Types of Companies
The Corporations Act 2001 allows for the formation of four different types of companies with different liability obligations. They are:
- companies limited by shares
- companies limited by guarantee
- unlimited companies with share capital
- no-liability companies.
Each type of company will be examined in detail.
Companies limited by shares must be incorporated (registered) and have ‘Limited’or ‘Ltd’ as part of their name. This is the most popular type of company in the US. Some of these companies raise capital by inviting the public to purchase shares in the organization. Those who purchase shares are part owners of the company and are known as ‘shareholders’. Companies limited by shares enjoy limited liability. Investors in these limited liability companies have the protection of being liable only to the extent of the full value of their shares. This means that the financial obligations of shareholders are limited if the company is wound up.
Limited liability restricts the financial obligation of the investors, in the event of liquidation, to the full value of their shares.
When shares are fully paid, the shareholders are relieved of any legal obligation to contribute more if the company is wound up. Therefore creditors of companies limited by shares do not have access to the personal property of the shareholders of these companies to satisfy any debt that may be outstanding. Potential accounts payable should assess each company’s ability to pay before allowing it to run up large debts.
The Corporations Act 2001 also governs companies limited by guarantee. These types of companies have limited liability but do not have share capital. Members are not required to contribute capital while the company is a going concern. Only if the company is being wound up and there are outstanding debts will they have to contribute capital.
Guarantee companies with constitutions can and should state the value of members’ liability for the company’s debt. This value may be only a few dollars, and it is a way of safeguarding the personal assets of the members from being
liquidated to pay for any debt if the company is wound up. This type of company structure usually applies to incorporated clubs, charities and other non-trading companies where funds can be raised by means other than trading for profit (e.g. donations).
Unlimited companies with share capital do not enjoy limited liability. There is no limit to their owners’ liability. This type of company is very similar to an incorporated partnership and is recognized as a separate legal entity.
This type of company structure can be useful for mutual fund companies because of the ease of share redemption. Some accountancy and legal practices still choose this form of company because professional rules prohibit them from forming a limited liability company. However, they still enjoy some advantages of incorporation.
Only a mining company can be incorporated as a no-liability company and it must have ‘No Liability’ or ‘NL’ as part of its name. To qualify to form a no-liability company, mining must be the sole objective of the company. Mining is defined as prospecting, extracting, selling or disposing of ores, metals or minerals, or any incident business or activity.
No-liability companies have share capital but have no obligation for their shareholders to pay for calls on their shares. Calls are the unpaid portion of shares owed by shareholders on share holdings. However, if shareholders in these companies do not pay the calls owing on their shares when a call is made, they forfeit their shareholdings within 14 days of the call falling due. These shares are then held in trust by the company if they cannot be sold on the market.
