AISV : Governance guidelines : 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 structure themselves along corporate lines 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.

4. Legal status of schools

Most schools fall into one of the following categories:

Companies limited by guarantee

This is the most common legal structure for schools.
A company limited by guarantee is a separate legal entity distinct from its members and is the vehicle of choice for not-for-profit entities.
In the event that on the winding up of the school 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 Founding Document (usually $100 or less).
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 principally regulated by the Corporations Act 2001.
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.
Members of the company do not own the assets but act in a stewardship capacity. They are freely able to change from time to time.

Incorporated Associations

The incorporated association is a simpler and less expensive alternative to registration as a company.
It is primarily intended for sporting clubs and other similar non-profit organisations and may be suitable for small schools or kindergartens.
Due to the complex nature of schools, operating as an incorporated association can be ineffective as it is a very informal structure, it lacks clear rules and procedures, and it is generally considered to lack the sophistication required for most schools.
Incorporated associations are established under the Associations Incorporation Act 1981 (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 prior to incorporation as a company.

Unincorporated Associations

An unincorporated association, that is a committee operating without the benefit of an incorporated entity be it a company or incorporated association, 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 and the ability to own property. They must operate through individuals.
Members of unincorporated associations are personally liable for the activities of the organisation.

Trusts and foundations

Trusts are funds usually created by a Trust Deed which sets out the purposes of the trust and sets out the powers and duties of those charged with the responsibility of administering the trust, the trustees. 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 are acting in the capacity of trustee.

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 but the company limited by guarantee is the usual structure.

For the purposes of these Guidelines we have not considered those schools established under religious or canon structures. For a discussion of governance procedures in Catholic schools see “Guidelines for Boards of Regional and Diocesan Colleges in the Archdiocese of Melbourne”.

Governance Guidelines

Across the Board

Purpose

Governance

Applying principles of good governance to schools

Legal status of schools

Primary legislation governing schools

Ancillary legislation

Funding and operating agreement

Structure of the school and delegation of powers

The key roles of the school board and its members

Legal obligations and potential liability of board members