Ted’s Corporate Services is the business run by Ted. He is a sole trader. He wants to convert his business from sole trader to company to take the benefit of limited liability and other benefits as well. He wants advice for forming a company which is the most appropriate for him. Proprietary company unlimited by shares capital, public company unlimited by shares capital, public company limited by guarantee and public company with no liability are the companies which are not appropriate for Ted. As, the companies have unlimited liabilities which Ted do not want to establish and also no liability company is done for mining purpose only. Whereby, proprietary company limited by shares and public company limited by shares are the companies which can be set up by Ted. If company can easily get large capital, have good ability to borrow money from public, possibly list on stock exchange then Ted can form the public company limited by shares. Whereas, small business like Ted are unlikely to meet these abilities and want to convert to company. So, the most appropriate type of company Ted could form is proprietary company limited by shares. This can also be converted to public company limited by shares in the future if Ted wants to expand his company.
Company is defined as a legal entity which is allowed by legislation and permits a group of people to apply to the government for an independent organization as shareholders who can then target on pursuing objectives, and empowered with legal rights (Modern Company Law 1997). Advantages of company are it is a separate legal entity; it can sue and can be sued by others, protection of assets and so on whereas complex legal formalities, more paperwork, costly to run and establish are some of the disadvantages of company (The Advice Spot 2010). The purpose of writing this report is to advice Ted about forming the company. Also, advising him about the most appropriate type of company which he can form.
2. Process of registering a company
Certain requirements should be followed to register a company. First of all, a person must lodge an application with Australian Securities and Investment Commission (ASIC) using the prescribed form: s117 Corporation Act (CA) 2001. Section 117(2) (CA) states that the application must state specified information such as the type of company, the company’s name, names and addresses of persons consenting to be members, the address of the company and so on. (Lipton, Herzberg 2001) If the company wants to follow its own time table then it should also be mentioned by the public company in the application. The number of shares, class of shares, amount the member is ready to pay, and amount paid fully or partly should all be mentioned by the company limited by shares or unlimited company on the application. Also, if the public company wants to have a constitution on the registration, then a copy of the constitution must be lodged but it’s compulsory for the public company with no liability. The application must be in the advised form. Also, the company must have the consents and agreements. (Lipton, Herzberg 2001)
After, the requirements are done successfully, ASIC will issue a certificate of registration and an Australian company number and it also will have the power according to S124 (1) (CA). S119 (CA) states that company comes into existence on the day it is registered with the specific name in its certificate of registration (Lipton, Herzberg 2001). This means that the company is a separate legal entity now. It is separate from people who run and manage the company. 3. Could Ted perform the process of registering the company? Anyone who is above 18 years old can form the company. Additionally, the person should not have any cases of bankrupts and also any offences related to misconduct or fraudulent activities relating to company. (Finance 2007) This shows that Ted can perform the process of registering the company. Also, it’s better for Ted to consult a lawyer if he has committed a breach of corporate law before setting up the company, for instance, as a director.
4. Advantages and Disadvantages of each type of company.
The company is divided into two parts, i.e. Proprietary company and Public company which is discussed below.
4.1 Proprietary Company
Proprietary company is a company where the fund is raised by issuing shares to known people such as friends, employees and relatives. In this type of company, there should be at least one director who is resident of Australia, not more than 50 non-employees shareholders and minimum 1 member: s114 (CA). Also, S148 (CA) states that company should have the abbreviation of either “Proprietary “or “Pty” to be recognized as proprietary company. (Lipton, Herzberg, Welsh 2000) Proprietary company is divided into two parts which have been discussed below with its advantages and disadvantages.
4.1.1 Company limited by shares
A company limited by shares is a type of proprietary company where shareholder only pays amount unpaid on shares when company makes a call, i.e. they have fully and partly paid shareholders. Advantage of this company is that the shareholders are provided more protection when the case of liability rises. Whereas, more paper work, complex legal formalities, high cost to establish are some of its disadvantages. (Finance 2007)
4.1.2 Company unlimited by shares capital
A company unlimited by share capital is the company where the shareholders are fully responsible for all the debts of the company. Advantage of this company is that it has separate legal entity, can sue and be sued and so on whereas unlimited liability is the major disadvantage. (Lipton, Herzberg, Welsh 2010)
4.2 Public Company
Public company is the company where the fund is raised by issuing shares to general public by using disclosure document prospectus. In this type of company, there should be at least 3 directors where minimum 2 should be the resident of Australia and also can have infinite number of shareholders and members. Also, S148 (5) (CA) states that public company has no distinguishing name. (Lipton, Herzberg 2000) Public company is divided into four parts which have been discussed below with its advantages and disadvantages.
