This article is useful reading for anyone wishing to set up a company, buying or selling a company. Net Lawman hosts a further two articles on ‘business structures’. These are:
- Trusts: ins and outs
- Partnerships: ins and outs
Companies: an introduction
A company or corporation is a legal entity in its own right. It can enter into agreements in its own name, just like a person can. Thus, while its directors and shareholders make decisions, the company is liable should anything go wrong. Of course this is unless there is misconduct by the directors or officers such as misrepresentation or misleading or deceptive conduct. Similarly, the company can take legal action against others for loss it has suffered.
If the company owes money and there is no dispute as to the debt the creditor, those owed the money, can usually serve a statutory demand.
If the company becomes unable to pay debts as and when they fall due it may be insolvent the directors may be liable for debts incurred by the company during this time. In this case it would be necessary for a creditor to commence court proceedings to prove this. The shareholders and directors of the company should be aware of the action that they could take, and action that creditors may decide to take against the company.
Corporations Law Requirements
The Corporations Law requires companies to keep accounting records in order to accurately record all their transactions. The records must be kept so as to enable accounts to be prepared and audited. The records must be kept for a minimum of seven years. Accounting records should also be made available to directors and auditors. Once the records have been checked, an accounting report is prepared for the shareholders.
Directors and secretaries: appointments, resignation or removal and their duties
Appointment: When a company is incorporated, the initial appointment of directors is usually contained in the company's constitution. Where there exists no constitution, statutory “replaceable rules" set out in the Corporations Law take effect. Directors can then be appointed by other directors or by shareholders in a general meeting. Other appointment procedures can be provided for in a company's constitution.
Resignation or removal: Generally, subject to a company's constitution, a director may resign at any time during the term of their office. How a director is dismissed depends on whether it is a private or public company. If a private company, the procedure for dismissal will be contained in the constitution (if there is one). In the case of a public company, the Corporations Law has provisions setting out the procedure to be followed.
Duties: Directors owe a "fiduciary" duty to the company. Generally, this means they must act honestly, with diligence and in the company's best interest. Under the Corporations Law a director is required to fulfil the following duties:
- act honestly;
- exercise a reasonable degree of care and diligence;
- not to make improper use of inside information;
- not to make an improper use of their position.
A company director is required to fulfil a number of duties apart from the ones listed
Contracting
A company is a separate legal entity and can enter into agreements with other parties. Only a person with the appropriate authority, such as a company director, may enter into an agreement on behalf of the company.
A company will not be bound by an agreement unless the person or persons signing on their behalf have authority to bind the company
Insolvency
If a company is unable to pay its debts as and when they fall due, the company is considered "insolvent" ( See Making an Agreement ).
Once a company is insolvent, it must cease trading and its directors are not permitted to incur any further debts in the company's name
Forming a company
The process of forming a company is called incorporation. There are three basic steps involved in incorporating a company. They are:
- Reserving a company name. This can be done with the Australian Securities and Investments Commission (ASIC). Please note that the proposed name cannot be one which is already registered or reserved and cannot be one which is declared by law to be unacceptable in any way. Of course, it is advisable to avoid names which are similar to the names of competitors so as to avoid possible future disputes.
- Lodgment of prescribed documents. The law requires that certain documents be lodged with the ASIC prior to incorporation. These prescribed documents will set out information such as the names and number of directors, the number of shares and the type of company it is. You may also wish to consider whether your company needs a constitution to set out procedures for meetings and clarifying relationships between directors and shareholders.
- Payment of prescribed fees. Once it is confirmed that the proposed company name is available and the prescribed documents have all been lodged, the final step in incorporation is paying the amount of fees required by the ASIC.
The incorporation stage is extremely important and will set the guidelines for the way the company is run.
Tax issues
Just like an individuals, companies are required to pay tax. There is a separate company tax system which applies to companies for the purposes of:
- calculating the amount of tax companies have to pay;
- calculating the amount of tax its shareholders have to pay;
- calculating tax deductions or rebates.
Companies will also be liable to pay tax when they enter into transactions, for example, stamp duty may be payable in relation to a transfer of property including transfers to or from a company. Companies will also need to be aware of how a Goods and Services Tax (GST) will affect them.
You should also be aware of the effect the Goods and Services Tax may have. | 
