Australian Commercial Law Services

A Pty Ltd (Proprietary Limited Company) is the most common corporate vehicle adopted by Chinese entrepreneurs in Australia. Registration is administered by the Australian Securities and Investments Commission (ASIC). The principal steps are as follows:

• Step 1 – Choose a company name: search the ASIC register to ensure the name is not already taken or in conflict with a registered trade mark.
• Step 2 – Decide on governance documents: rely on the “replaceable rules” in the Corporations Act, or adopt a tailored Constitution.
• Step 3 – Identify directors, shareholders and (if any) company secretary: at least one director must ordinarily reside in Australia. Since 2022, all directors must apply for a Director Identification Number (Director ID).
• Step 4 – Establish the registered office and principal place of business.
• Step 5 – Lodge the registration application via ASIC Form 201 or through an authorised intermediary, pay the registration fee, and obtain the ACN (Australian Company Number) and certificate of registration.
• Step 6 – Post-registration matters: apply to the ATO for an ABN (Australian Business Number) and TFN (Tax File Number); register for GST if expected annual turnover reaches AUD 75,000; and, where employing staff, register for PAYG withholding and superannuation.

The principal information required includes: the full name, residential address, date and place of birth of each director, shareholder and secretary; the share capital structure (number of shares, class, paid-up amount); and written consent from the occupier of the registered office address (where it is not owned by the company).

The two structures differ significantly in legal status, liability exposure, taxation and compliance obligations. The choice should be made having regard to the scale of the business and its risk profile:

• Legal personality: A Sole Trader is not a separate legal entity; the operator personally is the legal subject of the business. A Pty Ltd is a separate legal person, capable of holding assets, entering contracts, and suing or being sued in its own name.
• Liability exposure: A Sole Trader bears unlimited personal liability for business debts, exposing personal assets to creditors. Shareholders of a Pty Ltd are in principle liable only to the extent of their unpaid capital, although directors may incur personal liability where they breach fiduciary duties, fail to remit certain taxes, or have given personal guarantees.
• Taxation: Sole Trader profits are taxed as part of the operator’s personal income at marginal rates (up to 47% including the Medicare levy). A Pty Ltd is taxed at the corporate rate of 25% if it qualifies as a “base rate entity” or 30% otherwise.
• Compliance costs: A Sole Trader needs only an ABN and individual tax return — minimal cost. A Pty Ltd is subject to ASIC annual review, must maintain statutory registers, comply with directors’ duties and meet ongoing reporting obligations.
• Funding and growth: A Pty Ltd may issue shares to bring in investors, facilitating capital raising and equity incentives, and is generally better suited to medium-to-long term growth and partnerships.

As a general guide, a small-scale, low-risk business may begin as a Sole Trader; once revenue is expected to grow, the business will be contracting with third parties, or debt risk arises, a Pty Ltd should be incorporated promptly to achieve asset separation.

A shareholders agreement is the central instrument governing the rights and obligations of shareholders and avoiding future disputes. A well-drafted agreement should typically address:

• Equity structure and share classes — capital contribution proportions, classes of shares (ordinary, preference) and their associated rights;
• Corporate governance and the board — director appointment rights, board reserved matters, shareholder meeting procedures;
• Reserved matters — significant decisions that require a special majority or unanimous shareholder approval, such as capital raises, M&A activity, borrowing thresholds and related-party transactions;
• Restrictions on share transfers — pre-emptive rights, tag-along and drag-along rights;
• Exit mechanisms — buy-back provisions, valuation methodology, treatment on death or incapacity of a shareholder;
• Deadlock-breaking mechanisms;
• Non-compete and confidentiality obligations;
• Dividend policy;
• Dispute resolution — preference for negotiation and mediation, escalating to arbitration or litigation, with a clear governing law and jurisdiction clause (Victorian law and Victorian courts are recommended).

Note: the shareholders agreement and the company’s Constitution should remain consistent. Where the two conflict, the Constitution generally prevails as against third parties, so the Constitution should be amended in tandem or the agreement should expressly state which document prevails as between the shareholders.

