How a...COMPANY Works

Youth 2 Youth

INTRO

Proprietary limited companies (denoted by the words “Pty Limited” or “Pty Ltd”) are the most common type of business structure used by small business in Australia.  The legislation governing proprietary companies is the Corporations Law. The operation of this law is overseen and administered by ASIC. 

A company comes into legal existence when it is registered with ASIC. On and from the date of registration the company is deemed to have certain characteristics. 

In particular, companies have a separate legal existence that is distinct from that of its owners, managers, operators, employees and agents. Although companies do not have a physical existence, they have the same powers as individuals including the power to own and dispose of property, sue and be sued, and enter into contracts. 

The primary advantage of conducting a business through a company is that it confers limited liability on its shareholders. That means shareholders of a company are not liable (in their capacity as shareholders) for the company’s debts. The only obligation placed upon shareholders is to pay any amount unpaid on their shares if they are called upon to do so.  

CHARACTERISTICS OF PROPRIETARY COMPANIES 

Registration with ASIC 

To set up a new company, an applicant must apply to ASIC for registration of the company.  

A proprietary company must have at least 1 shareholder and at least one director and secretary (all of whom may be the same person). 

When a company is registered with ASIC it comes into legal existence and obtains separate legal identity distinct from that of its owners, managers and employees. Once it is incorporated a company has its own rights, its own property and its own obligations. 

Use of your company name and ACN 

When a company is registered with ASIC it obtains an Australian Company Number (or ACN). An ACN is a unique 9 digit number allocated by ASIC to each company. 

A proprietary company must also have the words “Proprietary Limited” as part of its name, which can be abbreviated to “Pty Limited” or “Pty Ltd”.  A proprietary company must legibly display its company name and its ACN on: 

• every public document issued, signed, or published by or on behalf of the company;
• every negotiable instrument (for example cheques and promissory notes) signed by or on behalf of the company;
• all documents lodged with ASIC; and
• the common seal (if the company chooses to have a common seal).

In some circumstances, a company can now use its Australian Business Number in place of its ACN. 

Directors and Secretaries 

The directors of a company are responsible for managing the company’s business. A company must appoint at least one director and one secretary who lives in Australia. As stated above, the same person may act as both director and secretary.

A person cannot act as a director or a secretary if the person: 

• is under 18 years old;
• is an insolvent under administration;
• has been convicted of any serious offences as specified in the Corporations Law; or
• is banned by a court or ASIC from managing a corporation. 

If you are a director you must ensure that you are honest and careful at all times and ensure you know what the company is doing. 

REGISTERS TO BE KEPT BY THE COMPANY 

The directors and officers of the company are responsible for keeping and updating certain registers.

A company must keep registers containing the following details about the company: 

• names, addresses and shareholding of each of its members;
• names and addresses of its option holders (if any);
• minutes of directors’ meetings and resolutions passed by directors without a meeting; minutes of general meetings and resolution passed by members without a meeting;
• details of charges on property of the company that have been lodged with ASIC, including the date of its creation, the liability secured by the charge and a description of the property charged. 

A company must keep its registers at either: 

• its principal place of business (as disclosed to ASIC); or
• its registered office; or
• some other place where the work of maintaining the register is done and approved by ASIC.

The company must notify ASIC if a register is not located at one of the places specified above within 7days of the re-location of the register. 

In addition, the company must keep accounting and other records sufficient to enable annual financial statements to be prepared and audited if necessary, for at least 7 years after the transactions have occurred.

SIGNING COMPANY DOCUMENTS

A company can sign a document in many different ways. However, if a company executes a document in one of a number of ways specified in the Corporations Law, persons dealing with the company are entitled to assume that the document has been duly executed by the company. 

Under common seal 

One specified way is under common seal, where the fixing of the seal is witnessed by: 

• two directors of the company;
• a director and secretary of the company; or
• for a company with a sole director who is also the sole secretary – that director. 

Signing documents without a common seal 

A company is no longer required to have a common seal. And even a company with a common seal can sign contracts and other documents without using its common seal. 

A person dealing with a company can assume the document was duly executed if it is signed by: 

• two directors of the company;
• a director and secretary of the company; or
• for a company with a sole director who is also the sole secretary – that director.         

COMPANY DECISIONS & COMPANY RESOLUTIONS 

Decisions by directors 

The constitution of a company will generally provide that the business of the company is to be managed by the directors. See also the replaceable rule to this effect in section 198A of the Corporations Law.

