Business Structure Basics: choosing an entity type

Farming Together

Type: PDF
Knowledge level: Introductory

Business structure basics – a guide for Farming Together groups

What is the best business structure for your farming group?

Informal farming groups can collaborate successfully, but soon require legal and financial clarity. Then, they need a formal structure. To receive direct Farmer Group Project funds, a group must form an incorporated entity or be sponsored (auspiced) by one. Some entities are more collaborative than others and each type has different values. A sustainable structure is an important choice for collaborators.

How will you choose?

Groups should clearly identify and document why they are coming together, to ensure the structure is a good fit for the business. Entity choices need to be investigated and communicated to potential members, to avoid misunderstanding. It is possible to change later, but such change comes at significant cost and inconvenience.

Incorporated or unincorporated?

An incorporated structure is a separate legal entity to its members. It can enter into contracts, operate bank accounts, own assets and borrow, all in its own name. It can sue and be sued and continues to exist, even if its members change. These formal structures have registration, reporting and regulation requirements governed by state or federal agencies. Rules and regulations cover: ownership, operations, governance, responsibilities and protections for members and elected representatives.

Recognition as a separate legal entity provides some protection for elected representatives and members by limiting personal liability (to the value of shares held). There are some exceptions to this rule for elected representatives and groups should seek legal advice in this area.

Co-operatives, growing in numbers, are a sustainable collaborative structure and have origins dating back to the 1800s. The values underlying a co-op include: democracy, equality, equity, solidarity, self-help, selfresponsibility, and co-operation. Membership should be active, voluntary and open and the co-op business should support the education and development of its members and its community.

Co-operatives can be either Distributing or Non-Distributing.

Unincorporated agreements
An un-incorporated structure can be either formal (with legal agreements) or informal (with a handshake). For example, an unincorporated partnership might have an agreement while an unincorporated association might operate without one. Unincorporated associations have minimal registration costs and few reporting requirements.

An un-incorporated entity does not hold separate legal status to its members. This means that members effectively trade as individuals and are personally responsible for the debts and liabilities of the entity. Farming Together favours incorporated entities and only provides direct project funding to unincorporated entities under special circumstances, via an auspice (incorporated) entity.

For some groups, limiting legal liability for elected representatives and members will be the most significant consideration in choosing a structure. If you intend to trade with consumers or group members, or you intend to operate for profit, get incorporated. If you only come together for informal discussion or education, or have limited resources, stay unincorporated, but check your eligibility for funding in government programs.”Not for profit organisations can be incorporated or unincorporated, though most would be incorporated.

These organisations can make a profit, but cannot distribute that profit to members. Profits must be reinvested in the business. On winding up, surplus funds cannot be distributed to members and are usually donated to charity or the industry.

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