Proprietary limited company

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Proprietary limited company — what does it mean for small business? When it comes to setting up a business, entrepreneurs can choose from many structures. Choosing a business structure can be a complicated task. The first step is to ascertain the best structure for your business needs.

One option is to set up business as a registered company, such as a proprietary limited or public company. Most companies registered in Australia are proprietary companies and this is the preferred option for most small businesses.

Unlike operating as a sole trader, many more regulations come with operating a company and understanding your rights and responsibilities when forming and running a company is crucial.

The type of company structure you choose will depend on the type of business you run, your financial situation, individual circumstances and the level of control needed to operate the business.

For example, if a business is likely to need a large capital base, easy transfer of share ownership, the ability to borrow from the public and to possibly list on the stock exchange, then a public company would be the appropriate form.

However, many small businesses are unlikely to require these abilities and are more inclined to set up a company structure that can be used for family tax planning while providing restricted liability and enough flexibility to run the business effectively. Then the appropriate form would be a proprietary company.

A proprietary company may also be the preferred structure for small businesses owners over a partnership, depending on individual circumstances. For instance, a proprietary limited company allows for up to 50-non employee shareholders, essentially potential investors, while a partnership is restricted to 20 members.

A proprietary limited company is the most common type of company used by small business. Here we look at what to consider when setting up a proprietary limited company.

What is a proprietary limited company?

A company has a separate legal existence, distinct from its owners, managers, operators, etc. It also has its own income tax liability, separate to your personal income tax.

Effectively, a company has the powers of an individual and can:

  • Own and dispose of property and other assets
  • Enter into contracts
  • Sue and be sued.

There are two types of companies, proprietary and public. Under the governing Corporations Act, a proprietary company must either be:

  • Limited by shares: In this case, shareholders are afforded more protection when it comes to the level of liability they face for company debts. Generally speaking, this is the set-up most preferred by small businesses; or
  • An unlimited company that has a share capital. Here, shareholders face unlimited liability.

The proprietary company must have at least one shareholder and no more than 50 non-employee shareholders. Unlike a public company, a proprietary company can not sell shares to the public, however, it can offer its shares to:

  • Existing shareholders of the company; or
  • Employees of the company or a subsidiary of the company.

If a proprietary company does not meet these criteria, the Australian Securities and Investments Commission (ASIC) may require it to convert to a public company.

In addition to differences in how a public company is limited compared to a proprietary company (a public company can be limited by shares or guarantee, unlimited with share capital or can be a no liability company) there are other variations in structure.

A proprietary company must have at least one director who must live in Australia. On the other hand, a public company must have at least three directors and of these, at least two directors must ordinarily live in Australia.

The proprietary company must also have an appointed secretary. The company secretary, like the directors, must be at least 18 to hold such a position. One person may hold both positions of company director and secretary.

The company secretary is an officer of the company and as such may be subject to requirements under the Corporations Act. He/she has specific responsibilities, including making sure the company notifies ASIC about changes to the identities, names and addresses of the company's directors and secretaries and that the company lodges its annual return.

A director is also bound by certain responsibilities under the Corporations Act. This is covered in greater detail further on.

Proprietary companies are also classified as large or small. A company is classified as small only if it meets at least two of the following criteria:

  • Gross operating revenue of less than $10 million for the financial year
  • Assets of less than $5 million at the end of a financial year
  • Fewer than 50 employees at the end of a financial year.

Most large proprietary companies have to lodge audited accounts. Small proprietary companies only have to prepare audited financial statements if ordered to do so by ASIC or members holding five percent of voting shares and in some cases if controlled by a foreign company.

A proprietary company is often the preferred option for small businesses, not only because of the liability issues, but also because of the tax advantages a company set-up can provide. For instance, a company is a legal entity with its own income tax liability separate from your personal income tax and as such the company is currently taxed at 30 percent.

What are the advantages and disadvantages of setting up a proprietary limited company?

As with any business structure, there are certain advantages and disadvantages and the benefits of a proprietary limited set-up will depend on your individual circumstances.

