What Are Unincorporated Groups (Unincorporated Societies)?

In New Zealand Aotearoa, unincorporated societies make up the largest proportion of not-for-profit organisations, 61% in total. Almost all nonprofit groups begin as unincorporated and over time, many develop a more organised structure and set of rules or policies to better manage their operations. Small groups often make up the bulk of unincorporated groups and must decide if they want to keep things more informal. Keeping an organisation informal is often due to a lack of financial resources, little time, or a perception that rules are not needed to accomplish the objectives of the group members

Unincorporated Society vs Unincorporated Group

What is an unincorporated society in NZ? Is there a difference between the terms unincorporated society and unincorporated group? The terms ‘unincorporate society’ and ‘unincorporate group’ are used interchangeably, but most government offices prefer to use the word ‘group’. For the purpose of this article, we will use incorporated groups.

“An unincorporated group can be any group of people that gets together for some purpose, whether it is to change something in the community, provide some service, work on a project or simply to socialise”¹.

The main objective of this type of organisation is usually to have a positive impact on the public or group members. In New Zealand, there are ten typical features that define an unincorporated group:

1. They don’t follow specific legislation.

2. They have no legal status or standing as an entity.

3. Members often come and go.

4. Members often have verbal or written agreements between them.

5. Groups must have a minimum of two individuals.

6. Decisions are made by group members through a committee or general meeting.

7. Members are personally liable if the group is improperly managed (ex. debt is incurred).

8. There are no reporting requirements unless the group registers as a charity.

9. Surplus assets can be distributed among members unless registered as a charity.

10. The organisation typically has an informal structure and few rules or restrictions.

The main difference between incorporated and unincorporated nonprofit organisations is that a corporation can sign contracts with financial institutions, suppliers, employees, and other organisations or individuals. Unincorporated groups don’t have this ability because they have no legal standing, therefore the responsibility falls on their membership to enter into legal agreements, increasing their liability. Examples of unincorporated groups include unincorporated joint ventures, sports clubs, voluntary groups, faith-based groups, social clubs, cultural or music groups, and special interest groups.

Benefits of Being Unincorporated

The four biggest benefits to remaining unincorporated as a group are that there is more flexibility in terms of operating the organisation, no need to register or meet strict legal requirements, and less operating costs associated with the work.

Flexibility

Unincorporated groups are free to organize their operations and activities as they choose. They don’t have to develop firm rules or governance procedures since they are not required to do so by any Act. This is the key difference between an unincorporated society and incorporated society or company.

No Registration

As an unincorporated group, you do not have to register with the Registrar of Incorporated Societies or any other federal or state authority. You will not need to provide supporting documents to receive status and there is no requirement to show that you meet the legal definition of charitable purpose in the same way a trust or registered charity would. You become an unincorporated group the day your members decide to start working together.

Fewer Requirements

Incorporated societies have several ongoing legal and administrative requirements, including maintaining a register of members and filing annual financial statements. Unincorporated groups are not regulated by a specific Act, but may still need to comply with other local, regional, or federal laws and should be aware of those that apply to their activities.

Fewer Costs

Unincorporated groups (unincorporated societies) have no need to pay registration fees and don’t have to invest in costly legal advice like incorporated societies do during the incorporation process. They don’t need to hire an auditor or accountant to prepare or review financial statements. They don’t need to pay fines if the society breaches certain rules or pay a fee to reserve a name.

Limitations of Unincorporated Groups

Despite the flexibility and lack of oversight, there are several limitations and risks associated with operating under the legal structure (or in this case, without a legal structure) of an unincorporated group.

Liability of Members

What liability do unincorporated groups have in NZ? Committee members of an unincorporated society (and sometimes general members) are personally liable for any financial agreements they enter into for the purpose of the organisation’s activities and operations. This means they will be held responsible for any court judgment made against the group, any unpaid debts, and any breach of contract incurred.

Unclear Rules

Unincorporated groups can have few or no rules when it comes to governance and managing operations. It may be difficult for group leaders to show that rules were previously adopted since official documents like constitutions and by-laws are not needed. This is especially true if meeting minutes are not recorded or there are no official procedures during meetings. Even with rules, decisions may not be binding if members don’t vote on them, and some may dispute them later on, increasing the risk of conflict.

No Legal Standing

Unincorporated groups have no legal standing and are not independent of individual members. Incorporation gives groups legal standing and allows organisations to enter into legal agreements as a separate entity. When groups are unincorporated, the responsibility falls on their members to enter into leases, rental agreements, property purchases, loan applications, and work contracts.

Risk of Conflicts

The obligations and responsibilities of unincorporated group members are uncertain, and procedures can sometimes be unclear. This may lead to miscommunication or confusion and make it difficult to govern the organisation. When members resign, complain, or engage in misconduct it may be difficult to replace, discipline, or remove them, making it more likely the group will need to manage internal conflicts.

Decision Making

Unincorporated groups are not required to have a constitution or by-laws, and decision making can be slow, disorganised and inefficient. The lack of voting procedures can mean members will need to make unanimous decisions, slowing progress. Having group members who oppose a decision or frequently miss meetings can create challenges for leadership.

Best Practices for Unincorporated Groups

While it is not legally required for unincorporated societies to have written rules, they can help members run the organisation more smoothly and avoid potential problems. Written rules can help you manage changes in membership, dispute resolution, communication between members, control finances, and choose who runs the group. At minimum, you should put on paper what your process is for making decisions that affect the organisation. For example, having voting procedures can make approving decisions and managing dissenting opinions easier.

Unincorporated groups usually form a committee made up of some of their more active members and the management of activities is delegated to them. Committee members are called officers and they should be chosen wisely since they will be responsible for acting in the best interest of the organisation. You should choose members who will be fully engaged, careful not to engage in risky activities, harm your group’s reputation, or cause financial risk to your members.

If your group does not wish to incorporate, you may instead want to consider becoming part of an existing organisation. Umbrella organisations work with smaller unincorporated groups to enable them to do their work without expensive administrative costs and substantial financial and legal responsibilities. National bodies are an example of an umbrella organisation. They receive and pass on money to smaller local groups and typically charge a handling or administration fee for their services.

Most grant making organisations don’t give to a group unless it has legal standing. Unincorporated groups without charitable status will have difficulty receiving funding, donations, and gifts. Under these circumstances, a member of the group may choose to receive the money from grant makers or donors, or the grant or gift can be donated to an umbrella organisation and distributed to the unincorporated nonprofit. The second option is more likely since it presents less risks to the grant or gift donor.

Resources

Clubs New Zealand has introduced a model constitution to support its members who are transitioning to the Incorporated Societies Act 2022.

Banks are required by law to verify the identity of unincorporated societies and key members associated with the group. ASB Bank group has a helpful step-by-step sheet explaining the guidelines.

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This fact sheet is intended as a simple overview. Non-profit law is incredibly complex and there are many components, allowances, restrictions, exceptions and important qualifications that are not described above. Dedicated legal advice should be sought from a legal practitioner before taking action.