Business structure basics: companies
A company is a business that has shareholders who own the company and directors who run it.
Companies can be private or public. When a business is listed as a public company, the public can buy shares to invest in the company. However Gadens partner Richard Partridge suggests this isn’t a great option for new businesses.
“As a startup I would not recommend incorporating as a public company (at the beginning).” he says.
“It’s incredibly costly and completely unnecessary. The biggest difference between a public and private company is the annual reporting obligations.”
Companies have limited liability, but directors can be personally liable under the Corporations Act, if found to be fraudulent, negligent, or reckless.
A private company can have no more than 50 shareholders, any more than that and it must become a public company.
“So there’s no point throwing out small parcels of shares to huge groups of people,” Partridge says.
“You’ll become subject to the requirement to convert to a public company.”
According to Business Victoria proprietary companies must have no more than 50 non-employee shareholders and be either limited by shares or an unlimited company that has share capital.
Companies limited by shares, limit the liability of shareholders to the value of their shares. Business Victoria suggests this structure is suitable for most trading businesses. Companies limited by guarantee are most often non-trading organisations e.g sporting clubs.
Proprietary or Pty must be included in a company name to indicated a business’ legal status as a company. Limited or Ltd also needs to be included in a name if it’s a limited liability company.
Where should I incorporate?
Partridge says there are no favourable jurisdictions in Australia because all corporations are governed by the same piece of legislation, the Corporations Act.
With that said, one reason to consider where your company will be based, is the grants that might be on offer by particular state governments.
Partridge says not to just look out for those grants that are publicly advertised but to also approach government directly.
“Small business grants some states are more favourable than others,” he says.
“If you’ve got a good story to tell it’s always a good idea to approach government.”