Advantages can include:

  • The liability of shareholders is limited to the share capital they have subscribed and any debts which they may have personally guaranteed.
  • Shareholders and directors can be employed by the company under normal salary and wage conditions and their income taxed at personal rates
  • Shareholder's personal assets are not under threat if the company incurs financial loss and debts.

Company taxation is at a fixed rate. A company's income tax is calculated as a percentage of the taxable income earned by the company during the financial year. The current rate is 30 percent.

Compared with other business structures, the transfer of company ownership can be relatively simple. The company does not have to be wound up in the event of the death, disability or retirement of any on the persons involved.

Disadvantages can include:

  • Forming a proprietary company can be a complicated task and with the level of legal paperwork required, can take up to six weeks.
  • There are greater regulations to adhere to under the Corporations Act and through the Australian Securities and Investment Commission.
  • Increased record-keeping is required.

Who can form a company?

Anyone can form a company if they are aged 18 and over, with a few exceptions — people who are undischarged bankrupts or who have been convicted of any offences relating to the formation or fraudulent operation of a company.

It is recommended that those who have committed a breach of corporate law should speak to a lawyer before starting up a company or entering into a company, for instance, as a director.

Setting up a company

When setting up a company there are three essential steps to keep in mind.

  1. Register your company name with ASIC and obtain an Australian Company Number.
  2. You must have a registered office (if the company doesn't actually occupy the registered office, you must have written permission from the person who does, verifying it is also your office)
  3. Make sure you get written consent from those who are to be company director(s) and secretary. This is a requirement of the application process.

    Registered office: A company must have a registered office and must inform ASIC of the office location. A post office box cannot be the registered office of a company. If the company doesn't occupy the premises where its registered office is located, the occupier of the premises must agree in writing to having the company's registered office located there. A proprietary company is not required to open its registered office to the public but is still obligated to make documents available for inspection.

    Keeping registers: A company must keep a register of its shareholders and a register of charges. The register must be kept at either the company's registered office, the company's principal place of business, a place where the work in maintaining the register is carried out or another place approved by ASIC. The shareholder information required to be kept in the register should include shareholder names and addresses and details of the shares held by individual shareholders. A register of charges is to be kept if the company gives a bank, trade creditor or anybody else a charge of company assets.

    Lodging an annual return: An annual return must be lodged once every year, no later than January 31 of the following year. Late returns will be hit with a penalty fee. The annual return contains information such as:

    • Names and addresses of each director and company secretary
    • Issued shares
    • Shareholder details
    • Address of registered office
    • Address of principal place of business.

    How to register a proprietary company

    There are a number of key steps when it comes to registering a proprietary company. All applications must be completed through the Australian Securities and Investment Commission.

    1. Select a name
    Selecting a name for the company that is appropriate and not already in use can be done by searching ASIC's National Names Index. If the name you want to use is available, you can reserve it. However, it is only reserved for two months upon approval by ASIC. Application to reserve a name will cost you $36, extending this reservation will cost an additional $36.

    The name must be reflective of the legal status of the company. For instance, a proprietary company must include the word "proprietary" or the abbreviation "Pty" in its name. A company that has limited liability must have the word "limited" or the abbreviation "Ltd" at the end of its name. A no liability company must end its name with the words "No Liability" or the abbreviation "NL".

    It is, however, not necessary to nominate a name for the proposed company. You can use your CAN, which is issued upon registration of the company.

    2. Each person who is to become a director of the company needs to give written consent as part of the registration application. Written consents are also required for each person who agrees to become a secretary or member of the company.

    3. You will need to complete and lodge Form 201 Application for Registration as a Company. Depending on the type of company, you can expect to pay approximately $740 for the registration fee. The application can be lodged in person at an ASIC Service Centre or mailed to Australian Securities and Investments Commission, PO Box 4000, Gippsland Mail Centre, Victoria, 3841.

Once your application has been successfully processed, ASIC will issue an Australian Company Number and a certificate of registration.

