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Flashcards in Week 1 Deck (47)
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Key issues to consider in comparing structures

Risk of loss of assets or the business

Asset protection/ limit liability

Minimise expenses

Succession planning passing on the business

Raising funds for future expansion


Advantages of a company structure

Limited Liability

Perpetual succession


Limited Liability

Debts of company are its own
Members have no personal liability except for capital to be contributed


Perpetual succession

Continues indefinitely even if owners and operators change


Disadvantages of a company structure

Compliance costs

Disclosure (publicity)


Compliance costs

Set up, running, audit and wind up


Disclosure (publicity)

Info to ASIC and ASX rules


If it is to be a company then what is a company?

See sections 9 and 57A Corporations Act for the definition

“company" means a company registered under this Act

A Corporation includes a company and any body corporate


What sort of company should I form?

Company Limited by Shares
Proprietary versus Public
Listed versus Unlisted

Company Limited by Guarantee

Unlimited Company

No Liability Company


Company Limited by Shares

Most common type
Raise funds by issuing shares
Shares can be fully paid or partly paid
Can be proprietary or public


Proprietary companies (e.g. private, family)

s 113:

no more than 50 members

no fund raising activity requiring a disclosure document under Chapter 6D

may be a company limited by shares or an unlimited company with share capital – s 112

(If it doesn’t meet all of above then it will be a public company)


Companies Limited by Shares (Proprietary companies)

Can be single director/single shareholder company (such as Racing Parts Pty Ltd). Classified as small or large (s 45A) Tests to determine.

Must meet two of three tests to be a small pty company

Tests are:
Revenue less than $25m,
Assets valued at less than $12.5m
Less than 50 employees


Companies limited by shares(Listed and unlisted public companies)

Benefits and disadvantages of listing

Cost of capital
Access to capital/funds


Companies limited by shares(Listed and unlisted public companies)

Eligibility to list on ASX

Size and shareholder spread


Companies limited by shares(Listed and unlisted public companies)

Process of listing on ASX

Application for admission to the list


Conversion from one type of company to another

Change in activities of company eg proprietary company can/ may want to go public or revert back to a private company to retain control. Process to change is in Part 2B.7 of the Corporations Act


Process to change is in Part 2B.7 of the Corporations Act

Pass a special resolution

Regulatory requirements

Provide information to ASIC

Does not create a new legal entity or affect the company’s relationship with outsiders


Companies limited by guarantee

The members of the company have their liability limited to the amounts that they have undertaken to contribute to the company in the event of a winding up. It has no share capital. Only contribute on winding up and not during the operations. Amount to be paid by the member is called the members guarantee. No capital raised initially. Capital comes from donations/subscriptions. Used for clubs, charities and other non-trading activities.


Unlimited Companies

It is a company whose members have no limit placed on their liability to the company. In a winding up members are liable for the debts of the company without limit. Therefore similar to a partnership.


Why create unlimited companies?

Examples are professional practices (e.g. lawyers and accountants) which are prohibited under their professional rules from running a practice with limited liability


A No Liability company must have:

Share capital

State that its objects are mining

No contractual rights in its constitution to recover calls made

NL company can only operate in the mining sector

Calls on share must be paid within 14 days otherwise shares are forfeited

However, note that not all mining companies are no liability companies (the major ones are public companies limited by shares – ASX: BHP, RIO, FMG etc.)


How do you now create a company?

Create a new company (Form 201) or purchase a shelf company


Shelf company

Company already exists and has been registered with ASIC. New owner just charges name and owners and rules.

Costs are about $600 - $1,500 plus GST (including the ASIC fee)

ASIC fee is about $460


Corporate groups

Business can operate through more than one company. If running multiple businesses may wish to separate different businesses because of reporting, performance profitability and liability purposes.

Each company in a corporate group is a separate legal entity

Tests to determine what is a subsidiary are in section 46 (4 tests)


Tests to determine what is a subsidiary are in section 46 (4 tests)

Only need to meet one of tests:

Holding company controls composition of board of directors i.e. appoint or remove directors of subs company

Holding company controls more than 50% of the votes of the subsidiary company

Holding company holds more than 50% of the issued shares of the subsidiary company

The company is a subsidiary of another subsidiary of the holding company


Legal recognition of corporate groups

Limited recognition of corporate groups – law treats them as separate entities.

However some recognition of groups in the law covering insolvent trading e.g. holding company may be liable for debts of a subsidiary (see section 588V).

Related party transactions (section 208) transactions between public company and related entities.

Financial statements consolidation of accounts.

Directors duties director of wholly owned subsidiary to act interests of the parent company in some cases. E.g. normally director owes duty to company they are a director of, but section 187 allows a director of wholly owned subsidiary to act in the interests of the holding company.


Certificate of Incorporation per s 1274(7A)

A certificate issued by ASIC stating that a company has been registered under this Act is conclusive evidence that:
(a)  all requirements of this Act for its registration have been complied with; and

(b)  the company was duly registered as a company under this Act on the date specified in the certificate.


First Legal Concept: Separate Legal Identity

A company once registered is a separate legal entity from its members and those that manage its operations. A company can incur debts in its own name, hold property take and defend legal action. The company continues unchanged even if members and operators change.


Separate Legal Entity and the “Corporate Veil”

The company is a legal person separate from its participants


The company is a legal person separate from its participants

This means that:

The company is separate from the people that run the company and own it

its obligations and property are its own and not those of its participants

The company can sue and be sued in its own name

its existence continues unchanged even if the identity of the participants changes

A company can contract with its participants