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Advice from Outside the Square

The Legal Responsibilities Of Operating A Company

The Legal Responsibilities Of Operating A Company

If you run your business through a company, what are your responsibilities?

Many of our readers may be operating Family Trusts, with what is called a “corporate trustee”, that is a company that is the trustee of the Family Trust. Others actually operate their business through a company directly.

In either case there are responsibilities under the corporate legislation under which these companies were incorporated, and there may be some tax implications. Let’s run through them here.

Firstly, understand that there is specific legislation that provides certain rules and legal duties that you are obliged to follow if you own and operate a company. This is the Corporations Act 2001 and in conjunction with the Courts’ interpretation of the law, form the basis of your duties and responsibilities.

If you own and operate a company, you and your family members or business partners are likely to be Directors and Shareholders of the company. If this has not been properly explained to you, “shareholders” are the owners of the company, and “Directors” are people who have been nominated to run the company on behalf of the shareholders. The fact that you see yourself as the “boss” and owner and you run your business in the way you want to, doesn’t reduce the need to understand your responsibilities as Directors.

In law, a company is a separate “person” from the “owners” and so while you might argue that it’s “your” company, the law will see it differently in that you will have to comply with the duties expected of you and not treat the company as just another one of your bank accounts.

The Directors, through a Company Secretary or an external person such as the accountant or company lawyer has to maintain certain records, and inform the Australian Securities and Investment Commission (ASIC) of any changes to some of those records.

These include:-

  • A Register of Officeholders (including Directors);
  • A Register of Shareholders and the types and number of shares they hold;
  • Other details such as Registered Office and Business Premises as well as other details.

We maintain these records for most of our clients, so it is important to tell us if there are any changes including changes of addresses of the business premises or even those of the office holders and shareholders. We maintain these records electronically using our special company secretarial software.

Some of these changes have to be advised to ASIC using specific forms. You can either complete these forms manually, or if you tell us of the changes, we make them on our software which automatically prints the affected forms which we lodge electronically using ASIC’s “EDGE” portal. This is our preferred method of dealing with your changes. Since we maintain the records electronically, if you or your lawyer make the changes on manual forms, the company’s registers kept by us may not be synced with the ASIC registers.

You are also required to keep minutes of Directors meetings, such as those held to record the above changes. Again, we use our software to automatically prepare these minutes from existing templates.

Most private companies do not need to lodge their annual financial statements with ASIC. However once a year, at the anniversary of their incorporation, the Directors have to hold a meeting to review and resolve the company’s solvency, and to respond to ASIC about any changes to the details, and pay an annual fee to ASIC.

Again, for most of our clients we receive these notices from ASIC just before the anniversary date, and using our software we prepare the responses and minutes.

For those of our clients who choose to use these services, we charge a small annual fee once a year of under $400. This covers the annual statement as well as any changes and other matters that require forms to be submitted, as well as the maintenance of the required registers. Some of our clients have decided not to use this service, so when we need to prepare forms if they have any changes, or if they need assistance with the annual statement, we charge them our usual fees based on time spent. Depending on the frequency of changes and meetings, this may end up being more than our annual fee system, because of economies of scale.

So those are the administrative procedure requirements of running a company. Failing to comply can lead to a fine and late lodgement penalties payable to ASIC, with the ultimate penalty being that Directors could be found personally liable for costs and penalties.

As for the legal duties of Directors, these are not onerous but must still be complied with. Non compliance could be catastrophic with fines, possible gaol time, and potentially personal liability for the company’s debts.

Put simply, the duties of a Director can be said to be “don’t be crooked, don’t be lazy”!

In actuality, the duties of a Director are:-

  • The duty to act with reasonable care and diligence. This means that you need to have had a real interest in the running and decision-making of the company. You shouldn’t make a careless decision, especially if it leads to loss of value.
  • The duty to act in good faith in the best interests of the company. This means that you need to make decisions that are best for the company – even if in doing so it goes against your own, personal interest.
  • The Duty to not misuse your position or information. This goes towards protecting the interests of the company as opposed to yourself, and you can’t use your Director’s position or information that belongs to the company to better your own position.
  • The duty to disclose conflicts of interest. Obviously this is especially true if there are other shareholders and Directors – they need to know if in a situation, what’s good for you may not be good for the company.
  • The duty not to trade while insolvent. This is critical. Directors have been prosecuted, and found personally liable for company debts if it is shown that they continued to let the company trade while it was insolvent.

I mentioned a the beginning that there may be tax implications in running your business through a company.

Actually there are a lot of specific tax issues. However the main ones to be aware of stem around the fact that the company is seen as a separate “person”. This means that it has its own tax liability and obligations to file returns.

As a separate person, it also means that you can’t treat it as just another one of your bank accounts and take money out when you want to. If you do so, the tax legislation under Division 7A may deem that withdrawal to be an unfranked dividend – not deductible to the company, but assessable in your hands!

So in conclusion, while there are many advantages in running your business through a company structure (ask us what these are!) you do have to be mindful of your responsibilities and duties.

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Talk to us to see how these responsibilities affect you and how we can help. Go to our website and click on the “Contact Us” tab. For new contacts we offer an obligation-free first meeting.

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