A company may be formed under the Corporations Act 2001(Cth) to run a business. The major advantage of forming a company is that on incorporation it becomes a separate, independent legal entity, distinct from its members, directors, employees and agents. Therefore a company is capable of suing and being sued in its own name, and it can hold property and earn income in its own name.
A company must have at least one member (shareholder). The company's members own the company's capital. Members may receive a dividend on their shares but are not responsible for the company's debts. A dividend is a form of income paid to a member from the net trading profit (if any) of a company. If the company is wound up and the debts have been paid, the members are entitled to any capital that is left in proportion to their share holdings. Members can call general meetings on a specific issue and a majority vote will usually bind the company.
In addition to having at least one member, the common form of family company called a proprietary limited company (or Pty Ltd) must also have at least one director (who can be the same person as the member). Directors owe certain duties to the company, and the law in this area is quite complex. It i very important to properly understand the duties of a director before agreeing to become one as breaches of the duties can attract both civil and criminal penalties. For further information, see company directors.
Large public companies (usually listed on the Australian Stock Exchange or ASX) are required to have at least three directors and at least two of them must ordinarily reside in Australia [s 201A].
A company must have a Constitution (formerly known as the Memorandum and Articles of Association) that sets out the rules by which the company must be run. Unless a company makes its own Constitution, the Corporations Act 2001 (Cth) contains sections setting out the rules that the company must obey. These are known as Replaceable Rules. It is possible to adopt rules that control or abolish members' voting powers or that give certain members preferential rights to take shares issued by the company. Shareholders may also sign a shareholders agreement which may give additional protection for minority shareholders, as well as setting out rights for the transfer of shares and other matters affecting the relationship.
Companies pay company income tax on profits currently at a flat rate of 30%. Members pay personal income tax on any dividends received. If the dividends are franked by the company, the member does not pay tax on the dividend as the company has paid the tax already.
How is a company incorporated?
A company is incorporated by lodging the required documents and fee with the Australian Securities and Investments Commission ("ASIC").
Detailed information about the steps required to incorporate a company are set out on the ASIC website (click here). Certain preliminary matters need to be attended to prior to incorporation, and it is prudent to obtain advice from either a lawyer or an accountant to ensure that the correct process is followed.
The advantage of conducting business via a company is that the liability of members (or shareholders), unlike in a partnership, is limited to the amount, if any, which remains unpaid on the shares of the company which they own although in the case of a proprietary or family company, most credit providers (including suppliers) require personal guarantees from the directors before they give credit or lend money to the company. The other main advantage is the tax benefits as the company tax rate is considerably less than the personal income tax rate for people in the higher tax brackets.
It is a criminal offence for any person to contravene a provision of the Corporations Act 2001 (Cth) [s 1311].
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.