When it comes to registering a company, it can be quite a complicated and overwhelming task, particularly if you don’t know whether your company will be limited by shares or limited by guarantee. It is important to understand the differences between the two, including their advantages and disadvantages, before you decide on which structure will suit your business.
However, if you are ready to register your company, you can register your company with our 100% online and easy to use company registration service. We also have a range of bundles and additional services to help protect your new company from the get go.
Are There Any Differences?
For information about the types of business structures you can choose from, check out our previous guide on How to Decide Your Business Structure.
In Australia the majority of companies, regardless of whether they are commercial or charitable in nature, are limited either by shares or by guarantee. But what does this mean?
What Is A Company Limited By Shares?
The most popular form of company is a company limited by shares. This is because it is available to all business companies, and offers limited liability. A company limited by shares can be a private or public company. An identifiable trait of companies limited by shares is the word “limited”, which is used in their names to warn creditors the company has limited liability. Basically, this class is described as a company formed on the principle of having the liability of its members limited to the price to be paid for those shares. In short, the shareholder’s liability is limited by the value of their shares and the amount they have paid or due to pay. So the individual puts money into the company, and in return, the company gives him or her a percentage of ownership, which will be in the form of shares. Normally, an individual share can be priced at any value.
Moreover, the rights and obligations of individuals can be in proportion with an individual’s investment. For shareholders, they have limited liability, and an obligation to pay the company for the shares they have taken in it. In contrast, the directors are not liable for the company’s debts. In fact, they only become personally liable if they breach their directors’ duties or legal obligations, or participate in activities that cause the company to suffer loss. For example, wrongful or fraudulent trading. An advantage of choosing a limited liability company is if the company has financial difficulties, the personal assets of members are not at risk, and its debts do not become the debts of its shareholders.
What Is A Company Limited By Guarantee?
Unlike a company limited by shares, a company limited by guarantee has members and not shareholders. This type of company limits the liability of the members to a fixed amount, which is the amount of the guarantee fixed by the company’s constitution. The guarantee is usually called when the company is wound up. If this occurs and the company does not have sufficient assets, each present member has an obligation to contribute an amount. If the present members cannot satisfy the guarantee, then past members (excluding past members that ceased to be members) must contribute.
Ultimately, a company limited by guarantee is mainly for not-for-profit companies. It is not a popular choice to provide a guarantee in the company’s constitution because if capital needs change, members cannot increase or decrease the guarantee, nor can it be changed. Another reason is companies limited by guarantee do not have share capital, and they cannot be formed as proprietary companies.
However, if you later decide you want to convert your company from one limited by guarantee into a company limited by shares, it is possible to do so if you comply with the requirements in ss 163 and 164 of the Corporations Act 2001 (Cth). But this no easy task.
If you are interested in starting a not-for-profit organisation, check out How To Start A Not-For-Profit Organisation.
If you have any questions or need help with setting up a company, you can contact one of our business lawyers.
Overall, it is extremely important you understand the two categories of company structures before you register your company. If you make a decision without forethought, it can negatively impact how your business operates in future.
Unsure where to start? Contact a LawPath consultant on 1800LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 700+ expert lawyers or to get answers to your legal questions.