© MAUS Business Systems — All rights reserved. Visit www.maus.com.au.
This website has a range of software, resources and tools for businesses. Free information and calculators. Access to business planning, human resource and financial software. Access to over 160 Startup business guides and benchmarking statistics.

What is an Australian Company Number and why do you need one?

Once a company is registered, ASIC will allocate a unique nine-digit number which is your Australian Company Number (ACN).

Under the Corporations Act 2001, every company in Australia has been issued with an ACN which must be shown on a range of documents. The aim is to ensure adequate and easy identification of companies when they are conducting business.

The name of the company must be shown on all the company's premises (including its registered office). The company's name and its ACN must also appear:

  • On its public documents
  • On its cheques and negotiable instruments
  • On all documents lodged with ASIC
  • On statements of account, including invoices
  • Business letterhead
  • Receipts (which are not machine-produced)
  • Orders for goods and services
  • Written advertisements making a specific offer
  • Where it has one, it should also appear on its common seal.

Items which don't require the ACN include:

  • Packaging and labelling, including envelopes and transport documents
  • Advertisements which do not make a specific offer which is capable of being accepted (such as advertisements which only promote the company and its goods or services in general)
  • Credit cards and credit card vouchers
  • Machine-generated receipts, including cash-register receipts
  • Business cards and "with compliments" slips
  • Items which are not documents (eg. vehicles, television advertisements).

The penalty for non-compliance with the ACN provision of the Corporations Act 2001 is $1100 or three months imprisonment or both.

Do you need an ABN for your company?

In addition to an ACN, it is also possible to have an Australian Business Number for your company. The ABN is a single identifier for use in business dealings with the Australian Taxation Office (ATO) and for future dealings with other government agencies. All companies are entitled to an ABN.

Your ABN is based on your ACN but has two additional leading digits and becomes an 11 digit number. The ABN will eventually replace the Australian Company Number (ACN) and the Australian Registered Body Number (ARBN).

Once you have registered and received your ABN, you are able to use this number instead of your ACN, on company documents, provided that:

  • Your ABN includes your ACN; and
  • The use of the ABN is the same as the ACN. (For example, a company is required to place its ACN with its name on the first page where that name appears in a document).

You can register for your ABN through the Australian Business Register at < a href=http://www.abr.gov.au target="_new"> www.abr.gov.au.

What to consider if you are to become a director

Effectively, anyone aged 18 and over can become a company director, with the exception of those declared bankrupt or who have been convicted of offences such as fraud or offences under company law.

According to ASIC, if you have been convicted you cannot manage a company within five years of your conviction or if imprisoned for one of these offences, within five years of your release from prison.

ASIC can ban you from being a company director in certain situations. If you are banned, it also means you are not allowed to manage a company. It is a serious offence to set-up dummy directors while you really manage the company.

If you plan on becoming a director, there are many issues you need to take into account.

A director is responsible for making sure the company is keeping up-to-date financial records, that it can pay its debts and is operating in a true and fair manner.

Keeping the appropriate financial records is important. These must record company transactions and explain the company's financial position and performance. If you are at all unsure about the kind of financial records that should be kept, you should get professional advice by speaking to your accountant or lawyer.

Anther important responsibility facing directors is what to do if the company can't pay its debts. Directors must stop the company trading if it cannot meet existing debts and prevent taking on any new debt.

A company is insolvent if it cannot meets its debts and you would be breaking the law if the company was allowed to continue to do business while in that position. A director could be personally sued by a liquidator or creditors for his/her own assets and could also face criminal prosecution.

A proprietary company is required to have at least one director. The following are director duties and liabilities as set down in the Corporations Act 2001. In managing the company, each of its directors is subject to a wide range of duties, including:

  • To act in good faith
  • To act in the best interests of the company
  • To avoid conflicts between the interests of the company and the director's interests
  • To act honestly
  • To exercise care and diligence
  • To prevent the company trading while it is unable to pay its debts
  • If the company is being wound up, to report to and help the liquidator on the affairs of the company.

