Limited Liability
Limited liability means a shareholder’s liability is limited to the nominal value of their shares, and their other personal assets are not at risk should the company be unable to pay its debts. This is not so for directors whose duties are set out in the Corporations Act and company constitution (we recommend all companies have one). If a director fails in their duty to the company, they can be personally liable. As a director, there are obligations you need to fulfill.
Director Duties
Under the Corporations Act, there are four general duties of a director:
1: to act with the degree of care and diligence that a reasonable person would expect to show in the role, they need to understand what the company is doing at all times.
2: to act in good faith in the best interests of the company and for a proper purpose.
3: not to improperly use their position to gain advantage for themselves or someone else, or to the detriment of the company;
4: not to improperly use information they gain while being a director to gain advantage for themselves or someone else, or to the detriment of the company.
However, this is not all. The Corporations Act also sets out a number of specific duties, including a duty to ensure that a company:
i) does not trade whilst insolvent or where they suspect that it might be insolvent;
ii) complies with its obligations to the keeping of financial records. See below for further information on records that are to be kept; and
iii) complies with lodging information with ASIC. This is important in the day-to-day running of your company, and we will go into further detail below.
Other specific duties exist; however, they are relevant only for large proprietary and publicly listed companies, so we will not go into the details here. Failure in your duties as a director can mean fines, at the very least, through to personal liability for insolvent trading and criminal sanctions, so it is essential you’re ready and prepared to take on your new role as director.
Record Keeping
Correctly record and explain the company’s transactions, and outline the company’s financial position and performance.
Record keeping goes beyond what is required for tax time. As the director of a company, it’s your responsibility to make sure the company keeps financial records that:
Correctly record and explain the company’s transactions, and
Outline the company’s financial position and performance.
This is critical in being able to determine if your company is solvent or not. Given the heavy price a director can pay for insolvent trading, it is to be avoided, and this is the way to do it. We recommend Xero for financial record keeping; however, there are others. All financial records must be kept for 7 years from the time they are created. This is different to the ATO’s requirement of holding them for 5 years.
In addition to financial records, companies need to keep:
Its constitution (if it has one, remember we recommend that all companies do)
All documents lodged with ASIC
Register of all company shareholders
Register of all company directors and secretaries
Copies of minutes from any general meetings
Copies of minutes from any directors’ meetings
Finally, all public documents issued by the company must contain its ACN or ABN.
Company Formation Documents
On the formation of your company, you will be given the following documents:
Certificate of registration
Constitution
Initial meeting minutes
Public officer consent
Officeholder consents
Shareholder consents
Share certificates
Register of officeholders
Register of shareholders
On the formation of your company, you will be given the following documents:
These documents should be stored in a safe place at the registered office of the company.
A soft copy of the documents should also be retained in the event of an unforeseen occurrence resulting in the destruction of the paper copy.
Lodging Information With ASIC
Annually
Each year, around the anniversary of the registration of your company, ASIC will send an Annual Statement and an invoice. The Annual Statement contains the company’s details recorded in ASIC’s database, and the invoice is the Annual Review fee. When the company is sent these details, the director needs to:
Check the statement to make sure that the details are correct and update them if not. Fines will apply if changes are made more than 28 days late (no exceptions).
Pay the annual review fee by the due date. Fines will apply if the fee is so much as a day late (no exceptions).
Pass a solvency resolution (within two months of the review date) to the effect that the company can pay its debts as and when they fall due, if solvent. If the company is not solvent and passes a negative resolution, it must also notify ASIC within seven days.
When something changes
Ideally, you should not be waiting until you receive the Annual Statement to notify ASIC of a change in your company. In most cases, a change will have happened more than 28 days in the past, which will result in a fine being imposed when the change is lodged.
You need to notify ASIC, within 28 days, each time there has been a change in:
In the registered office or principal place of business address
In a director, secretary or shareholder address
Who is a director or shareholder
Share structure
ASIC Key
On the registration of your company, you will be issued an ASIC Key. The key is a number unique to your company that ensures only authorised people can change the information held about it by ASIC. KEEP THIS NUMBER IN A SAFE PLACE.
While ASIC keys can be reissued, it takes time and effort to make this happen, and it can put you outside the 28-day time limit to notify of a change.
While this may not sound onerous, we recommend that all companies use the services of an ASIC Registered Agent (your accountant will likely provide this service) who can deal with ASIC on their behalf. The fee you pay for this service can save you hassle and unnecessary fines.
Public Officer
It's the role of the public officer to be the company’s representative to the ATO and is also usually a director of the company. The public officer must consent to their appointment in writing. If you use an accountant or solicitor to set up your company, the consent will be part of the document pack they prepare for you.
