shares in the company.
While this does not necessarily mean that the company is not entitled to charity registration, it must ensure its directors comply with obligations to act in the best interests of the company and to further its charitable purposes when deciding to pay brokerage or commissions.
When deciding on the value of any brokerage or commission, directors should consider whether such payments could amount to providing individuals with a private benefit which is not necessarily incidental to the company providing a public benefit through its charitable purpose.
Governing documents for proprietary limited companies sometimes allow for the pre-payment of calls, or allow directors to authorise such payments.
A charity should be careful with such clauses in its governing document.
In particular, a clause that allows the charity to pay interest to members if they pre-pay calls may be inconsistent with registration requirements. This is because providing private benefits is not necessarily incidental to achieving the public benefit of the charitable purpose of the company.
Governing documents for proprietary limited companies sometimes allow for payment to a director from the proceeds of sale or realisation of company property.
The proprietary limited company should ensure that any such decisions are made in accordance with its ACNC-related obligation to act in the best interests of the charity and to further its charitable purpose for the public benefit.
See more information on remunerating charity board members.