A company is a legal entity in its own right and therefore enjoys all of the commercial privileges of an individual. It can own properties, conduct business, invest funds in a variety of investments, and of course, be sued in a court of law.
The most common company is the proprietary company (identified by the letters “Pty. Ltd.”) and it must be incorporated under the federal Corporations Law. Two documents are prepared for every company which basically set out the objectives and ground rules of operation.
Owner/managers should have a working knowledge of these documents known as the Memorandum of Association and Articles of Association. The Corporations Law assumes that the directors will act within the stipulated rulings.
Ignorance is not an acceptable excuse at law. This means if you establish a company you should find yourself an accountant that knows what he or she is doing, or obtain a copy of the Corporations Law and Regulations and start reading. Because if anything goes wrong or you forget to lodge a particular form you can be fined.
Useful information can be obtained from the Australian Securities and Investment Commission (ASIC) in most capital cities. The ASIC is the government body that controls incorporation of companies and controls their activities (they replaced the old Corporate Affairs Commissions in each state).
You have found a business for sale, you have bought it and you are now considering forming a company. What are the advantages of a Company? The main advantage is the so called limited liability principle, where a company has separate legal status, the debts it incurs are its responsibility and not those of the shareholders. An example would be if two people set up a business selling “widgets” to the trade and do so by incorporating a company as their trading structure.
They then borrow $100,000 from an investor or financier to purchase stock. Now the investor decides NOT to take any security like a personal guarantee from the directors because the directors have offered him 30% return on the $100,000 invested.
Unfortunately, the business goes bust with nothing left in the business, no stock, no money, nothing of any value. The investor/financier has lost the lot. The directors have lost the business but do not have to pay back the $100,000, because the company owed the money, not them personally. This is one of the main advantages of a Proprietary Limited company, the Proprietor’s liability is Limited.
Now before you set up a company, borrow a million dollars and send it broke and retire to Spain, there are wide ranging laws these days for corporate fraud, and directors negligence and incompetence which could land you in Jail if you try to deceive an investor or commit fraud. So, don’t even think about it. For this reason, most companies you deal with will request a personal guarantee before they will sell you any goods.
Once signed, you will be liable for the debts of the company if the company can’t or doesn’t pay the bill, regardless of Pty. Ltd. Always try to avoid signing personal guarantees because if you sign one you have Just given up one of the main advantages of a company.
Try to compromise with the supplier on a lower initial purchase until the supplier is a little more confident with your paying patterns. Of course when you are the one offering credit (selling things to other companies), you always insist on a directors personal guarantee when dealing with small companies, particularly when dealing with large amounts.
If they don’t pay you, your own company could be in trouble paying it’s bills to someone else. So always be aware of how much unsecured credit you are giving and how many personal guarantees you’ve signed yourself (if any). You see the idea is to have others sign personal guarantees, but sign none yourself!
Trading as a company can often assist the management process by virtue of the fact that directors can be separate from the owners (shareholders). Also, their responsibilities and duties are spelt out in the Memorandum and Articles of Association and the Corporations Law and Regulations.
A company can, because of its separate legal status, trade indefinitely regardless of shareholders dying, becoming , incapacitated. Companies allow a great degree of flexibility when it comes to transferring a percentage of shares if required.
It is a relatively easy procedure to transfer shares or issue new shares. Under a company structure, it is very easy to have different classes of owners (shareholders). This may be desirable if you want to allow people the right to vote on company policy but not earn some of the profits or visa versa. It may be easier to obtain capital in larger amounts when a more formal trading structure such as a company is utilised.
There are of course some disadvantages, for instance, every company is required to file an annual return which gives details of the shareholders and directors. In companies where an audit is not performed, an abridged summary of the financial results is required.
The cost of an annual return will be around $200. Companies are costly to set up and will cost you between $700 and $1,000 depending who you use to obtain the company for you. A solicitor or an accountant can arrange this for you, but from my experience shelf company specialists are cheaper. Look up “Shelf Company Services” in Google.
These companies specialise in setting up companies and can arrange name changes, share class structures and any other individual requirements you may have. They cost about $800 to $1,000. You probably require an accountant to administer the company records for you, such as annual returns, company registers, directors and shareholder details etc. This could be as much as $1,000 per year depending on how complicated your company is, and this doesn’t include accounting services, this will be extra.
The company only requires one director who must reside in Australia as well as a company secretary, but one person can do both jobs. This makes life easy for the sole trader as he or she can be director, company secretary and shareholder all by themselves.
The ASIC can assist you with any questions you may have and have some excellent brochures and information they can send, so give them a call. The company secretary’s role is the administration of the company such as responsibility to lodge and sign tax returns, annual returns, maintenance of registers and lodgement of government forms. Most of this work is usually done by your accountant so don’t have a heart attack.
If you are looking for a Cairns MYOB bookkeeping service or Townsville MYOB bookkeeping service for your company, make sure you contacy Dollarwise Bookkeeping.