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.

Different business structures have significant differences in terms of liability, taxation, control, access to finance and compliance costs.

A Sole Trader structure is simple to establish and generally has lower setup and administrative costs. However, the business and the owner are not separate legal entities, meaning that business debts and legal liabilities are generally the personal responsibility of the owner. A Pty Ltd company is a separate legal entity. It can own assets, enter into contracts and incur debts in its own name, and is often more suitable for businesses with co-founders, employees, external investors or higher levels of operational risk.

However, establishing a company does not completely protect individuals from personal liability. Directors may still be personally liable in circumstances involving personal guarantees, insolvent trading, breaches of directors’ duties or certain unpaid company tax obligations. A Trust may provide benefits for asset holding and tax planning, but its structure, trustee responsibilities and distribution arrangements are generally more complex.

When choosing a business structure, you should consider:

• The level of business risk and expected turnover;
• Whether there are co-founders or investors;
• Whether external funding may be required or shares may be sold in the future;
• Protection of personal assets;
• Taxation and profit distribution arrangements;
• Administrative and compliance costs.

Legal structure and tax outcomes are not necessarily the same, so it is generally advisable to have the proposed structure assessed by both a commercial lawyer and an accountant. Australian Government comparison of business structures

Before purchasing a business, you should not make a decision based solely on the turnover, profits or verbal representations provided by the seller. Buyers should complete legal, financial and operational due diligence before signing an unconditional contract or paying a non-refundable deposit.

Legal due diligence will generally include reviewing:

• Whether the seller actually owns the assets being sold;
• Whether the transaction involves purchasing business assets or shares in a company;
• Whether the commercial lease can be transferred and whether the landlord’s consent is required;
• Whether equipment, inventory and intellectual property are included in the transaction;
• Whether there are any security interests or registrations on the PPSR;
• Whether licences, registrations and industry approvals can be transferred;
• How employees, annual leave, long service leave and other employee entitlements will be dealt with;
• Whether customer, supplier and franchise agreements can continue after completion;
• Whether there are any existing or potential litigation, debts, refunds, warranties or regulatory risks;
• Whether the warranties, indemnities, restraints of trade and conditions of completion in the contract adequately protect the buyer.

Financial information should be independently verified by an accountant, including BAS records, tax returns, profit and loss statements, cash flow, accounts receivable and accounts payable. The Australian Government also recommends reviewing financial records, operational information, leases, licences, assets, liabilities and PPSR registrations before signing a contract. Australian Government guide to buying an existing business

Shareholder disputes commonly arise over matters such as profit distributions, the appointment or removal of directors, the use of company funds, lack of financial transparency, the issue of new shares, related-party transactions or one shareholder seeking to exit the company.

When a dispute arises, the following should first be reviewed:

• The company constitution;
• The shareholders’ agreement;
• Board and shareholder meeting minutes;
• Share ownership, capital contribution and loan records;
• Financial statements and banking records;
• Share transfer, exit and dispute resolution provisions.

The parties may then seek to resolve the dispute through written notices, shareholder meetings, negotiation or mediation. If the company’s operations, funds or important assets are at immediate risk, it may be necessary to seek an injunction or other urgent court orders.

In serious cases, minority shareholders may be able to bring an oppression claim under the Corporations Act 2001. The court may make orders requiring the purchase of shares, changes to the company’s governance arrangements, restrictions on particular conduct or, in some circumstances, the winding up of the company. ASIC generally does not intervene in private disputes between shareholders of proprietary companies, so shareholders may need to protect their rights through negotiation, mediation or court proceedings. ASIC guidance on proprietary company shareholder disputes

Generally, a Pty Ltd company is a separate legal entity, and the company’s debts do not automatically become the personal debts of its shareholders or directors. However, “limited liability” does not provide absolute protection.

Common circumstances in which directors or shareholders may become personally liable include:

• Signing a personal guarantee for a business loan, commercial lease or supplier account;
• Allowing the company to continue incurring new debts while insolvent;
• Receiving a Director Penalty Notice;
• The company failing to pay PAYG withholding, GST or Superannuation Guarantee Charge;
• A director breaching statutory duties relating to care and diligence, good faith or conflicts of interest;
• Improperly using company funds or transferring company assets;
• Entering into contracts personally or failing to make it clear that the contract is being signed on behalf of the company.

If a company is experiencing ongoing cash flow shortages or is unable to pay tax liabilities, employee wages or suppliers when they fall due, directors should seek restructuring, insolvency and legal advice as early as possible rather than waiting until creditors commence winding-up proceedings. ASIC makes it clear that directors must not allow a company to continue trading while insolvent. ASIC guidance on directors and insolvent companies