Characteristics of Companies
Types of Companies
Several types of companies can be registered under the Corporations Act 2001, but the focus in this Unit will be on 'Limited Companies'. Limited Companies are further divided into Public and Proprietary companies. Limited companies are ones where the owners (shareholders) have limited liability. This means the extent of the individual shareholder's liability in repaying business debts is proportionate to the money they have contributed to the business in the form of share capital. For example, if a shareholder owns 1000 shares at $2 each, the extent of liability they incur is $2000 - the value of their contributed share capital in the company.
The shareholder's personal assets are NOT at risk, they are known to have limited liability. In contrast to a partnership, partners are personally liable for business debts. If one or more partners are incapable of repaying the business debts, the remaining partners must settle the business debts from their personal assets. Also in the case of sole traders, both sole traders and partners in a partnership are personally liable for the business debts and their personal assets are at risk to settle the debts. They are known to have Unlimited Liability.
A Limited Company is required to have the word 'Limited' or 'Ltd' at the end of its name. The features of a Proprietary and Public Company are compared below in the table.
Features of Proprietary Companies
Proprietary companies are not allowed to issue a Prospectus to the general public inviting them to purchase shares or debentures in the business. Capital can be raised internally from existing shareholders and employees. The invitation to buy and sell shares are done privately as Proprietary companies are NOT listed on the stock exchange.
The capital raising abilities of Proprietary companies are limited compared to a Public company as they require a minimum of 1 shareholder but have a maximum number of 50 shareholders.
This structure requires a minimum of 1 company director.
This business structure provides the benefit of 1) separate legal entity and limited liability, while also 2) being run by a few people (which is a benefit for sole traders and partnerships). The level of control is not diluted.
Proprietary companies must have the name 'Pty Ltd' at the end of their business name. This stands for 'Proprietary Limited'.
Hosting an Annual General Meeting (AGM) is not necessary if all the shareholders agree. - Proprietary companies are either classified as 'small' or 'large', the condition of which are discussed below.
Large Proprietary companies have to provide audited financial statements to the Australia Securities and Investment Commission (ASIC). Small Proprietary companies are not required to submit their audited financial statements unless requested by ASIC or a shareholder who holds 5% of shares.
Small Vs Large Proprietary Companies
A proprietary company is classified as 'Small' if it satisfies 2 of the 3 characteristics:
The gross revenue for the financial year is LESS than $25 million.
The gross value of assets owned by the entity at the end of the financial year is LESS than &12.5 million.
The company has LESS than 50 employees. If 2 of the 3 characteristics are not satisfied, then the proprietary company is classified as 'Large'.
Public companies are permitted to issue a Prospectus, inviting the general public to purchase shares or debentures in the company. The buy and sell of shares occurs on the Securities Exchange (stock market).
This business structure has unlimited capital raising capabilities, with the minimum number of shareholders being 1, with no maximum number of shareholders.
This structure requires a minimum of 3 directors, 2 of which must reside in Australia.
Public companies must have the name 'Ltd' at the name of the business name. This stands for 'Limited'.
The Listing Rules of the Australian Securities Exchange (ASX) must be abided by in order for the shares to be continually listed on the site.
Audited Financial Statements must be lodged with the Australian Securities Exchange (ASX), Australian Securities and Investment Commission (ASIC), and also sent to the company's shareholders.
An Annual General Meeting (AGM) must be held.