As with individuals a company is recognised as a separate legal entity under the Corporations Act 2001 (“the Act”).

Legal Capacity
As a separate legal entity a company may sue or be sued and contract with another party just as an individual. Although there are different types of companies which may be incorporated under the Act the most common type of company is a proprietary limited company (maximum: 50 shareholders) otherwise known as a private company.

Registration and Activities
On registration of a company in the Australian Securities & Investments Commission (“ASIC”) a Constitution is lodged which regulates the conduct and affairs of a company. A Constitution shall prescribe the manner in which a company shall undertake its corporate activities (e.g. affixing of company seal, conduct of directors meetings etc.). Once registered you have a proprietary right in the company name within Australia and no other company or business name substantially the same can be registered without the consent in writing of the company.

Apart from the Constitution of a company regulating the internal activities of a company the Act prescribes how a corporation may act at law. A company may enter into contracts for the sale or purchase of land by executing a contract under common seal or a third party may assume that a company has authorised directors to sign a contract without the seal (Sections 127 and 129 of the Act).

Company’s Affairs
A company’s day to day affairs are conducted by the directors. As a company is a legal entity in its own right the director/s of a company shall only be personally liable for the acts of a company in limited circumstances (e.g. insolvent trading under the Act). Otherwise, a company is responsible for its own acts and omissions and any liability of shareholders is limited to any unpaid capital on shares owned by the shareholders.

As a result of amendments and commencement of the Corporations Act 2001 (formerly the Corporations Law) a company since 2001 is permitted to have a sole director (previously minimum of 2 directors). Although the directors of the company are responsible for the day to day conduct of the company the ultimate control of the company rests with the shareholders who have the power to appoint or dismiss directors.

Company as Trading Entity
Prior to determining whether a company is the appropriate structure to acquire property or undertake a business you should consult with your accountant as to the benefits or disadvantages arising from utilisation of a corporate structure rather than the alternative business arrangements (e.g. sole trader; discretionary trust).

Apart from the apparent benefit of limited liability by trading as a company the other benefits which arise by utilising a proprietary limited company involve:-
• A company survives the death of a director or shareholder (perpetual succession);
• A company is an entity which may be sold by the transfer of shares;
• A company may distribute profit by way of dividend at its discretion;
• Lower tax rate may apply;
• A company may raise capital by the issue of shares or a charge over shares by way of security.

Notwithstanding the benefits associated with utilising a company as the trading entity the pros of operating as a company must be contrasted with the cons.

• As a separate entity application must be made for an ABN and the company shall have liabilities (e.g. taxation);
• Greater regulation over company (i.e. reporting responsibilities to ASIC);
• Loss of personal control of company (i.e. decisions made by Board of Directors rather than individual);
• Costs associated with registration and continuation of company (i.e. Incorporation, Annual Returns).

Dealing with Companies
If dealing with a company you should ensure that a search is undertaken of the ASIC to ensure that the company is duly registered. An ASIC search shall disclose the current directors, shareholders, registered office and whether the company’s assets are encumbered by way of charge.

Due to the limited liability of a company (with exceptions) any person contracting with a company should undertake enquiries to ascertain whether the company is solvent and obtain wherever possible personal guarantees from the shareholders of a company. Any opportunity which an unpaid creditor has to wind up an insolvent company does not realise funds to pay the accrued debt for the supply of goods or services.

Solvency and Debt Collection
A company is deemed to be insolvent at law if it is unable to pay its debts as and when they fall due. As insolvent trading is a limited circumstance in which a director of a company may be held personally liable for a separate entity’s debts the directors of a company should ensure the trading company is solvent at all times.

If monies are due and owing by a company a procedure is available under the Act to issue a Creditor’s Statutory Demand for Payment of Debt if the amount owed exceeds the $2,000.00 statutory minimum. Should a Creditor’s Statutory Demand for Payment of Debt in the prescribed form be duly served on the registered office of the company any failure by the company to set aside the duly issued demand shall result in the company being deemed insolvent at law.

If you have any queries arising under the Corporations Act 2001, please refer to our Antony Knox.