When opting to organize your business as a Pty Ltd Company, it’s crucial to have a clear understanding of the specific protections that come with operating under such a company structure and the limitations it may have.
An incorporated company, often denoted by the addition of Pty Ltd after the company name, is among the structures you might contemplate for your new business.
A company is a distinct legal entity and is formally established under the Corporations Act 2001, with registration carried out through the Australian Securities and Investment Commission (ASIC).
Given that a company is a separate legal entity recognized by law, in contrast to sole traders and partnerships, which lack this legal separation, there is a common misconception that adopting a Pty Ltd company structure provides comprehensive protection against all forms of liability.
Travis Preece, SBDC Dispute Resolution Case Manager, cautions against assuming that having a company structure safeguards you from all legal and financial liabilities. While it is accurate that a company can mitigate certain liabilities, such as personal responsibility for company debts, company directors remain subject to obligations outlined in the Corporations Act.
Travis emphasizes the importance of carefully evaluating the most suitable business structure for your specific circumstances, as recommended by your accountant, rather than opting for company registration solely based on the belief that it ensures protection in all situations.
The reality is that each organizational structure comes with its own set of advantages and disadvantages, and the associated costs can vary. Here are five aspects for which you may still retain liability when operating a company.
Employer obligations
If your company has employees, you are likely to have various employer obligations, which include:
- Adhering to equal opportunity laws.
- Providing pay and employment conditions, including leave entitlements, in accordance with regulations set by the Fair Work Ombudsman.
- Reporting employee earnings to the Australian Taxation Office (ATO), collecting withholding (PAYG) taxes, and contributing to employee superannuation funds.
- Maintaining employment records for a period of seven years.
Additionally, depending on the size of your company, you may be obligated to pay payroll tax.
Workplace Health and Safety
As a company director, it is imperative to ensure a safe workplace and prioritize the health and safety of both employees and customers. Failure to meet Work Health and Safety (WHS) obligations can result in penalties.
Under the new work health and safety laws in WA, a company can be deemed a ‘person conducting a business or undertaking’ (PCBU) and is bestowed with a primary duty of care to guarantee the health and safety of workers and others affected by the work activities. Additionally, officers can be held accountable for workplace health and safety deficiencies in specific circumstances.
It is mandatory to have workers’ compensation insurance for your staff, including contractors and family members working in your business. Failure to comply with this obligation may incur penalties. Moreover, a documented injury management system outlining the steps to be followed in case of a workplace injury is required.
As part of the new WHS laws, reporting requirements for ‘notifiable incidents’ include serious illness, injury, or death, as well as dangerous incidents occurring during business activities. Familiarizing yourself with your obligations is crucial, and resources are available on the WorkCover WA and Department of Mines, Industry Regulation, and Safety websites.
Director ID
All directors of Australian companies must undergo registration for a director ID, a 15-digit identification number unique to each individual. This identifier remains constant even in the event of a name change or transitioning to a different company.
Directors are required to inform the designated record-holder within their company, such as the company secretary, another director, a contact person, or an authorized agent, about their director ID. Furthermore, directors must provide their director ID to the pertinent record-keepers in any future companies where they assume a directorial role.
The implementation of this distinctive identification system aims to counteract illicit activities such as phoenixing, wherein a new company is established to perpetuate the business of a deliberately liquidated company, evading responsibilities such as settling debts, including taxes, creditors, and employee entitlements.
Personal guarantees
Numerous directors may opt to offer personal guarantees or director’s guarantees when leasing a property or seeking a bank loan. Through these guarantees, directors consent to assume personal liability for the debts of a company. A director’s guarantee can supersede the protection that a company typically offers against personal liability.
Trading insolvent
According to ASIC, a company is deemed insolvent when it is unable to meet its debts as they fall due. Allowing your company to continue trading while insolvent can lead to various consequences, including civil penalties, compensation proceedings, and potential criminal charges.
Travis emphasizes the importance of company owners being vigilant about their business’s financial standing. He notes, “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 recommends maintaining thorough financial records and being attentive to signs that your business may be facing difficulties to avoid trading while insolvent. If you sense financial trouble, the SBDC’s free business advisory service is available to offer guidance and connect you with contacts and services that may assist you.