As a company director you should also:

  • Be fully up-to-date with what your company is doing
  • Find out for yourself how any proposed action will affect your company's business performance, especially if it involves a lot of the company's money
  • Get outside professional advice when you need more details to make an informed decision
  • Question managers and staff about how the business is going
  • Take an active part in directors' meetings.

Understanding shares and shareholder rights and responsibilities

To a small business operator, the issue of shareholders and share capital can be daunting when considering setting up a proprietary limited company. However, the rules bounding a proprietary limited company are relatively simple and clearly stated in the Corporations Act.

The premise behind a proprietary limited company is that its shareholders are privy to limited liability. Shareholders of a company are not liable for the company's debts. As shareholders, their only obligation is to pay the company any amount unpaid on their shares if they are called upon to do so. However, particularly if a shareholder is also a director, this limitation may be affected by other common laws and provisions set out in the Corporations Act. For example, a director of a company may be liable for company debts.

While the company shareholders effectively own the company, the company continues to have a separate legal existence and the company's assets belong to the company. Shareholders can make decisions about the company, usually via shareholder meetings. At such meetings, shareholders have the ability to cast votes.

When it comes to issuing shares, a company may issue shares at a price it determines, the same can be said for the amount of shares issued. While a proprietary company cannot sell shares to the public, it is permitted to have no more than 50 non-employee shareholders. Shares can also be offered to employees. Some companies even offer shares as bonuses to their staff.

A person can become a shareholder by:

  • Being listed as a shareholder on the application for registration of the company
  • The company issuing shares
  • The person buying shares in the company from an existing shareholder and the company registering the transfer.

A person ceases to be a shareholder if:

  • The person sells all of his/her shares in the company and the company registers the transfer or shares
  • The company buys back all the person's shares
  • ASIC cancels the company's registration.

If you are at all confused about the issues of shares and shareholders, get professional advice from your accountant or a lawyer. For additional information, visit ASIC at www.asic.gov.au or the Centre for Innovation, Business and Manufacturing at www.cibm.com.au.

Buying a shelf company

Instead of setting up your own company, you may want to buy an already established shelf company. A shelf company is one that has already been registered but has not traded.

There are many businesses which specialise in helping other businesses set up as companies or purchase pre-registered companies (shelf companies). However, a good starting point is to speak with your lawyer or accountant to assess if a shelf company would be appropriate for your needs.

For more information, visit the Australian Securities and Investment Commission at www.asic.gov.au. To find a business which specialises in selling shelf companies, look under "shelf company services" in your search engine.

How do you wind down your company?

You may wish to shut down your company. It may be that the business is no longer viable, facing financial difficulties or there has been a court order to stop you from trading.

If a company has stopped trading or been wound up, it will remain registered until ASIC cancels the registration. Once a company is deregistered, it ceases to exist.

According to ASIC, you can apply to have the company deregistered if certain conditions are met, including:

  • The company is not carrying on business
  • The company has paid all its fees and penalties under the Corporations Act
  • The company has assets of less than $1000
  • The company has no outstanding liabilities
  • The company is not a party to any legal proceedings
  • All its members have agreed to the deregistration.

If the company is experiencing financial difficulties, directors can appoint an administrator to take over operations to see if a solution can be worked out between the company and its creditors. A court can also order a receiver to come in and take over some or all of the company's assets if there is financial trouble.

If the company is facing financial difficulties, it can also be wound up as a result of a court order or voluntarily if company shareholders vote to do so. In this situation, a liquidator is appointed. It is the liquidator's responsibility to take over the company's assets, determine who is owned money, distribute the company's leftover assets to shareholders once creditors have been paid and to have the company deregistered.

For more information on how to deregister a company, visit ASIC at www.asic.gov.au

© MAUS Business Systems — All rights reserved. Visit www.maus.com.au.
This website has a range of software, resources and tools for businesses. Free information and calculators. Access to business planning, human resource and financial software. Access to over 160 Startup business guides and benchmarking statistics.

19/04/2014 14:54Sydney, Australia. 19 April,2014
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