While a company may use the services of a Registered Tax Agent, it doesn’t negate the need to have a public officer. The public officer is ultimately responsible for keeping tax records, submitting company returns, including tax returns, activity statements (BAS and IAS), FBT returns and other returns. Speak to your accountant in relation to any other lodgements that are required for your type of business.
ABN and TFN
The first thing your company will need to start interacting with the Australian Taxation Office (ATO) is an Australian Business Number (ABN) and Tax File Number (TFN). If you have been trading your business as a sole trader or partnership for some time prior to its registration and have an ABN and TFN already, you will need to get new ones for your company. If you have used an accountant to register your business, this should be included as part of the service in registering your company.
It can take up to 28 days to be issued your ABN and TFN; however, in practice, we often find that the ABN is issued immediately and the TFN within 7 days.
GST Registration
GST registration is required for businesses that turnover more than 75,000 dollars. If you expect your turnover to be more than 75,000 dollars in the first year of operation, your company should register for GST from the start. If you’re not ready to do this, you should monitor your turnover each month to see if you are likely to exceed the threshold.
You have 21 days to register for GST once your turnover reaches the threshold. If you don’t register in time, you may be required to pay GST on sales you made from the date you should have registered, even if you didn’t collect GST on those sales. Interest and other penalties may also apply.
GST is paid annually for businesses that have a turnover of less than 75,000 dollars and voluntarily choose to be registered for GST.
GST is reported on an Annual GST Return. For most other businesses, it is quarterly and reported on a business activity statement (BAS).
PAYG Withholding
Pay as you go (PAYG) withholding is the tax withheld on behalf of company employees. Whether you pay yourself periodic director fees or regular salaries or wages, you will also need to pay PAYG withholding on payments from the company to yourself.
If your PAYG withholding will be or is more than 25,000 dollars, then you will be required to lodge a monthly instalment activity statement (IAS) disclosing total wages or salaries, directors' fees and bonuses in addition to PAYG withholding on those amounts. IAS’s are due for lodgement and payment 21 days after the end of the month to which they relate.
If PAYG withholding is less than 25,000 dollars, then it is reported on the quarterly BAS. BASs are due 8 weeks after the quarter end if you use a tax agent to lodge, otherwise 28 days.
The ATO can recover any unpaid GST and PAYG directly from a director. It is therefore critical that IAS and BAS lodgements are kept up to date and any amount owing is paid in full. In the event that an amount can’t be paid, then a payment arrangement should be arranged.
PAYG Instalments
Pay as you go (PAYG) instalments are a prepayment of company tax. In your first year of trading in your company, you will not have any instalments. You will not be required to pay instalments until after you have lodged your tax return for your first year of profitable trading.
The ATO will calculate the amount of the instalment, and you get to choose if you pay using the:
The instalment amount is the same fixed dollar amount each quarter
Instalment rate, a percentage of the turnover of your business for the quarter
Instalments are included on your quarterly BAS, where the ATO will prefill the instalment amount or instalment rate.
Bank Account
Once your ABN and TFN are issued, you will be able to open a company bank account. You must not continue to use your current bank account that you have been using for business transactions. It is a legal requirement for companies to have a separate bank account. This also greatly assists with record keeping by keeping business and personal expenses separate.
We recommend you make regular transfers of cash as directors' fees or salaries, or wages to your personal account. Don’t get into the habit of paying personal expenses from your company account. This often leads to large and unexpected tax bills.
Super, including yours
The ATO administers super payments. Super is required to be paid on all payments to employees (including yourself) on payments termed ordinary time earnings (OTE). OTE payments include salary and wages, in addition to directors’ fees and some bonus payments. You can access the full list of what is and isn’t OTE here.
Super must be paid by the 28th day after the end of a quarter; otherwise, the company is not able to get the benefit of a tax deduction for the super paid.
The dates for payment are:
28 July
28 October
28 January
28 April
The company must lodge an SGC Statement advising the ATO of the shortfall amount, penalty interest and administration fees for each quarter that superannuation has been paid late. There’s no deduction for the interest and administration fees either.
All superannuation must be paid through a clearing house, no exception. The ATO offers a free clearing house service. You can access this service from the ATO’s website here.
Our recommended option is to enable the super module on Xero. Super amounts are calculated automatically from your payroll data. When you run the super payment workflow from Xero and approve super for payment, it is directly debited from the company bank account and paid to the clearing house for disbursement to the super fund or funds.
The process of using a clearing house takes approximately seven business days, so payments need to be processed well before the 28th day deadline, say around the 18th day, to guarantee your tax deduction.