Thus most decisions regarding the company are made by the directors. The Corporations Law requires these decisions to be recorded in minutes to be kept by the company. 

But the Corporations Law or constitution requires some decisions to be put to shareholders (or members). 

What is a company resolution? 

A resolution is a formal expression of a decision made by a meeting of company members. 

Requirements for resolutions 

The general requirements for passing any resolution are that: 

• it takes place at a meeting which is properly convened on at least 21 days notice (unless shorter notice is approved in accordance with the Corporations Law);
• it satisfies the quorum (or attendance) requirements;
• proper records are entered into the books kept by the company within one month of the meeting being held; and
• the minutes are signed by the chair of the meeting at which the resolution was passed or by the chair of the next meeting.

Most resolutions are one of two types: ordinary and special. 

Ordinary resolutions 

Ordinary resolutions must be passed by a simple majority in a general meeting of the company. That is, more than half the votes cast by members present at the meeting in person or by proxy.

Unless the Corporations Law or the constitution of the company (if any) requires a decision to be made by a special resolution, an ordinary resolution is required. 

Some of the matters for which ordinary resolutions are generally used include: 

• election and re-election of directors; and
• decisions affecting the fundamental nature of the business.

Special resolutions 

A special resolution is a resolution passed by at least 75% of the votes cast by members entitled to vote, either in person or by proxy. 

Members with at least 95% of the votes can consent to shorter notice (100% for an AGM).

The notice must specify: 

• the intention to propose the resolution as a special resolution; and
• the entire text or substance of the proposed special resolution.

Passing resolutions without holding meetings 

A proprietary company may pass resolutions without holding a general meeting. This may be achieved in the following ways. 

If all members of the company sign a document containing a statement that they are in favour of a particular resolution that would ordinarily have been passed at a general meeting, then the resolution will be deemed to have passed when the document is signed by the last member. 

In the case of a proprietary company that has only one member, the company may pass a resolution by the member recording it and signing the record.

Note: Passing a resolution as outlined above is not permitted for resolutions that require special notice (for example, removing an auditor). 

ASIC reporting obligations 

In most cases, if a company passes a special resolution it must lodge a notification with ASIC using ASIC Form 205. 

If a company passes an ordinary resolution it is generally not required to notify ASIC unless the resolution related to a matter that must otherwise be disclosed to ASIC. 

Shareholder (member) agreements 

Often, the members of a company will enter into a shareholders agreement that further regulates the operation and ownership of the company. A shareholders agreement will typically cover matters such as: 

• restrictions on the right to sell shares;
• representation on the board of directors;
• decisions which must be referred to members; and
• the majority vote required for particular decisions of directors or members.

ON-GOING REPORTING OBLIGATIONS TO ASIC 

The following is a basic checklist of some of the main on-going reporting obligations for registered proprietary companies and their officers and the relevant ASIC lodgement forms. It is not an exhaustive list. 

Annual Return of a Company (ASIC Form 316)

Each year the company must lodge an annual return and pay the prescribed fee by 31 January of the following year. It is current ASIC practice to send a pro-forma annual return to each company’s registered office (or other nominated service address). If a company does not lodge its annual return with the prescribed fee then late fees will apply.

Notification of change of officeholders (ASIC form 304)

A company must complete and lodge ASIC form 304 where there has been a change in directors or secretaries, a new appointment or cessation or change in their name or residential addresses. The same notifications also apply to alternate directors. There is no prescribed fee for lodgement but you must lodge the form within 14 of the change. 

Notification by officeholders of resignation or retirement (ASIC form 370)

Where a director or secretary wishes to give notice of their own resignation or retirement then they may lodge ASIC form 370. The prescribed period for lodgement is any time after date of cessation. 

Notification of share issue (ASIC form 207)

A company must complete and lodge ASIC form 207 where a company issues or cancels shares. The prescribed period for lodgement is one month of the issue or cancellation. 

Notification of change of office hours or address (ASIC form 203)

A company must complete and lodge ASIC form 203 where a change occurs in the address of the registered office or the principal place of business or the office hours. The prescribed period for lodgement is within 14 days of the change. 

Change of company name (ASIC form 205)

Where a company wants to change its name, it must pass a special resolution adopting a new name and lodge a copy of the special resolution with ASIC. ASIC may only change a company’s name if that name is available and with payment of the prescribed fee. The prescribed period for lodgement is 14 days from the date of the meeting.

FURTHER INFORMATION

Please recommend a solicitor who is experienced in this area of law.

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