One of the benefits of using the company (or “corporate”) business structure for your business is that the law gives companies limited liability, which means that in ordinary situations the maximum amount a company will be liable for is the total of the fully paid-up value of its issued shares. For example, if a company has issued 500 $2 shares, then its maximum liability is $1,000.
The idea behind limited liability is that conducting a business is inherently a risky enterprise, and, therefore, limited liability confers on the owners of the company (its shareholders) and its managers (the directors) immunity from personal attack on their assets in the event that, through bad luck, the company fails and goes into liquidation. The details of each company’s share capital is available for public inspection in the register of companies. If you are nervous about doing business with a limited liability company, you can ask for guarantees or some other form of security.
Limited liability is not absolute, however, and it is important for people who own shares in companies or who are directors of companies to understand that, in certain situations, the courts will lower the drawbridge and allow creditors and other parties who have suffered losses to sue a company’s directors. One of the most commonly used “doors” to make a director personally liable in such a situation is through a breach of directors’ duties. One of the most common examples of such a breach is allowing the company to trade while insolvent.
The area of directors’ duties is a complex area of law. If you are interested in learning more about directors’ duties in Australia, I recommend that you start with ASIC’s website and then investigate other online resources such as the website of the Australian Institute of Company Directors. What you must NOT do, if you are a company director, is make decisions that break the law. If you don’t understand your responsibilities, then get advice.
If you require advice about the application of the Corporations Act of Australia, contact us at Irving Law on (08) 6460-5460 or, if you are calling internationally +618-6460-5460.
[The author of this post is James Irving, lawyer. The post reflects the law in Australia at the time of writing, and is not intended as legal advice for any particular person.]