Australian Limited Companies

"Limited" in a company's name is short for "limited liability" and it means that the liability of a shareholder for the debts of a company is limited to the outstanding amount that the shareholder has agreed to pay for its shares. In most cases, this will mean that no more is payable by a shareholder if the company becomes insolvent or bankrupt. If the shares are "partly paid" then the shareholder's liability is limited to the amount which remains unpaid on the shares.

Limited liability companies are a common business structure in Australia. According to ASIC (the Australian Securities and Investments Commission, the national corporate regulator) there are over 1.7 million Australian companies registered as at October 2009. It is quick and easy to set up a new Australian company.

Types of limited company

There are two main types of limited liability company in Australia: private companies (their corporate names will end with "Proprietary Limited" or "Pty Ltd") and public companies (their names will end with just "Limited"). All stock exchange listed companies are public companies. However, the vast majority of registered companies (by number) are private companies. Public companies give the same advantages of incorporation as private companies, but have higher compliance obligations such as a requirement to publicly file audited accounts each year.

Another type of public company is a company limited by guarantee. This is a company where the liability of a member (shareholder) on a winding up of the company is limited to a specific "guaranteed" amount per member, instead of the amount of unpaid capital on a share. The guarantee amount is usually a small nominal amount, such as $5 per member. Companies limited by guarantee are sometimes used for not-for-profit enterprises or clubs, because they do not have shares. Members can join simply by being approved by the Directors, which is an easier process than buying and selling shares.

A rarer type of company is an unlimited company, where the liability of a shareholder for the company's debts on a winding up is not limited. The name of an unlimited company will end in just "Proprietary" or "Pty" without the "Limited".

Limited companies are not like the US style "LLC", as an Australian limited company is a separate legal entity and cannot be treated like a partnership or other unincorporated entity. The company will pay Australian tax on its taxable earnings (if any) before passing dividends to its shareholders.

New company formation

Limited companies can be formed very quickly, either directly with ASIC or by using an online incorporation agent. The ASIC filing fee is $426, but you have to file paper forms if you do it yourself. Online agents can automate the incorporation process for you and get a new company formed in just minutes, usually for under $500 including the ASIC fee.

To set up a new Australian company, you need:

- a company name.
- 1 shareholder minimum (for either a private or a public company).
- 1 director minimum for a private company, or 3 minimum for a public company. Directors have to be individuals (not companies), and aged 18 years old or above.
- At least 1 director has to be an Australian resident.
- A public company needs a company secretary, but this is optional for a private company.
- A registered office in Australia. This can be the office of the company's accountant or lawyer.

Why incorporate?

There are a number of benefits to running your business as a limited company:

  • Limit liability: if the business fails, your liability as a shareholder can be limited to your original investment.
  • Raise capital: as an individual you can't easily take on investors and split ownership in your business. A company can issue more shares to new investors or business partners.
  • Company tax rate: the 30% company income tax rate is lower than the top personal tax rate in Australia. The Australian government also proposes to reduce the corporate tax rate to 29% over the next few years. There are possible tax risks though, such as losses being "trapped" in the company. Talk to your tax adviser to see if incorporation makes sense for your business.
  • Easier to sell: selling the shares in a company is an easy way to sell the whole business, including its employees, contracts, and all liabilities (unless you have given personal guarantees). Selling an unincorporated business is harder, and can require third party consents (for example, to assign contracts).