There are many different types of structures and entities articulated in the Corporations Act 2001 (Cth). While it can get quite confusing, it is also essential that when you adopt a particular structure or establish an entity, you are confident that it is the correct choice. In this article, we explain what a controlled entity is and how it can assist your company and business goals.
What is an ‘entity’?
Under section 9 of the Corporations Act 2001 (Cth), an entity can be a body corporate, partnership, unincorporated body, an individual or trustee(s).
So, what is a ‘controlled entity’?
Under section 50AA of the Corporations Act 2001 (Cth), a ‘controlled entity’ is an entity that has ‘the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.’ It is a much broader concept to the holding company and subsidiary company relationship. It is also distinct from an associated entity because, in that type of relationship, both entities (principal and associate) have some influence over each other (s 50AAA).
How do you determine if an entity has this ‘capacity’?
The Corporations Act 2001 (Cth) says that when determining if A has the capacity (stated above) over B, there are two factors to consider:
- Can A exert a practical influence over B?*
- Are there any practices or pattern of behaviour affecting B’s financial or operating policies?**
*The focus is on what happens in practice as opposed to A’s ability to enforce rights against B.
**The pattern of behaviour includes circumstances where there has been a ‘breach of an agreement or breach of trust’ (s 50AA(2)(b)).
When is an entity not a controlled one?
There are two circumstances where A does not have control over B:
Joint capacity
A does not have control over B merely because A and C (third party) ‘jointly have the capacity to determine the outcome of decisions’ about B’s financial and operating policies (s 50AA(3)).
Obligation to control
A does not have control over B if:
- A ‘has the capacity to influence decisions’ about B’s financial and operating policies; and
- A is ‘under a legal obligation to exercise that capacity for the benefit of someone other than A’s members (s 50AA(4)).
In all of these situations, B will not be a ‘controlled entity’.
What should you consider before establishing a controlled entity?
Purpose
Controlled entities are usually established to further the goals of another entity. Many universities have controlled entities that focus on improving university facilities, research and education. Before setting up one, think about why you are creating one and what purpose it will serve in furthering your business goals.
Financial risks and liabilities
You should consider the costs required to establish and operate a controlled entity. It is also essential to think about whether it must pay taxes or other fees, and who will be in charge of managing this.
Regulations
You shoudl consider whether the law says that your controlled entity must satisfy specific requirements. You should also think about whether these requirements will impact on the entity’s activities and operations.
Compliance
You must mention your controlled entity in your company’s constitution or a policy. You should articulate:
- Who is the controlled entity?
- Why was it created?
- How will you ensure that it does not do anything beyond what is expected?
Note, these considerations should be stated in the controlled entities policy, constitution or other relevant documents. The document should also outline the procedures for establishing a controlled entity.
Need further assistance?
Establishing a controlled entity can be appropriate in some circumstances and not so much in others. As a result, we recommend that you seek assistance from our lawyers to ensure that creating one is right for your company or business.
