Embarking on a new business venture can be an exciting time. The structure you use to run your business will depend on its proposed size and activities, your family and financial circumstances and the risks involved. Getting legal and accounting advice from the start of your new venture is a smart idea.
A business may operate as a sole proprietorship, a partnership, a joint venture, through a trust structure or by registering a company.
Incorporating a proprietary limited company is a popular choice as it creates a separate legal entity that is distinct from its directors and shareholders and able to trade, hold assets and enter into legal contracts in its own right.
The following will assist you in understanding the process involved in registering a proprietary limited company and your obligations as an officer of that company.
Structuring and registering a proprietary limited company
The Corporations Act 2001 (Cth) sets out the framework for the incorporation and conduct of companies in Australia and the Australian Securities and Investment Commission (ASIC) is charged with overseeing the regulation of companies.
The company will require a minimum of one director and one shareholder (who may be the same person). At least one director must ordinarily be resident in Australia.
A shareholder may include a person, another company, a trust, an incorporated association or partnership. There can be no more than 50 non-employee shareholders.
A company secretary may be appointed and if the company has only one director that person often takes on the role of both.
A public officer must be appointed, and the Australian Taxation Office (ATO) notified within three months of the company conducting business. The public officer must ensure the company complies with its taxation obligations and must liaise with the ATO regarding the company’s tax affairs.
The company must nominate a physical address in Australia as its registered office for service of legal documents or notices. This is often the premises of the company’s accountant or law firm but can be a personal residence.
A director must:
- be a natural person at least 18 years old;
- provide written consent to act as a company director;
- not be an undischarged bankrupt or subject to a personal insolvency agreement that has not been complied with;
- not, within the past five years, have been convicted of an offence of dishonesty such as fraud or a company law offence such as insolvent trading – a person who has been imprisoned for such an offence, must not manage a company until five years after his or her release.
Once registered a company can be governed by replaceable rules, a constitution, or a combination of both. The replaceable rules are contained in the Corporations Act 2001 (Cth) and set out a basic structure for the company’s management. These rules can be ‘adopted’ upon registration, rather than having to keep a written company constitution. A written constitution will generally be tailored to the specific requirements of the company.
Companies with only one officeholder are not required to follow replaceable rules or to have a constitution.
Once registered, the company acquires a unique 9-digit Australian Company Number (ACN) which is used for identification and reporting purposes and must be displayed on any formal or public documents, cheques and at the company’s place of business.
Registering with the Australian Taxation Office (ATO)
The company must apply to the ATO for a Tax File Number (TFN) which is used when filing mandatory annual company tax returns. The company should also register for an Australian Business Number (ABN) under the Australian tax system, which is an 11-digit identification number comprising two digits preceding the ACN.
The company may also need to register for Goods and Services Tax (GST), Pay-As-You-Go (PAYG) withholding tax and other types of taxes.
It is advisable to retain a qualified accountant to advise on these matters and to prepare annual financial reports
Understanding directors’ duties and obligations
Registration of a proprietary limited company provides a degree of personal asset protection for its members. However, certain conduct may result in company directors being legally liable for their actions and the debts of the company.
Directors have an overriding duty to act in the best interests of the company and owe various statutory and common law duties to the company and its shareholders. These include:
- a duty of good faith – a fiduciary duty to act honestly, for the company’s benefit and not use their position for personal gain;
- a duty of care, skill and diligence – to exercise a reasonable level of skill in managing the company, generally determined in light of the director’s experience and qualifications;
- a duty to avoid conflicts of interest and misuse of information or position – directors filling other roles or with other business interests must be careful to avoid a conflict to the detriment of the company they represent;
- a duty to prevent insolvent trading – directors can be held personally liable if they cause a company to continue to incur debt when it is reasonably foreseeable that the company is, or likely to become, insolvent;
- a duty to retain discretion and not to disclose confidential information.
Company names, business names and trade marks
Choosing a company name and its ‘branding’ is an important part of your enterprise. Generally, a company name cannot be identical to an existing company or business name unless the identical name is owned by the individual, company director or company proposing to register it. Business and company name availability checks can be made on ASIC’s register.
Other restrictions apply when registering a company or business name. Names that may be misleading, such as ‘university’, ‘bank’ or ‘royal’ generally may not form part of the company name, and names considered offensive or that are suggestive of an illegal activity are prohibited.
Business and company names can be reserved, generally for two months, through ASIC prior to registering the company.
A company name must show its legal status – for example a proprietary limited company must state its’ name ‘ABC’ followed by ‘Pty Ltd’. The company may register a business name (in addition to its company name) which can be used for trading purposes, for example ‘ABC Pty Ltd’ may register the business name ‘ABC Learning Systems’ which can be used for marketing and advertising.
When registering a business name, directors should also check the IP Australia website for identical or similar names or trade marks to avoid action by another company for passing off or infringement. IP Australia is responsible for administering intellectual property rights and laws regarding patents, trade marks, registered designs and plant breeder’s rights.
If employing staff, company officers should be familiar with their obligations under the Fair Work Act 2009 (Cth) and other employment legislation, as well as state or territory based occupational health and safety laws.
Running a business can be financially and personally rewarding – it also carries inherent risk and it is therefore recommended that you retain a professional to help guide you in your new enterprise.
If you or someone you know wants more information or needs help or advice, please contact us on 02 8373 2555 or email [email protected].