4.2.1 Company limited by shares
Section 9 (CA) states that a company limited by shares is the company where shareholder only pays the amount unpaid on shares when company makes a call. There are two types of members who have paid the amount of shares either partly or fully. Under s515 (CA) a member is liable to contribute to the company’s debts and liabilities and the costs, charges and expenses of the winding up. Advantage of company limited by shares is that the creditor does not need to sell the personal property to pay the debt of the company. Whereas, the disadvantage is that it has more legal formalities, more paper work and so on similar to other companies. (Lipton, Herzberg 2001)
4.2.2 Company unlimited by shares capital
Company unlimited by shares capital is the type of the company where the shareholders are fully responsible to pay for all debts of company. Recognition as a separate legal entity, large capital, highly professional persons engaged in the company is some of the benefits of company unlimited by shares capital whereas unlimited liability is one of the major disadvantages. (Redmond 2000)
4.2.3 Company limited by guarantee
A company limited by guarantee is a company whose members have their liability limited to the amounts that they have undertaken to contribute to the property of the company in the event of it being wound up. Guarantee companies retain the advantages of being legal entities with the liability of the members limited to the amount of guarantee. Also under section 115 (CA), only a company limited by guarantee may obtain a licence to dispense with the word “Limited” at the end of its name. Whereas, the drawback of this type of companies is that it does not raise initial or working capital from its members. (Redmond 2000)
4.2.4 No liability Company
A no liability company is a company where shareholders are not bound to pay the amount owed to company when company makes a call. Advantage of being this company is that there will be no liability for the shareholders, whereas the drawback of this company is that only mining can be done if no liability company is formed. (Redmond 2000)
5. What might be the most appropriate company to form, and can this be changed at a later point of time?
5.1 Most appropriate type of company.
5.1.1 Proprietary Company limited by shares
This company is one of the appropriate companies for Ted. The shareholders are only liable to pay the debt of the company when company makes a call and also shareholders are more protected. Also, proprietary company limited by shares is good for the small family business (Finance 2007).
5.1.2 Proprietary Company unlimited with share capital
Proprietary company unlimited with share capital is not appropriate company for Ted. As, in this company shareholders are fully responsible to pay the debt. Whereby, Ted wanted to convert to company because of limited liability.
5.1.3 Public Company limited by shares
It is one of the companies which attract more number of shareholders. For Ted’s business activity, company limited by shares is also one of the appropriate companies as the shareholders will only be liable to pay for the amount unpaid on shares when the company makes a call.
5.1.4 Public Company unlimited by shares capital
Ted wants to convert his sole trader business to company because of the limited liability. But company unlimited by shares capital has unlimited liabilities. Also, these sorts of company are established by professionals. So, it does not suit for the Ted’s business.
5.1.5 Public Company limited by guarantee
A company limited by guarantee is convenient for clubs, charities and other non-trading companies whose capital is raised by members’ fees, donations, subscriptions and social activities (Lipton, Herzberg, Welsh 2010). Whereas, Ted Company is a trading companies and profit oriented, which means choosing company limited by guarantee is the wrong decision to be taken.
5.1.6 Public Company with no liability
Section112 (3) (CA) states that a no liability company is prohibited from engaging in activities that are outside its mining purposes objectives (Lipton, Herzberg, Welsh 2010). This reflects that no liability company is not appropriate type of company to be formed by Ted.
5.2 Can certain company be changed at a later point of time?
Proprietary company limited by shares and Public Company limited by shares are both appropriate for the Ted’s business. In Future, if Ted wants to convert from proprietary to public or either from public to proprietary, he can convert it.
