What Is the Best Legal Structure for a Charity?

Choosing the right legal structure for a charity isn’t just paperwork-it shapes everything from how you raise money, how much control your board has, and whether you can even get tax exemptions. Many groups start out as a loose group of friends helping out, then hit a wall when they want to open a bank account, apply for grants, or hire staff. That’s when the question comes up: what is the best legal structure for a charity? The answer isn’t one-size-fits-all. It depends on your goals, size, funding sources, and where you operate.

Why Legal Structure Matters

Think of legal structure like the foundation of a house. If it’s weak, everything else cracks over time. A charity without the right structure can’t receive tax-deductible donations, can’t sue or be sued in its own name, and might leave founders personally liable for debts or accidents. In Australia, charities that want to issue tax receipts must register with the Australian Charities and Not-for-profits Commission (ACNC). But registration doesn’t happen automatically-you need to pick a legal form first.

There are four main options most charities use: unincorporated association, incorporated association, company limited by guarantee, and charitable trust. Each has pros and cons. Let’s break them down with real examples.

Unincorporated Association: Simple but Risky

This is the easiest to set up. Just get a few people together, write up some rules (called a constitution), and start running activities. Many small community groups-like a local book club raising funds for a school library-start here.

But here’s the catch: an unincorporated association isn’t a legal person. That means if someone slips on a wet floor at your fundraiser and sues, the people running the event are personally on the hook. Bank accounts are held in the name of a trustee, not the group. Grants often won’t accept applications from unincorporated groups. And if someone leaves or passes away, the whole thing can fall apart.

Only consider this if you’re testing an idea with under $10,000 a year in income and plan to grow quickly. It’s a starting point, not a long-term solution.

Incorporated Association: The Most Common Choice

If you’re running a charity in Australia with more than a handful of volunteers and any kind of budget, the incorporated association is the most popular option. It’s governed by state or territory laws-like the Associations Incorporation Act 2009 in New South Wales.

Once incorporated, your charity becomes a legal entity. You can open a bank account in the charity’s name, sign contracts, and own property. Members aren’t personally liable for debts. You can apply for ACNC registration and get DGR (Deductible Gift Recipient) status, which lets donors claim tax deductions.

Most local charities-think food banks, animal shelters, youth sports clubs-use this model. It’s affordable (around $50-$100 to register), straightforward, and gives you enough structure without heavy reporting.

Downsides? You’re limited to operating in one state unless you register elsewhere. And if you want to raise money nationally or get big grants, some funders prefer companies limited by guarantee.

Company Limited by Guarantee: For Bigger Operations

This is the go-to structure for charities with national reach, complex funding, or those applying for large government grants. Think of organizations like the Red Cross, RSPCA, or Oxfam Australia. They’re all companies limited by guarantee.

Here’s how it works: instead of shareholders, members guarantee to pay a small amount (usually $10-$100) if the company winds up. This protects them from personal liability. The company is registered with ASIC (Australian Securities and Investments Commission), then applies for ACNC registration.

Advantages? You can operate across all states without extra registration. Most major foundations and government tenders require this structure. It looks more professional to donors and partners.

Disadvantages? More paperwork. You need to file annual financial reports with ASIC and ACNC. You need a formal board structure with directors, minutes, and compliance rules. Costs are higher-around $500-$1,000 to set up, plus ongoing fees.

If you’re planning to scale, hire staff, or compete for large grants, this is the structure that gives you credibility.

Charitable Trust: Control, Not Control

A charitable trust is different. It’s not owned by anyone. Instead, a trustee holds assets (money, land, property) for the benefit of a charitable purpose. The trust deed-written at the start-says exactly what the charity does, who the trustees are, and how decisions are made.

This model is popular when someone wants to donate a large sum of money to create a lasting legacy. For example, a family might set up a trust to fund scholarships for Indigenous students, with the trust deed specifying eligibility rules that can’t be changed easily.

Trusts are great for long-term stability. They don’t dissolve when trustees change. They can hold property forever. But they’re inflexible. Changing the purpose of the trust requires court approval or a special order from the Attorney-General’s department.

Also, trusts can’t employ staff directly. They need to partner with an incorporated body or hire through a managing organization. And they’re harder to register with ACNC-you need to prove the trust is exclusively charitable under Australian law.

Best for: Legacy giving, endowments, land donations, or when you want to lock in a specific mission permanently.

Comparison Table: Which Structure Fits Your Charity?

What Most Charities Choose (And Why)

Based on ACNC data from 2024, over 70% of registered charities in Australia are incorporated associations. Why? They strike the perfect balance: enough legal protection to operate safely, without the cost and complexity of a company.

Companies limited by guarantee make up about 20%. These are the bigger players-national charities with paid staff, multiple programs, and federal funding. The rest are trusts or unincorporated groups, mostly small and local.

If you’re starting a charity today and want to grow, go with an incorporated association. It’s the sweet spot. You can always upgrade later to a company limited by guarantee if you land a big grant or expand nationally.

If you’re setting up a trust because you’re donating a house, land, or $500,000 to fund a scholarship forever? Then go with the trust. But even then, you’ll likely need to partner with an incorporated body to manage day-to-day operations.

What to Do Next

Here’s a simple checklist if you’re ready to move forward:

1. Decide your charity’s purpose. Be specific. “Helping the homeless” is too vague. “Providing meals and case management to homeless youth in Sydney” is better.
2. Choose your structure based on size and goals. Use the table above.
3. Write your constitution or trust deed. Don’t copy-paste from the internet. Get help from a legal service like Legal Aid or a pro bono lawyer.
4. Apply for incorporation (if needed) through your state’s fair trading office.
5. Register with the ACNC. You’ll need your constitution, ABN, and details of your governing body.
6. Apply for DGR status with the ATO. This lets donors claim tax deductions.

Most charities take 3-6 months to get fully set up. Don’t rush it. Getting the structure right saves headaches later.

Common Mistakes to Avoid

People make the same errors over and over:

• Thinking “we’re a charity, so we don’t need to register.” Nope. ACNC registration is mandatory if you want to be recognized as a charity in Australia.
• Using a personal bank account for charity money. That’s a red flag for auditors and donors.
• Not having a constitution. Even if you’re small, written rules protect you.
• Choosing a trust because it sounds “more official.” It’s not. It’s harder to manage and less flexible.
• Waiting until you have money to sort out the structure. Do it first. You can’t apply for grants without it.

When to Get Professional Help

You don’t need a lawyer for an incorporated association-but you should get help if:

• You’re setting up a trust or company limited by guarantee.
• You’re receiving a large donation or property.
• You’re unsure if your purpose qualifies as charitable under Australian law.
• You’re planning to operate across state lines.

Free legal advice is available through community legal centres. Many universities also have pro bono clinics. Don’t try to wing it with a template from Google. A bad constitution can cost you your charity status later.