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.
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.
If a company is unable to pay its debts as and when they fall due, the company is considered "insolvent“. 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.
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.
Advantages of a company
One of the biggest advantages of the company structure is that the legal liability of your company's shareholders is limited to their share capital (that is, how much money they pay for their shares in the company). This means that, in most cases, the personal assets of shareholders cannot be seized to pay company debts. Rather, only the assets of the company can be used to pay the company's debts. However, company directors may still be liable for any debts, liabilities and legal actions held against their company in certain circumstances, such as when the directors have allowed the company to continue trading when insolvent.
Pay less tax
Companies may also pay less tax than other business structures such as sole traders or partnerships. Companies are taxed on their profits at the company tax rate, which may be lower than the marginal tax rates of its individual shareholders. When shareholders receive company dividends that the company has already paid tax on, they will often receive tax credits through the company imputation tax system. This means that the tax paid by the company is already taken out and shareholders' dividends are given credits for the tax already paid by the company. Tax implications are discussed later in this fact sheet.
A company structure can ensure continuity of management and ownership in the event of the death or disability of key people in the business because shares in companies may be transferred.
You can use a company structure to effectively separate the management and ownership aspects of the business. For example, the managers of the business can be appointed directors of the business. The owners of the business are its shareholders.
Under the Corporations Act 2001 (Commonwealth), once your company is registered in one state it's free to trade in all states, provided your Australian Business Number is on all business stationery.
Disadvantages of a company
There are ongoing costs of compliance with the Corporations Act. These include costs of preparing and submitting annual statements, keeping ASIC informed of any changes to the company's structure, officeholders or operations, and any fees for accounting and legal services. Company administration can also require the directors, and more particularly the company secretary, to spend a lot of time attending to company paperwork.
Responsibilities of directors
The directors of the company have certain legal obligations. If directors fail to meet these obligations they may be held personally liable for the debts of the company.
There are other advantages and disadvantages to using a company structure for your business. They depend on the specific nature of your business and other aspects of your financial affairs.