5.2.1 Proprietary to Public Company
Corporation act allows proprietary company limited by shares to convert to public company limited by shares by passing a special resolution to this effect and by lodging an application with ASIC: s162 (CA) and s163 (CA). Also, the company should omit the word “Proprietary” from the company. Then the company is issued with an amended certificate of registration and becomes a public company. Under s165(CA), if the company has contravened s113 (CA), then ASIC may direct a proprietary company to change to public company. (Lipton, Herzberg, Welsh 2010)
5.2.2 Public to Proprietary Company
Corporation act allows public company to convert to proprietary company by passing a special resolution to this effect and by lodging an application with ASIC: s162 (CA) and s163 (CA). The special resolution must alter the company name by including “Proprietary” or “Pty”. Also, S113 (CA) states that the proprietary companies to have share capital and a maximum number of 50 shareholder members. (Lipton, Herzberg, Welsh 2010)
6. On-going requirements
If Ted were to set up a proprietary or public company, several more steps would have to be taken from the time the company is officially registered. Firstly, under s286 (CA), a detailed financial record should be kept by Ted. Also, these records should be available for the next seven years. A minute book must be there under section 251A (CA). Whereby, the minute book consists of the records and resolution of meetings which should be signed by the director and chairperson of the company. Also, minute should include declaration form which is optional for proprietary and compulsory for public company. Additionally, under s168 (CA) register have to be maintained for members, option holders and debenture holders. As, Ted wants to increase his capital, he should give notice to ASIC of the shares he wants to issue, amounts paid and unpaid on the shares. Likewise, within two months, Ted need to issue share certificates to the holders. Appointing a public tax officer and an appropriate insurance would be advised for Ted. (Lipton, Herzberg, Welsh 2010)
7. Liable for the actions
After setting up the company, the shareholders, members are not liable for the actions undertaken by the company. The precedent case Salomon v Salomon & Co Ltd (1897) Ac 22, the court decided that Salomon was not held liable because the company and he himself are two different business entity doing business together. However, the court will lift the veil of incorporation if the company is used to perpetuate a fraud, if company is used to avoid an existing legal obligation, situation of agency and so on. Whereby, veil of incorporation is defined as barrier which separates the company on one hand and the members, promoters and controllers on the other. (Lipton, Herzberg, Welsh 2000)
In the case Re Darby (1911) 1 KB 95, the court decided that Darby was liable for his actions and so the court lifted the veil of incorporation. Also, in the case Gilford Motors Co Ltd v Home (1933) Ch 935, the court held that the Gilford was liable as the company was created for fraudulent purposes. (Lipton, Herzberg, Welsh 2000) Under the case Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 2 QB 480, the court decided that there must be a representation that the agent has the authority, the 3rd party must be well known that the contract is done on good faith and the contract must have power under memo & articles to make contract. Or else, the person will be fully liable for his/ her activities. (Commonwealth Consolidated Act 2001)
8. Restrictions on the sale of shares
Usually shares are easily transferable. Shareholders have right to buy and sell the shares. However, the company also can restrict the shareholders to transfer the shares. S1072 G (CA) states that the director of proprietary companies have right to refuse to transfer shares. Also, S1072 F (CA) states that the public company have limited right to restrict transfer of share. (Commonwealth Consolidated Acts 2001) This shows that Ted can restrict on the sale of shares by following the S1072 G (CA) or S1072 F (CA). He might do this to be the majority shareholder of the company. He can maintain the less chances of takeover by the third party. Also, if he restricts the transfer of shares then the business would remain in the family’s hand only.
9. Recommendation and Conclusion
Type of business run, individual circumstances, the level of control and financial situation are the things which should be considered before choosing which type of company to set up. For example, if the company can easily get a large capital, have easy transfer of share ownership, have good ability to borrow money from public and possibly list on the stock exchange, then choosing public company with limited shares won’t be the wrong decision for Ted. (Finance 2007) However, many small businesses like Ted’s are unlikely to require these abilities and are more willing to set up a company structure for family tax planning. Likewise, company also provides more benefits than sole trader, i.e. limited liability, recognition, enough flexibility and so on. This shows that the appropriate form of company would be proprietary company limited by shares for Ted. To conclude, a proprietary limited company is the most common type of company set up by small businesses. So, Ted can choose proprietary company with limited shares. Also, in future if he wants to expand his business, he can go through some legal formalities and can convert to public company limited by shares.
List of References
Adams, M, 2002, Essential Corporate Law, 1st edn, London
Commonwealth Consolidated Act, 2001, Corporation Act 2001, viewed 30 April 2012, Davies, P 1997, Gower’s Principles of Modern Company Law, 6th edn, London Finance, 2007, Proprietary limited company, viewed 30 April 2012, Lipton, P, Herzberg, A, 2000, Understanding Company Law, 10th edn, Sydney, New South Wales Lipton, P, Herzberg, A, 2001, Understanding Company Law, 9th edn, Sydney, New South Wales Lipton, P, Herzberg, A, Welsh, M, 2010,
Understanding Company Law, 15th edn, Sydney, New South Wales