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Should I start a company?

Why incorporate?

Main advantages:

  • Incorporation protects board members from most instances of personal liability by creating a separate legal entity.  The company instead of the individual can enter contracts, hold assets and can sue or be sued.
  • Basic principles of the entity and its operations are outlined and enforced. A variety of regulations and guidelines assist in ensuring that an entity conducts itself fairly, responsibly and with accountably to its members.
  • Additional funding can be easier to obtain or compete for, as many government and private entities require that applicants for funding are incorporated.
  • Incorporation can provide tax break.

Company types

There are two main types of companies:

The first is the propriety company.   A proprietary company is one which may limit its liability in two ways, either limited by shares or unlimited liability with share capital. The basic requirement for a proprietary company are one shareholder (member) and up to 50 non-employee shareholders. Proprietary companies cannot raise capital from the public. A propriety company can be classified in two ways, either small propriety company or large propriety company. This will be determined by the income and size of the company.

A small propriety company must satisfy two of the following criteria each year and any entities it controls:

  • $12.5 million in assets or less
  • $25 million in revenue or less
  • 50 employees or less

Small proprietary companies are generally not required to lodge its annual financial accounts with ASIC. However, if it is controlled by a foreign holding company or requested to do so by ASIC, it must comply.

The second type of company is the public company. A public company is one which can limit its liability in a number of ways either by limited by shares, limited by guarantee, unlimited with share capital or with no liability. There is no minimum or maximum number of shareholders required for a public company. Public companies can raise capital from the public and are subject to more stringent reporting requirements unlike propriety companies. Legal obligations apply to directors of companies which are listed on the ASX.

Regulatory structure

A regulatory structure exists for corporate governance and company directors. This structure is imposed via:

  • The Corporations Act 2001 (Cth)
  • The Australian Stock Exchange (ASX) Listing Rules, for listed companies
  • Common law rules, and
  • A company’s constitution or replaceable rules

ASIC is a government body which regulates and monitors companies in Australia.  ASIC also issues guidelines to assist companies to comply with obligations under the Corporations Act. However, it should be noted that although these guidelines are informal, they should comply with the Corporations Act. Other guidelines are available in the form of corporate governance guidelines from Standards Australia and Corporate Governance Guidelines from the ASX Corporate Governance Council.

Board structure and management

The business of a company is managed by its directors, in the form of a board of directors. The powers of the directors are given by the company’s constitution or replaceable rules. Under these powers delegation of powers can be performed.

Board members

The company’s constitution or replaceable rules determines who may be a board member. Consent must be given by the person to the company prior to being appointed as a director. Under the law employees are not entitled to board representation.