Having the right structure in place can set a business up for long-term success. At LegalVision, our clients are increasingly asking what they should consider when setting up a company. Generally speaking, it’s sensible for business owners to think about the following:
- Access to capital for future expansion of the business;
- The suitability of limited liability for businesses with high-risk operations;
- Tax burden;
- 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 (Cth) (‘Corporations Act’) governs companies in Australia. A company’s main characteristics include:
- Limited liability: this means that the shareholders’ liability for debts of the company are 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 company officer at any point in time;
- Separate legal entity with a right to sue and be sued: a company has a right to sue in its name and defend proceedings commenced against it; 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.
It is important to note that because a company is a separate legal entity, it must operate through others who are managers, directors or agents, and who will not incur personal liability through their actions. These people can delegate authority to bind the company, and they generally do not incur personal liability for contracts they enter into on the company’s behalf.
What are the Advantages and Disadvantages of a Company?
In many ways, the characteristics of a company described above are also the key advantages of this type of business structure, namely:
- Limited liability;
- Perpetual succession;
- Taxation benefits;
- Transferable shares;
- Separate legal entity; and
- The right to hold property in its name.
Alternatively, the disadvantages of a company structure include:
- Establishment and reporting fees can be expensive;
- There is a possible loss of control of the company to shareholders; 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 company. Here, members contribute money or property to purchase shares, and in return, they are issued with full or partly paid shares. Their liability is limited to the amount that is unpaid on their shares (s 9 of the Corporations Act).
There are two types of companies limited by shares in Australia, including:
- Public companies: a company is public when there are more than 50 non-employee shareholders, and it has no maximum limit of shareholders; and
- Proprietary companies: these are often small businesses and the most common type of company in Australia. They must have at least one shareholder and a maximum of 50 non-employee shareholders.
The Corporations Act draws a distinction between small and large proprietary companies for the purposes of reporting. A large proprietary company must prepare and lodge audited accounts with ASIC annually. A company is a large proprietary company if it meets two of the following three tests:
- The company has gross assets of more than $12.5 million for the financial year;
- The company has a gross operating revenue of more than $25 million at the end of the financial year; or
- The company has 50 or more employees (or part-time equivalent) at the end of the financial year.
So, a company can shift from being a large proprietary company 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 that the liability of its members is limited to the amount they commit to paying the company if it is wound up. These are most commonly not-for-profit organisations or other organisations which use their profit to advance their objectives.
Unlimited liability companies
Section 9 of the Corporations Act defines an unlimited company as one where its members do not have a limit placed on their liability. So, members have an unlimited liability if the company does not have sufficient assets to meet its debts (in this respect, an unlimited company is similar to a partnership).
Under section 112(2) of the Corporations Act, a company has no liability if it meets the following requirements:
- The company has a share capital;
- The company constitution states that its sole purpose is for mining objectives; and
- The 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.
When deciding on the right business structure, it’s important to consider the aims, risk points, assets and objectives of your business. There are various advantages of choosing a company structure, including limited liability and the fact that the company is a separate legal entity under the law.
If you have any questions about which business structure best suits your needs or incorporating your company, get in touch with our lawyers on 1300 544 755.