Companies

Should my business structure include a company?

Companies are very widely used in the operation of businesses in Australia.

From a risk point of view, a company has a separate legal existence distinct from its owners (the shareholders).  Shareholders are therefore not prima facie liable for the company’s debts.  However, if a shareholder is also a director, or has provided security for the company’s debts, he or she may be liable in those capacities.

A company structure, sometimes in conjunction with a trust,  can also be used to protect business assets by placing those assets in a company separate from the operating company, thus protecting them from trading risk. 

Generally, a corporate structure is a helpful structure for the growth of a business, as well as the full or partial transfer of the business.  Incoming equity investors can buy shares, thus precisely defining their share of the business operation. A transfer of shares also provides an easier mechanism for transferring ownership than a transfer of the underlying business assets, such as when assets are sold by a partnership or sole trader.

Having said that, a transfer of shares carries with it the prior risks, obligations and liabilities of the company, including potential legal actions and debts.

Many financiers actually require a corporate structure for various reasons, including the ease of dealing with a company as opposed to, for example, members of a partnership, and the obligations placed on directors under the Corporations Act.

From a succession point of view, a company continues to exist even if one or more of its shareholders or directors sells their shares, dies or leaves the company.  This means that ownership in the underlying assets can be transferred simply by transferring shares rather than the assets themselves, which may be numerous.

The tax position of companies needs to be taken into account, as there are differences in the tax treatment of capital gains in the hands of trusts, individuals and companies. There are also different tax rates that apply to companies and to individuals.

What risks do I have as a director of a company?

A director may:

• be liable for debts incurred by the company at a time when the company itself is unable to pay those debts as they fall due;
• be liable to compensate the company for any losses the company suffers from a breach of certain of the director’s duties to the company; and
• be subject to civil and/or criminal penalties in such circumstances.

As a matter of commercial practice, a bank, trade creditor or anyone else providing finance or credit to a company may ask a director of the company:

• for a personal guarantee of the company’s liabilities; and
• for some form of security over the house or personal assets to secure the performance by the company of its obligations.

The director of a company may, for example, be asked by a bank to give a mortgage over their house to secure the company’s repayment of a loan. If the company does not repay the loan as agreed with the bank, the director may lose the house.