![smallbusiness[HQ] - small business directory, business resources, business advice.](/cms/images/sbhq/logo.gif){kind=logo}
Companies - The Pros and Cons
Companies
By: Law 4U
What is a company?
In many ways a company is similar to a sole trader or partnership, except that it exists as a separate legal entity from the owners (who are called shareholders). This means that in most circumstances, personal assets of the owners cannot be touched to pay for the debts of the company.
What law applies?
On 15 July 2001, the Corporations Law was replaced by the Corporations Act 2001. It is similar to the law it replaced, the Corporations Law. The Australian Securities Investment Commission administers the Act. Part 1.5 of the Corporations Act contains a “Small Business Guide” to help small business operators understand their rights an obligations.
Regulation of companies
Companies are regulated by the Australian Securities and Investment Commission (ASIC). The ASIC is an independent government body that administers the Corporations Law. Its aims are to provide protection for consumers and businesses in their dealings with companies and to ensure that companies:
- operate according to the law;
- report their activities;
- maintain proper records; and
- maintain an information database on company details.
Types of companies
Most companies fall into two categories, depending on the type of liability that can be imposed on the owners:
- A company limited by shares, limits the liability of shareholders to the value of their shares. This structure is suitable for most trading businesses and can be a private company or a public company
- A company limited by guarantee, most often used by non-trading organisations, for example, sporting clubs.
The pros and cons
Advantages of a company include:
- it is a separate legal entity from the owners;
- you can own property in the name of the company;
- there is usually limited liability for the shareholders (unless they have given a personal guarantee);
- you may be able to take advantage of tax minimisation schemes (legal ones, of course!);
- it can be owned and operated by only one shareholder and director;
- it may make it easier to attract capital investment because of shareholders' limited liability.
Possible disadvantages include:
- they can be complicated and expensive to establish and administer if it is a "large company";
- if you are not a sole shareholder, the shares may be difficult to sell;
- if you have only a minority shareholding you may be allowed little or no input into the affairs of the company;
- you will only be able to leave the shares in the company to your beneficiaries under your will, not the assets of the company separately; and
- they require expensive procedures to comply with reporting regulations.
Is liability always limited?
No, there are types of structures that do not provide limited liability for owners, but they are unusual and we will not look at them here.
However, even in companies limited by shares it is possible for owners to be exposed to personal liability. For example:
- a bank may require a personal guarantee against loans or overdrafts; or
- sometimes a director can be held personally responsible for actions that are clearly beyond the ability of the company to pay.
Shareholders
Shares can either be available to the general public or the private owners. If the shares are available to the public it is called a "public" company. If the shares are available to private owners it is called a private (proprietary) company. We will deal solely with private companies.
Private companies
The Corporations Act makes the procedures for small companies a lot easier than they used to be.
A company will also have:
- the words "Proprietary Limited" (Pty. Ltd.) after its name;
- a unique Australian Company Number (ACN) that will be included in most company literature and business documents, e.g. invoices, receipts, business letterhead, cheques etc;
- a common seal (i.e. a stamp) which contains the company name and other identifying details, e.g. the ACN (it is no longer compulsory to have a common seal);
- a registered office, although this doesn't have to be the place of business, in fact it is often the address of an accountant or lawyer. However, under the law, companies are required to notify the ASIC of changes in the company's place of business where that place is different from the registered office.
Shelf companies & quick setup
Shelf companies are companies that has already been registered but has not traded. They are "sold" by services that simultaneously register a number of companies and then sell them "off the shelf". They suit people who have straightforward requirements for their company structure.
There are also nowadays a number of online companies that can register your company, and others that can take your instructions by fax.
Starting a private company
You must:
- choose a name for the company and ensure the name is acceptable for registration, e.g. it is not identical to another name or otherwise unacceptable (e.g. it cannot be the same as a pre-existing name). This can be checked with the ASIC. Remember, this refers only to the corporate name - if the company operates in the public under a different business name, that name must be registered under the appropriate State or territory legislation – see above for the appropriate website information. Note that the registration of a business name does not create a legal entity. It is not necessary to give a company a name. It can be its Australian Company Number (ACN), which ASIC gives a company when it is registered.
- reserve the company name. It will be reserved for two months (this can be extended for another two months if you follow the correct procedure). Otherwise you can apply to use the name at the time you register, but remember it may already have been taken;
- decide on the names of members, directors and the secretary of the company - these people must agree to taking on theses roles. A company may have a company secretary who may also be a director and member - the secretary has responsibility for record-keeping including registers required by Corporations Law and minutes of meetings. It is no longer necessary to have a secretary if you choose not to have one. Changes to appointments and changes of addresses of directors must be supplied to ASIC within prescribed periods;
- decide where the registered office will be;
- lodge the application with any ASIC Service Centre or with the Local ASIC Representative;
- notify the ASIC of certain changes to the business practices of the company e.g. changes to the registered office, operating hours, company name, substantial transfers of shareholdings;
- lodge annual returns with the ASIC if this is needed (this is not always the case for a small private companies);
- keep company books and records.
- Remember, unless a court agrees, you cannot be a company director if:
- you are declared bankrupt and have not been discharged; or
- you have been convicted of certain offences connected with the management of a company, a serious fraud, or certain other offences to do with the breach of duties of directors and insolvent trading. Usually you are barred for five years after the conviction.
Certificate of Registration
Following the receipt and processing of the application forms, the ASIS:
- provides an ACN;
- registers the company
- issues a Certificate Of Registration (you can order a Commemorative Record of Registration from ASIC if you want something more fancy).
Domain Names
Domain names are the addresses for sites that represent your business on the Internet. For instance, the commonly used “com.au” address. You must ensure that it does not infringe a company name, business name or trade mark. This is done by a search of a database that must be undertaken before registration. To register your trade mark as a domain name in Australia, it must be the same as your legal entity (business or company name).
Information brokers
The ASIC has approved a number of information brokers who can search the information database of the ASIC. Many lawyers also provide this service.
Although this information can be obtained direct from the ASIC, the brokers can save you time and effort, though of course at a cost. Information available includes all corporate searches, company financial information, name searches, new companies etc.
Forms
You can get the ASIC forms from the ASIC website. The most commonly used forms can also be obtained from a law stationer.
For lodgement fees check out the ASIC website (asic.gov.au) or give them a call.
Constitutions
Companies no longer require a memorandum and articles of association. Instead they may:
- have a set of rules called a "constitution", which sets out the objects of the company. It does not have to be lodged with the application for registration but must to be kept with the company's records; or
- depend on the rules of internal management - these are called "replaceable rules" because they can be replaced in whole or part by a constitution. The replaceable rules do not apply to private companies with a single member who is also the sole director;
- A proprietary company with a single shareholder who is also the sole director does not require replaceable rules or a constitution because s.135 of the Act explains that the replaceable rules do not apply for such companies.
Annual returns
All companies must lodge an annual return with the ASIC.
Read this: This fact sheet is intended to be general information about the law in
© Lawscape Communications P/L
Last Updated – February 2008
