Having the right structure in place can set a company up for long-term success. There are a few key considerations when setting up a new business. You should consider the following:
- access to capital for future expansion of the business;
- the suitability of limited liability for businesses with high-risk operations;
- tax obligations;
- the duration of the business; and
- whether the individual or the entity will own any property.
Below, we take a deep dive into the nature of companies, namely:
- the main characteristics of a company;
- the advantages and disadvantages of a company; and
- the different types of companies in Australia.
Although this article focuses solely on setting up a company, you can read more about other business structures, such as sole traders, partnerships, trusts and associations. This article is a useful guide for those who are considering incorporating a company for their business.
The Main Characteristics of a Company
A company has perpetual existence (i.e. can exist forever) and is a separate legal entity from those who operate it, are employed by it, or are its members/shareholders. The Corporations Act 2001 governs companies in Australia. A company’s main characteristics include:
- limited liability: this means that the shareholders’ liability for debts of the company is limited to the amount uncalled on their shares;
- perpetual succession: a company will continue to exist regardless of who happens to be the shareholder or director at any point in time;
- separate legal entity: a company has a right to sue in its name and defend proceedings commenced against it as well as abiding by other legal requirements; and
- right to hold property in its name: this avoids a dispute over who owns particular assets, which can often arise in a partnership structure.
As a business owner, you should note that because a company is a separate legal entity, it must operate through others who are directors or agents (i.e. employees and senior staff).
What Are the Advantages and Disadvantages?
Similarly, many characteristics listed above are also key advantages of a company, such as:
- limited liability, where the directors and shareholders are generally not responsible for the company’s debts;
- perpetual succession, where the company entity continues on despite changes in directors and shareholders;
- taxation benefits when companies are taxed at a fixed rate which is lower than the highest income tax brackets for individuals;
- transferable shares, where ownership of the company can change; and
- separate legal entity, where the company can enter into contracts in its own name.
Alternatively, the disadvantages of a company structure include:
- establishment and reporting fees can be expensive, such as legal fees to keep up with regulatory requirements and company registration fees;
- loss of control of the company to shareholders, where shareholders are given authority under a shareholders agreement to participate in the decision-making process; and
- reporting requirements can be onerous.
The Different Types of Companies
Companies limited by shares
Companies limited by shares are the most common form of a company. This structure allows members to contribute cash, and in return, they receive shares (ownership/equity) in the company. However, your liability is limited to the amount that is unpaid on their shares. For example, if you agree to pay $100 to receive 100 shares in a company, the directors cannot ask you to pay more than $100 unless you agree to. If the company owes $100,000 to a supplier, your liability as a shareholder is limited to the $100 you have already paid.
There are two types of companies limited by shares in Australia, including:
- public companies: a company where its shares (ownership/equity) are traded on a listed exchange, such as the Australian Stock Exchange; and
- proprietary/private companies: the defining characteristic is that shares in a private company are not listed on a public stock exchange.
The law places clear reporting distinctions between small and large proprietary companies. A large proprietary company must prepare and lodge audited accounts with ASIC annually. However, a company is only a large proprietary company if it meets two of the following three tests:
- gross assets of more than $5 million for the financial year;
- gross operating revenue of more than $10 million at the end of the financial year; or
- 50 or more employees (or part-time equivalent) at the end of the financial year.
As a result, a company can shift from a large to a small proprietary company depending on whether it satisfies the above test each year.
Companies limited by guarantee
A company limited by guarantee means the members act as guarantors. Therefore, if the company is seized, liability is limited to the amount you committed to paying the company. This method is most commonly used by not-for-profit organisations or other organisations that use their profits to advance their objectives.
Unlimited liability companies
The Corporations Act defines an unlimited company as one in which its members do not have a limit placed on their liability. As a result, members have unlimited liability if the company does not have sufficient assets to meet its debts.
No-Liability Companies
The Corporations Act identifies that a company has no liability if the:
- company has a share capital;
- states that its sole purpose is for mining objectives; and
- company cannot claim for unpaid shares if the company is insolvent.
In addition to the above, a non-liability company must have the words “no liability” at the end of its name.
Key Takeaways
When deciding on the right business structure, it is important to consider your business’s aims, risk points, assets, and objectives. You must resolve the registration issue before thoroughly developing a business plan and organising your business operation.
If this issue persists or you have any further questions about business structure, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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