The core objective of contract review is to identify commercial and legal risk and to ensure the contract both reflects the parties’ true intentions and is enforceable. Our firm focuses on the following matters when reviewing commercial contracts:

• Parties — names, ACN/ABN consistency with ASIC records, and whether the signatory has authority to bind the entity;
• Subject matter and scope of services — clear, measurable, and free from ambiguity;
• Payment terms — amount, currency, payment timing, late-payment interest, default penalties, and GST treatment;
• Representations, warranties and remedies for breach;
• Limitation of liability and indemnities — avoiding uncapped exposure and one-sided indemnification;
• Intellectual property ownership and licensing;
• Confidentiality and data protection;
• Termination — termination events, notice periods, and post-termination rights and obligations;
• Force majeure;
• Governing law and dispute resolution;
• Whether the Australian Consumer Law’s “unfair contract terms” regime is engaged — following the November 2023 amendments, breaches of the unfair terms regime can attract substantial civil penalties, and parties offering standard form contracts should be especially mindful.

Practical tips for avoiding disputes: conduct adequate due diligence on the counterparty before signing; retain all negotiation records and annexures; avoid oral side agreements; periodically review the performance of long-term contracts; and, where issues arise, document them in writing promptly and seek legal advice early.

How a partnership dispute is resolved depends first on whether there is a written Partnership Agreement. If there is, its dispute resolution clause (negotiation – mediation – arbitration/litigation) should be followed. If there is no written agreement, the default rules under the Partnership Act 1958 (Vic) apply.

The principal legal avenues are:

• Negotiation and mediation — the lowest-cost approach and generally the recommended first step, with lawyers attending where appropriate;
• Dissolution by agreement or operation of law — under sections 36 to 48 of the Partnership Act, a partnership may be dissolved on expiry of its term, by mutual consent, on the death or bankruptcy of a partner, or by court order;
• Court-ordered dissolution — under section 39, a partner may apply to the court for dissolution where another partner is permanently incapacitated, has committed a serious breach of the agreement, where the business can only be carried on at a loss, or in any other circumstances that render it just and equitable;
• Accounting and asset distribution — the court may appoint a receiver or liquidator to settle debts and distribute the surplus in accordance with the Act;
• Action for breach of fiduciary duty — partners owe each other duties of utmost good faith and loyalty, breach of which can give rise to a claim for damages or an account of profits.

Practical tip: once a serious dispute arises, secure the financial records, customer information and bank account access at the earliest opportunity to prevent the unilateral dissipation of partnership assets.

The “limited liability” principle of a Pty Ltd provides a baseline of asset separation, but it is not absolute. There are several recognised circumstances in which the corporate veil may be “pierced” or in which legislation expressly imposes personal liability on directors. The key risks and mitigation strategies include:

• Insolvent trading liability (s 588G Corporations Act): if a company continues to incur debts when it is already insolvent, directors may be personally liable for compensation and may even commit a criminal offence. Mitigation: implement cash-flow monitoring and, at the first signs of distress, seek safe harbour advice or restructuring assistance;
• Personal guarantees: bank loans, commercial leases and trade credit facilities frequently require directors’ personal guarantees, which are contractual obligations not protected by the corporate veil. Mitigation: sign with caution, and where possible negotiate caps on the guaranteed amount or arrange for only one spouse to give the guarantee;
• Director Penalty Notices (DPN): directors are personally liable for unpaid PAYG withholding, GST and superannuation guarantee charge (SGC) of the company. Mitigation: lodge on time, even if the amounts cannot be paid, to avoid the DPN becoming “locked down”;
• Breach of directors’ duties (ss 180–184): negligence, lack of good faith, and conflicts of interest may give rise to civil or criminal liability;
• Improper use of company property or information for personal gain — unlawful.

Structural asset protection recommendations: hold core personal assets such as the family home in the name of a non-trading family member or a family trust; separate operating and asset-holding entities (a “dual company structure”); maintain timely company reviews and accounting records; obtain appropriate insurance for key risks (e.g. directors’ and officers’ insurance); and put in place a will and family trust planning.