Is there really any difference between a company and an incorporated business? Doesn’t incorporation mean the same thing as registration? Well, the names ‘incorporated business’ and ‘company’ can be used interchangeably. However, not every company will be an incorporated business. For example, a sole proprietorship is a company, but it is not an incorporated business or incorporated company. This is because incorporation refers to the actual process that a company undergoes in order to become a separate legal entity.
What is an Incorporated Business?
Well, incorporation refers to the process a company undergoes in order to become a separate legal entity. In other words, when you incorporate a business you are actually transforming your business into a separate legal entity that stands separate from its business owners.
It is important to note that this incorporation process is quite different from registering a business name or Australian Business Number (ABN). However, an incorporated business or incorporation refers to the process of changing the legal status of your business or company.
What is a ‘Separate Legal Entity‘?
According to the Corporations Act 2001 (Cth), a separate legal entity can:
- Perform all the functions of a body corporate,
- Be sued and sue others,
- Have perpetual succession,
- Acquire, hold and sell property.
In other words, when a company becomes incorporated and thus becomes a separate legal entity, it has the same rights as a natural person. Therefore, the owners of the company are not liable for the debts their incorporated business accrues. This is what initially attracts many Australian business owners to incorporate their already existing companies.
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Benefits of having an Incorporated Business
Incorporated businesses are able to enjoy a range of benefits. The most attractive benefits are:
- Limited liability enjoyed by directors/owners,
- Fostering business growth.
However, just because an incorporated business stands on its own and has its own legal identity, does not mean that its directors or owners have no liability or responsibility for their companies actions. The company’s owner will become the company director(s). Now, all directors must abide by a range of legal duties and obligations. Directors duties and obligations are in the Corporations Act 2001 (Cth). Consequently, if directors are in breach of their duties and obligations, they can become personally liable for the companies actions. Therefore, incorporation does not extinguish the owners/directors liability. However, it does limit it significantly.
The Incorporation Process
A business will become an incorporated business when the company’s owners file for incorporation. Now, this process is a bit more complex than registering your business name or ABN. There are a range of legal compliances and necessities that need to be abided by in order to successfully and legally incorporate your business. Below, we have outlined a few aspects you should consider before registering/incorporating your business:
- Decide if an incorporated business structure is right for you,
- Figure out your internal governance, i.e. will you draft a constitution or use the Replaceable Rules in the Corporations Act 2001 (Cth)?
- Understand your obligations as a company officeholder/director,
- Obtain consent from your company secretary and/or other members,
- Ensure that all your legal documentation and compliance documents are in order and ready to be set off to ASIC.
These steps are not exhaustive. Incorporation can be a lengthy process, that is why it is always best to speak to a business lawyer.
Key Takeaways
An incorporated company is a regular company that has undergone the process of incorporation in order to become a separate legal entity. There are many benefits to incorporating your business, with the most popular benefit being the enjoyment of limited liability and business growth. However, just because your incorporated business can operate as a ‘natural person’, does not mean that the directors/owners hold zero liability regarding the business’ actions. If you choose to incorporate, you must fully understand your directors duties as stated in the Corporations Act 2001 (Cth).
