This information explain the implications of registering the company, and issues that can affect the Company, directors, and shareholders. By registering a company, one must accept a number of legal duties and obligations imposed by the Corporations Act, which operates to protect the Company, shareholders, members of the public and creditors.
The Company is an independent legal entity, separate from its directors, shareholders, managers, employees, and agents. The Company's money and assets belong to it, and is only available for Company purposes. The Company has similar powers of an individual person, including the powers to own and dispose of assets, enter contracts, sue, and defend legal proceedings.
Shareholders are not liable for the Company's debts except for any amount unpaid on shares.
Directors can be liable:
a) For debts incurred by the Company at a time when it was unable to pay debts as they fell due b) To compensate the Company for losses it suffers resulting from a breach of certain directors’ duties
c) In some situations, for liabilities incurred by the Company acting as trustee of a trust d) For civil and criminal penalties
GUARANTEES & PERSONAL ASSETS
In business most banks, finance providers, or trade suppliers often require before providing loans, or goods and services, directors to give:
a) Personal guarantees and
b) Security (or mortgage) over personal homes or personal assets to secure the Company’s obligations to pay the loan or debt
In the event the Company does not pay the debt or loan as agreed, the directors become liable under the personal guarantee risking the loss of personal assets to the creditor. Directors must diligently control the financial position of the Company ensuring it does not incur debts when it cannot pay them.
Creditors holding guarantees and security over personal assets will take action to protect the money owing to them. It follows that directors must fully understand the implications of all entering mortgages and guarantees, and knows at all times, the Company’s financial position. Directors and company officers should never sign or agree to sign any loan documents without obtaining legal advice and board approval. Behan Legal can advise and assist on asset protection.
SUCCESSION PLANNING – COMPANY CONTINUITY
The Company continues to exist, even if shareholders, directors, or other company officers sell their shares, die, or leave. Most understand the problems that arise if the Company loses any one or more of those persons for whatever reason adopt succession planning. Sole director and sole shareholder companies face greater problems of succession and uncertainty without such plans.
The Corporations Act governs the Company’s management about appointments; meetings etc. and have rules known as Replaceable Rules. Some Replaceable Rules are mandatory whilst others are optional. Companies can adopt the Replaceable Rules, or can adopt its own Constitution, which is a far better option when running a business or investments.
The Replaceable Rules are not available to companies that:
a) Have sole directors and sole shareholders b) Already had a Constitution before the introduction of the Replaceable Rules
LEGALLY BINDING THE COMPANY
Although the Company does not have a physical existence, it can only act through its personnel and relies on directors to abide by their duties and obligations so it can function properly. It can authorise directors, employees, or agents to enter binding contracts. However, even if this authority does not exist, the actions of personnel can sometimes legally bind the Company, which may not have been its intention and the Company cannot avoid a particular contractual relationship. If any personnel have any doubts about any such dealings or transactions, call Behan Legal for advice.
OUTSIDERS DOING BUSINESS WITH THE COMPANY
Anyone doing business with the Company can assume the personnel have a legal right to conduct that business, unless the person knows or suspects otherwise. An outsider dealing with the Company can assume that any personnel who are:
a) Shown in a notice lodged with Australian Securities & Investments Commission as a director, secretary, or agent is properly appointed, and can act for the Company and
b) Held out by the Company, as director, secretary or agent is properly appointed, and can act for the Company
The Company can endorse any contract entered by someone on its behalf or for its benefit before registration as a company. If the Company does not ratify the contract, the person who entered the contract is personally liable for damages. If any personnel have any doubts about any such dealings or transactions, they must call Behan Legal for advice.
Personnel acting with the Company's authority can sign, discharge, and deal with contracts or transactions. The Company can deal with contracts without using the Common Seal. The Company is not required to have a Common Seal. If it does, the Common Seal must show the Company's name and ACN. The Common Seal is equivalent to the Company's signature and used on important Company documents such as mortgages or contracts. The Company can execute documents by having it signed according to the Constitution, or the Replaceable Rules, which can require:
a) Two directors of the Company; or
b) A director and secretary; or
c) For a Company with a sole director - that director
Directors are responsible to manage the Company's business and affairs. The Replaceable Rules give directors power to exercise all the powers of the Company, except a power, which the Corporations Act, a Replaceable Rule, or a Constitution requires the Company to exercise at a general meeting.
The Corporations Act sets out rules that deal with the calling, conduct, and recording of directors' meetings. Directors must keep written records or minutes of meetings and resolutions, and a director must record and sign the decision.
