1. Elements of a Proprietary Company
2. Advantages and Disadvantages of Proprietary Companies
3. Forming a Proprietary Company

The courts define proprietary company as a privately held business that does not offer public shares. As with other business structures, a proprietary company is a separate legal entity with its own tax liability. Determining the best structure depends on the particular characteristics of your business.

Elements of a Proprietary Company

A proprietary limited company can sell shares to a limit of 50 shareholders who are not employees. Partnerships are limited to 20 shareholders. Many Australian companies are proprietary, including most small businesses.

It's important to understand the reporting requirements and other obligations of forming a business entity. Some of the factors that determine the best type of business to start include your financial situations, the level of control you need as a manager, the individual circumstances, and the industry.

Small businesses often prefer a structure that offers easy family tax planning, the flexibility to run the business effectively, and limited personal liability. A company is completely separate from the individual who owns the company and can independently:

  • Own assets and property
  • Sign contracts
  • Sue others and be named in lawsuits

Companies in Australia are either public or proprietary. Proprietary companies must either offer liability limited by shares or unlimited liability. This type of company must have between 1 and 50 non-employee shareholders. Although it cannot sell shares to the public, it can provide shares to existing shareholders and employees of the company or one of its subsidiaries. Companies that do not meet these requirements may be ordered to convert to a public company by the Australian Securities and Investment Commission.

In addition, at least one director of a proprietary company must reside in Australia. Most public companies have three directors, two of whom must live in Australia.

Proprietary companies must have a secretary who is at least 18 years old, and one of the directors can also serve as a secretary. The secretary is responsible for notifying ASIC of updates such as changes in the names or contact information of the company's directors, as well as ensuring that the business files its annual tax return.

Proprietary companies are designated as either large or small. Those considered small must meet at least two of these three requirements:

  • Have less than $10 million gross operating revenue for the fiscal year
  • Hold less than $5 million in assets at the conclusion of the fiscal calendar
  • Have no more than 50 employees

Large proprietary companies must provide audited financial statements. Although small proprietary companies do not typically have to do this, they may be ordered to do so by shareholders who own more than 5 percent of available voting shares or by ASIC. Small businesses have separate income tax liability, which provides a tax advantage.

Advantages and Disadvantages of Proprietary Companies

The benefits of proprietary companies include:

  • Personal liability for shareholders is limited to their capital investment in the company and personally guaranteed business debts.
  • Directors and shareholders are taxed at the individual rate rather than the corporate rate since they are considered company employees.
  • Personal assets cannot be seized to cover company liabilities and debts.
  • Ownership transfers are simple.
  • The company is not disbanded if a member dies, retires, or becomes disabled.

Disadvantages of this business structure include:

  • Requires substantial paperwork to form this type of company, and it can take up to six weeks to process
  • Must adhere to ASIC and other federal regulations
  • Requires detailed record keeping
  • Taxed at a fixed rate of 30 percent

Forming a Proprietary Company

First, you must register with ASIC. You will then receive an official company number. Obtain written consent from the company secretaries and directors, and establish a registered office that is not a PO box.

You are required to keep a register of your company's charges and shareholders, and it must be held either at the primary place of business or another ASIC-approved location. The register should include the names and addresses of each shareholder and the shares he or she holds.

You must file an annual return for the year by January 31 of the following year. Businesses are charged a penalty for filing returns beyond this deadline. This return contains information about the business and shareholders.

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