We acknowledge there may be an additional cost to using Xero for managing super; however, our experience is that clients find super compliance much easier than using the ATO’s free service.
Finally, as with PAYG withholding and GST, a director can be personally liable for any unpaid super.
Income Tax
A company must lodge its own tax return as it is a separate legal entity from that of its owner. Company tax returns are due on either 28 February, 31 March or 15 May. The company’s tax agent will be able to advise on the due date for the return.
Unlike individuals, companies do not receive a notice of assessment. The tax is due for payment on the date the tax return is due. The ATO does not send notices for or reminders for the payment of tax.
For the 2020–21 financial year, the tax rate for trading companies with an aggregated turnover of less than 50 million dollars is 26 per cent. The rate is reducing to 25 per cent for the 2021–22 financial year and future years.
Workers’ Comp Insurance
It’s compulsory for any business with employees to have workers’ comp insurance; this includes any company that employs directors or shareholders. You will therefore need to take out workers’ comp insurance for yourself, even if you have no other employees.
In NSW, workers’ comp insurance can only be taken out through icare, a scheme administered by the NSW state government. The equivalent scheme in Victoria is WorkSafe Victoria, and in Queensland is WorkSafe. For other states and territories, speak to your accountant for the equivalent body.
Other Insurances
If you’ve traded your business as a sole trader or a partnership, you’ll need to transfer any insurance that you had in place to your new company. If your business is completely new, you will need to assess what insurance you need, including professional indemnity and public liability.
For this, we recommend you speak to your business insurance broker to ensure you get the policies you need with an appropriate level of cover.
Third Party Employees
When you register your company, you may or may not have third-party employees. If you do, you will need to ensure that you meet your legal obligations set out in any awards, including pay rates and entitlements.
For a full list of awards and details thereon, go to the Fair Work Commission’s website. You will also find information and resources in relation to resolving disputes at work and termination of employment.
If you do have employees, we recommend that you speak to your lawyer and have an employment contract drawn up. They will also advise you of any policies that you need to have documented and in place before you take on your first employee.
Business Partners
You may have a shareholder in your company that is not part of your immediate family. They may be a relative or someone totally unrelated to you. The prospect of going into business with someone else is exciting; you get to take your business further, faster, with the help of another person's sweat equity. At times, having a business partner is pretty similar to having a life partner. It is not always smooth sailing, and disagreements happen.
We therefore recommend that you put a shareholders' agreement in place to protect you in case a dispute eventuates.
A shareholder agreement will set out what you agree to upfront as to how your company should be run, how to approach dispute resolution and how to manage situations of planned or unplanned exits of shareholders to ensure a smooth transition.
Privacy Policy
Even for smaller businesses that aren’t required to comply with the Australian Privacy Principles (APP’s), it is best practice to be familiar with the APP’s and to have a privacy policy in place. A privacy policy documents how your business collects and processes personal information.
If you have customers or clients in Europe, you will need to comply with the European Union’s GDPR legislation (there are no exceptions for size or type of business), and you must have a GDPR Privacy Policy in place.
Most businesses choose to disclose their privacy policies on their website. Your lawyer will be able to assist with the drafting of a privacy policy or you may choose a DIY option from someone like our friends at Easy Legal Templates.
Trademark
A trademark provides you with the exclusive right to use, license and sell your company name. Just because you were successful in getting a company name, business name, or domain name registered does not mean you can use it. If another business has a similar name, it is likely they will enforce their trade, requesting that you cease and desist from using their name.
A lot of time and money go into company websites, domain names, business cards, stationery, signage and marketing. Before you commit to the financial outlay on your brand, it is worth spending the money to protect it.
Funding and Cashflow
With almost 50 per cent of small businesses under financial pressure within the first year of starting business, and this percentage increasing for years 1–3, the survival of your business depends on a steady supply of funding through the start-up phase before it must transition to a solid cash flow as the business gets established.
We cannot emphasise this point enough. Further to this horrifying statistic, more than 60 per cent of small businesses cease operating within 3 years, and 90 per cent of businesses fail due to poor cash flow.
Before giving up your well-paying job, have your funding plan in place. It may take some time before your income returns to what it was when you were employed.
You need to consider not only the costs of getting your business up and running but also your personal living expenses and financial commitments.
We recommend the Profit First cash flow management system when cash starts coming in to manage business expenses and taxes, ensuring there is profit left over and that you put money aside for unforeseen circumstances. We recommend that all businesses have at least enough cash to cover 3 months of operating expenses if they were to stop earning income suddenly.