Company assets belong to the Company, but at the same time, shareholders own the Company, which has separate legal existence. Shareholders can make decisions about a number of special issues that affect the Company by passing ordinary resolutions or special resolutions if required by the Constitution or Replaceable Rules. Special resolutions involve important issues that affect the Company as a whole, or the rights of some, or all of its shareholders.
A majority of votes cast by shareholders, in person or by proxy (if proxies are allowed) entitled to vote, can pass ordinary resolutions. A special resolution requires that at least 75% of the votes cast by shareholders entitled to vote on the resolution, and who vote at the meeting in person or by proxy (if proxies are allowed). The Company must keep written records or minutes of the meetings and shareholder resolutions.
Corporate Structure for Small Business
A proprietary Company limited by shares is suitable for use by most small business operators. Such companies must have at least one shareholder, and no more than fifty shareholders (which does include employee shareholders), and can have one or more directors.
COMPANY NAME & AUSTRALIAN COMPANY NUMBER
Every company must have a unique name not currently used by any other company in Australia. A proprietary Company limited by shares must use the words “Proprietary Limited” or “Pty Ltd,” as part of its name.
On registration, the Company receives a unique 9-digit Australian Company Number (ACN) and can register the ACN as its name. If it does so, the name must contain the words “Australian Company Number or ACN,” e.g., the name can be “ACN 123 456 789 Pty Ltd”.
The Company must show its name at every business premises (and registered office) open to the public, and show the ACN on public documents, cheques, and negotiable instruments, ASIC documents, and Common Seal.
Behan Legal applies to Australian Securities & Investments Commission for registration and submits properly prepared and completed documents. The details that support the application set out every person who has consented to be shareholder, director, or secretary together with the proposed name. When the Australian Securities & Investments Commission approves the application and receives payment of the statutory fees, the Company comes into existence, and receives its own Australian Company Number.
The Company can at any time, resolve to:
a) Adopt using the Common Seal b) Not, adopt using the Common Seal c) No longer, use the Common Seal.
Unless managing the Company requires strict supervision, Behan Legal suggests the use of the Common Seal is unnecessary and can cause inconvenience when signing legal documents. Behan Legal registers companies by preparing resolutions that record the Company will not adopt using the Common Seal, which adds to the simplification of running the Company.
ANNUAL REVIEW STATEMENTS & NOTIFICATIONS
Behan Legal prepares all compliance documents for Australian Securities & Investments Commission such as Annual Review Statements for lodging either annually or prior to the anniversary of the registration date, or soon after registering or re-structuring the Company. ASIC will impose a statutory fee (annual review fee). These documents are not accounting documents, taxation returns, or financial returns and do not involve any accounting requirements. The Company must provide notifications about any changes as they occur, and Behan Legal will handle these requirements to prepare and lodge all legal notices and documents.
The Company must have a registered office in Australia, and must inform ASIC of the address of the registered office, or any change of address. The Company cannot use a post office box as the address for the registered office. The purpose of the registered office is to have a location where the Company can receive service of all legal communications and notices and keep its Registers for inspection when required to do so by ASIC. The Company is not required to open its registered office to the public, but this does not affect its obligation to make documents available for inspection. Behan Legal will continue to protect the Company’s interests by providing its premise as the registered office. This allows Behan Legal to ensure the Company is fully aware of the legal communications and notices, and the legal implications on the Company that arise from those documents.
PRINCIPAL PLACE OF BUSINESS
If the Company has a principal place of business different to the registered office, on your instructions, Behan Legal notifies ASIC of the address of the principal place of business and any changes to that address.
Behan Legal will continue to maintain and service the legal requirements for the legal registers required by law, which include Members Register & Register of Charges. The Company must keep the Registers at its registered office; or principal place of business; place (whether on Company premises, or of someone else) where the work in maintaining the register is done; or another place approved by ASIC.
DIRECTORS & COMPANY SECRETARY
Any person over 18 years can be a director. If the Company has more than one director, then at least one director must ordinarily reside in Australia. If the Company has a sole director, that director must ordinarily reside in Australia. A director must give written consent to holding the position of director. The Company must keep the consent and must notify ASIC of all appointments. It is a Replaceable Rule that shareholders can appoint directors by resolution at a general meeting.
In some circumstances, the Corporations Act imposes the duties and obligations of a director on a person who, although not formally appointed as director of the Company, nevertheless acts as a director, or gives instructions to the formally appointed directors as to how they should act. A court or ASIC can prohibit a person from being a director, or from otherwise being involved in the management of the Company if, for example, that person breached the Corporations Act. A person who has criminal convictions of certain offences or is, in some situations, unable to pay debts as they fall due, or is bankrupt, needs the court's permission to be a director.
