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When deciding to structure your business as a Pty Ltd Company, it’s important to understand exactly what protections operating under a company structure does and doesn’t offer.
An incorporated company, often recognised by the addition of Pty Ltd after the company name, is one of the structures you may consider for your new business.
A company is a separate legal entity and is incorporated under the Corporations Act 2001 and registered with the Australian Securities and Investment Commission (ASIC).
Because a company is a separate legal entity at law, quite distinct from sole traders and partnerships which are not separate legal entities, there is often a misconception or misunderstanding that a having a Pty Ltd company structure will protect you from all liability.
SBDC Dispute Resolution Case Manager Travis Preece advises against assuming that having a company structure will protect you from all legal and financial liability, pointing out that while it is true that having a company can help protect you from some liability, such as personal responsibly for company debts, as a company director you still have other obligations such as those under the Corporations Act.
“It’s important that you carefully consider the business structure best suited to your unique situation, as advised by your accountant, rather than register as a company just because you think it will protect you in all situations,” says Travis.
The fact is, there are advantages and disadvantages to each organisational structure and the costs involved can vary. Here are five things you will likely still be liable for when running a company.
Employer obligations
If you employ staff in your company, you’ll likely have several employer obligations including:
- upholding equal opportunity laws
- providing pay and employment conditions including leave entitlements as governed by the Fair Work Ombudsman
- reporting employee earning to the ATO, collecting withholding (PAYG) taxes and contributing to employee superannuation funds; and
- keeping employment records for seven years.
Depending on your size, you may also be required to pay payroll tax.
Under the ATO’s Director Penalty Regime, as a company director you may also be personally responsible for unpaid (PAYG) tax, GST and/or Superannuation Guarantee Charges (SGC) not met by the company.
Workplace Health and Safety
As a company director, you are required to provide a safe workplace and look after the health and safety of your employees and customers. Penalties can apply if you do not meet your Work Health and Safety (WHS) obligations.
Under new work health and safety laws in WA, a company can be a ‘person conducting a business or undertaking’ (PCBU), and has a primary duty of care to ensure the health and safety of their workers and others who may be affected by the carrying out of work. Further, an officer can be held accountable for workplace health and safety shortcomings in certain circumstances.
You are required to have workers’ compensation insurance for your staff, including contractors and any family members who work in your business. This insurance is mandatory if you employ people. You are also required to have a documented injury management system that outlines the steps to be followed if an injury occurs in your workplace. Penalties may apply if you fail to meet this obligation.
As part of the new WHS laws, there are also reporting requirements for what are known as ‘notifiable incidents’, which includes serious illness, injury or death and dangerous incidents which might happen during the conduct of a business or undertaking.
To understand more about your obligations visit the WorkCover WA and Department of Mines, Industry Regulation and Safety websites.
Director ID
All directors of Australian companies are required to register for a director ID, a 15 digit identification number which is unique to you and remains the same, even if you change your name or change companies.
You need to notify the record-holder in your company such as your company secretary, another director, a contact person or an authorised agent of the company of your director ID. You will also need to give your director ID to the relevant record-holders at any future companies you are appointed as director of.
This form of unique identification has been introduced to combat illegal activities such as phoenixing - when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.
Personal guarantees
Many directors may provide personal guarantees or director’s guarantees when leasing a property or applying for a bank loan, through which they agree to become personally liable for a company’s debts. A director’s guarantee may override the protection that a company otherwise provides against personal liability.
Trading insolvent
According to ASIC, a company is insolvent when it cannot pay its debts when they are due. If you allow your company to trade while insolvent, you could be subject to consequences including civil penalties, compensation proceedings and criminal charges.
Travis says “it’s important for company owners to be aware of their business’s financial position at all times.”
“Ignorance is not an excuse when it comes to trading insolvent, so you should establish good financial procedures from the start, and keep a keen eye on your financial health with your accountant.”
Travis advises that keeping good financial records and being aware of the signs that your business may be in trouble is important in order to avoid trading whilst insolvent. If you feel you are in trouble, the SBDC’s free business advisory service can help guide you to contacts and services that may be able to assist you.
More information
- learn about the different business structures and what might suit your circumstances
- access help if your business is in financial distress
- stay on top of the legal obligations for your business
- find out how to effectively manage risks in your business
