As your business grows and develops, you may need to formally change the structure of your company. This must be done to ensure that you are complying with any legal obligations for different sized businesses. However, as the number of external shareholders in your company grows, you may need to consider changing your business structure to an unlisted public company limited by shares. This article will explain how to undertake this process and any legal obligations that you will need to undertake.
Legal Terms to Describe Companies
The terms used to describe the various business entities that operate in Australia depend on multiple factors. These factors may include the:
- operations of the business;
- aims of the business; and
- business’ size.
The Australian Tax Office (ATO) uses the term ‘business’ to refer to an ‘enterprise’. An enterprise is any business or other commercial activities that do not relate to:
- private recreational pursuits and hobbies;
- activities carried on as an employee, labour-hire worker, director or office holder; or
- activities carried out without a reasonable expectation of profit.
However, although there may not be a reasonable expectation of profit, the term ‘business’ also includes:
- deductible gift recipients;
- religious organisations;
- government organisations; and
- some non-profit organisations.
Groups within Groups
There are three different types of businesses the definition captures (as determined by the number of employees): small, medium and large.
- small businesses employ less than 20 staff;
- medium businesses employ 20 to 199 staff; and
- large enterprises employ 200+ staff.
Enterprise Business Structures
As mentioned above, a large enterprise has 200 or more employees. By the time your company has reached this stage, you are likely to have a significant number of non-employee shareholders. However, once the number of non-employee shareholders exceeds 50, you must change your company structure from a private company to a public company.
Public companies can be either unlisted or listed on a registered exchange, such as the Australian Securities Exchange (ASX). Both listed and unlisted companies can sell shares to the public. However, as the companies raise funds from the general public, there are higher compliance requirements to protect investors. Furthermore, changing from a private company to an unlisted public company also attracts increased obligations under the Corporations Act. These obligations may include:
- preparing financial statements; and
- opening your registered office for a certain number of hours each business day.
Changing Company Structures
Once you cross the threshold of 50 non-employee shareholders, you must change your company structure from a proprietary limited structure to an unlisted public company limited by shares. Furthermore, you also must inform the Australian Securities and Investments Commission (ASIC) of these changes.
To alter your structure, you must first pass a special resolution – the agreement of usually 75% of the directors present at a board meeting. However, a special resolution must satisfy certain requirements before it is passed.
Once shareholders have approved the change in company structure, you must inform ASIC of the changes. You will require two forms to notify ASIC:
Internal Changes Once You’re a Public Company
Once you’ve changed your company structure, you’ll be required to comply with greater levels of regulation under the Corporations Act. This largely attempts to protect the public from unscrupulous business people who aim to exploit the average investor’s lack of experience. Below are some examples of the different requirements for a proprietary limited company in comparison to an unlisted public company.
1. Changes to Minimum Office Holders
If you’re changing from a proprietary limited company to an unlisted public company, the requirements for minimum officeholders will change. The minimum amount of officeholders will increase from at least one Australian residing director to three directors (two of whom must reside in Australia).
In addition to the requirement for three directors, you’ll also need to nominate at least one company secretary who resides in Australia.
2. Share Register
Unlisted public companies are still required to maintain a share register. However, unlike proprietary limited companies, you are not required to inform ASIC every time there is a change in members. Furthermore, your members must be able to inspect the share register.
3. Financial Report Requirements
Unlisted public companies must maintain and lodge financial reports with ASIC. Furthermore, you must have these records audited. This ensures that the reports accurately represent the financial health of the company. These reports are complex financial documents that will require the assistance of experienced accountants.
These article listed just some of the changes required by law once you make the exciting change from a proprietary limited to an unlisted public company. There are a significant number of other changes that will be required, and your company’s requirements will vary depending on the industry you operate in and the services you provide. If you have any questions about changing from a proprietary limited to an unlisted public company, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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