A director can resign by giving notice of the resignation to the Company. The Company must notify ASIC of the resignation but a director who resigns, can independently notify ASIC. Behan Legal will prepare the necessary consents, resignations, and ASIC notifications on appointment or removal of directors.
DIRECTORS' DUTIES & OBLIGATIONS
Directors have a number of common law and statutory duties and obligations such as:
a) Duty to act in good faith in the best interests of the company (replaces duty to act honestly)
b) Duty to act with care and diligence
c) Prohibition against the misuse of information obtained by directors
d) Duty to avoid a conflict in the position of a director or any interest that a director may have
e) Duty to prevent insolvent trading
Directors’ obligations may continue even after deregistration of the Company.
Any director who fails to perform these duties and obligations can be:
a) Guilty of a criminal offence with a penalty of $200,000.00, imprisonment up to 5 years, or both and
b) Contravening a civil penalty provision with the court ordering payment to the Commonwealth an amount up to $200,000.00 and
c) Personally liable to compensate the Company, or others for loss or damage suffered and
d) Prohibited from managing a company
The directors can appoint a company secretary who must be at least 18 years old. If the Company has only one secretary, they must ordinarily reside in Australia. If the Company has more than one secretary, at least one must ordinarily reside in Australia. The Company secretary must give written consent to hold the position of Company secretary. The Company must keep the consent and must notify ASIC of the appointment. A director can be the secretary. Generally, the secretary may resign by giving written notice of the resignation to the Company. The Company must notify ASIC of the resignation. A Company secretary who resigns can independently notify ASIC of the resignation. Behan Legal will prepare the necessary consents, resignations, and ASIC notifications on appointment or removal of the Company secretary.
The Company secretary is an officer of the Company and is subject to the Corporations Act. The Company secretary is responsible for ensuring the Company notifies ASIC about changes to the identities, names, and addresses of the Company's directors and Company secretaries and that the Company lodges the annual return. A Company secretary's obligations may continue even after deregistration of the Company.
Unless managing the Company requires strict supervision, Behan Legal suggests the appointment of the Company secretary is unnecessary and if the position currently exists, the Company should consider removing the Company secretary. Behan Legal registers companies by preparing resolutions that record the Company will not appoint the Company secretary, which adds to the simplification of running the Company.
Shares & Shareholders
It is a Replaceable Rule that before issuing new shares, the Company must first offer them to existing shareholders in the proportions the shareholders already hold, and at a price, the Company determines.
BECOMING A SHAREHOLDER
One becomes a shareholder when:
a) That person is listed as a shareholder in the application for registration of the Company
b) The Company issues shares to that person
c) That person buys shares from an existing shareholder, and the Company registers the share transfer.
CEASING AS SHAREHOLDER
One ceases being a shareholder when:
a) That person sells all shares, and the Company registers the share transfer
b) That person forfeits shares for not paying share calls
c) The Company buys back the shares
d) ASIC cancels the Company's registration.
CLASSES OF SHARES
A Company can have different classes of shares. The rights and restrictions attached to the shares in a class distinguish it from other classes of shares.
Directors can call shareholder meetings, or shareholder meetings of only those who hold a specific class of shares. Shareholders holding at least 5% of the votes, that may be cast at a Company’s general meeting can call and hold a meeting themselves, or require the directors to call and hold a meeting. The Corporations Act sets out rules that deal with shareholder meetings The Company can hold meetings regularly, or when it becomes necessary to deal with, and resolve specific questions about the Company’s management or business. A shareholder can ask for a copy of the record of a meeting, or of a decision of shareholders taken without a meeting.
Different rights to vote at shareholder meetings may attach to different classes of shares. It is a Replaceable Rule that, subject to those different rights, each shareholder has one vote on a show of hands, and on a poll, one vote for each share held.
BUYING & SELLING SHARES
Shareholders can sell the shares but only if the sale does not breach the Constitution. It is a Replaceable Rule that directors can refuse to register a proposed share transfer if the shares are not fully paid or if the Company has a lien over the shares. In some cases, it is necessary to evidence the sale by a share sale agreement that takes into account the parties’ rights, obligations and liabilities, and taxation. Behan Legal can advise, assist, and prepare the necessary share sale agreements.
FUNDING COMPANY OPERATIONS
Shareholders can fund the Company's operations by lending it money, or by taking up other shares in the Company. Unless it is raising funds from its employees or shareholders, a Company cannot engage in any fundraising activity that requires disclosure to investors (for example, advertising in a newspaper inviting investment in the Company). The Company can borrow money from banks and other financial organisations. Anyone who lends money, or provides credit to the Company can require a mortgage or charge over the Company's assets to secure the loan or debt. Behan Legal can advise, assist, and prepare the necessary agreements.
Shareholders can take money out of the Company in a number of ways, but only if the Company complies with the Constitution, Corporations Act and all relevant laws. If the Company pays out money to shareholders in a way that results in it being unable to pay its debts as they fall due, the directors are liable to pay compensation and for criminal and civil penalties.
Dividends are payments to shareholders out of the Company's after tax profits. It is a Replaceable Rule that the directors decide whether the Company should pay a dividend.
A Company can buy back shares from shareholders.
DISTRIBUTION OF SURPLUS ASSETS
If the Company is wound up and there are assets remaining after paying all debts, the surplus is available for distribution to shareholders according to their share rights.
ANNUAL FINANCIAL REPORTS & AUDIT
The accounting requirements imposed on the Company under the Corporations Act depend on whether it is small or large. The Company's classification can change from one financial year to another as its circumstances change. A Company is small for a financial year, if it satisfies at least two of the following tests:
a) Gross operating revenue is less than $10 million for the year
b) Gross assets is less than $5 million at the end of the year
c) Fewer than 50 employees (of the Company plus the entities it controls (if any)) at the end of the year.
A Company that does not satisfy at least two of these tests is classified as a large company.
Accounting Requirements for Small Companies
Under the Corporations Act, proprietary companies must keep sufficient financial records to show and explain their transactions and financial position, and to allow the preparation and audit of true and fair financial statements. Financial records mean some kind of systematic record of the Company's financial transactions, and not merely a collection of receipts, invoices, bank statements, cheque butts, or computer records.
The Corporations Act requires a small Company, if either directed by shareholders with at least 5% of the votes or ASIC, to prepare annual financial reports that include:
a) Annual Statement of Financial Performance
b) Statement of Financial Position
c) Statement of Cash Flows
d) Directors’ Report about the Company's operations, dividends paid or recommended, options issued etc.
Unless the shareholders’ direction specifies otherwise, the Company must prepare the Annual Financial Report according to applicable accounting standards.
Although small companies do not need to prepare the Annual Financial Report except in the above circumstances, the Company can prepare the Annual Financial Report for income tax and management purposes. Good business practice suggests the Company should prepare the Annual Financial Report so it can monitor and better manage its financial position however; the accounting costs will increase sharply
Large companies and public companies must prepare the Annual Financial Report and Directors' Report and have Annual Financial Report audited, and send both reports to shareholders. They must lodge Annual Financial Report with ASIC unless exempted.
Disagreements within the Company
There are remedies available to shareholders if the Company conducts its affairs in a way that is unfair to shareholders or against the interests of the Company as a whole. In some situations, a court can order the winding up of a Company or appoint a receiver.
SHARE BUY-BACK & SELLING SHARES
The Company can buy back the shares of a shareholder who wants to sever the relationship with the Company. Shareholders who want to sever the relationship can decide to sell the shares. However, shareholders may not be able to sell their shares readily, in particular if they want to sell the shares to someone who is not an existing shareholder. Some difficulties they may face are that the directors have discretion to refuse the share transfer and there may be restrictions in the Constitution on transferring shares.
Companies in Financial Trouble
If the Company experiences financial problems, the directors can appoint an administrator to take over the Company’s operations to see if the creditors and the Company can find a solution to the financial problems. If the administration does not solve the Company’s financial problems it is likely, the directors need to wind up the Company.
The courts or a secured creditor under an agreement can appoint a receiver, or receiver and manager to take over some, or all the Company’s assets when the Company is in financial difficulty or because an amount owed to a secured creditor is overdue.
The Supreme Court can order the winding up of the Company, or the shareholders can pass a special resolution appointing a liquidator.
A liquidator administers the winding up of the Company, and whose main functions are to:
a) Take possession of the Company's assets and
b) Determine debts owed and pay the creditors who hold security over the Company’s assets first receive payment ahead of other unsecured creditors and
c) Distribute to shareholders according to the rights attaching to their shares any assets left over after paying creditors
d) Deregister the Company.
NEED MORE INFORMATION
Behan Legal assists and advises on these important issues only in conference. For an appointment, call 03 9646 0344