Following on from my blog on company characteristics, I thought I would write a quick blog on the different types of companies that are common today.
Companies are classified according to liability, size and where they are listed. We will discuss the first two and the resulting 6 common types of companies we arrive at.
Classification according to member liability
1 – Companies limited by shares (known as ‘limited liability’ companies)
Typically, members are usually shareholders and their liability is limited to the nominal (nominal capital is defined as the capital with which the company was incorporated) value of their shares plus any unpaid amount on their shares.
As an example, say you buy BHP shares at $10 for 100 shares, then your liability is limited so that if BHP were to be sued, it is limited to the $10 paid. This is sometimes conducted differently when you don’t fully pay for shares when the company floats. If $5 was paid and $5 was then owed on the shares, then the remaining amount must be contributed should it be called upon.
As we probably know by now, the significance is that shareholders are not liable for the full amount. This is known as the share capital method of corporate finance. Another method is by debt – going to a bank and asking for money to be lent. This is a different contractual agreement.
2 – Companies limited by guarantee (small and charitable organisations)
The difference with these companies is that members can place a guarantee on the company which may only be enforced on the winding up of the company and is not an asset of the company which may be charged during its life. These companies have no share capital unlike companies limited by shares.
Often non-profit companies and charities use this method.
3 – Unlimited liability companies (partnerships)
The unlimited liability company was the original form of registered company under the 1844 UK Act. It is defined in Australia in the corporations act as a company whose members have no limit placed on their individual liability to contribute to the debts of the company.
The Sole advantage is that this company is exempt from the prohibition on reduction of capital (s258A) which means money can be more freely taken out of the company’s capital base. The clear disadvantage is that members might not be aware of their unlimited personal liability when joining.
Today the unlimited liability company is used mainly by professional organisations carried on in a partnership like many Legal and Accounting firms.
4 – No liability companies (Exclusively mining and resource companies)
In Australia, companies may only be registered as no liability where
a) the company has share capital,
b) the company’s constitution states that its sole objects are mining purposes and,
c) the company has no contractual right under its constitution to recover calls made on its shares from a shareholder who fails to pay them s112(2).
s112(2) of Corporations Act says constitution must state that the sole object is mining purposes. Originally because mining is seen as particularly risky business and people were reluctant to invest. Shares are part paid with the option of paying the remainder later.
Classification according to size
The other key way to classify companies is by their size and the corporations act in Australia and its equivalents abroad have provisions relating to a company’s classification via its size.
Corporations Law has been structured for large companies with a division between ownership and control with significant capital from the investing public. While this is the classic model of the corporation, most Australian companies are small, family companies. This model is therefore appropriate for only a tiny proportion of the market companies with the larger number of small private companies out there. Small companies are still covered under the corporations act but typically more regulatory burdens on are placed on larger companies.
Both proprietary and private companies exist:
1 – Proprietary Companies
A proprietary company must:
a) be limited by shares (#1 above) or be an unlimited company (#3 above) with a share capital
b) have no more than 50 non-employee members
c) not do anything that would require the issue of a prospectus (prohibition on seeking investment from the public).
If a company doesn’t qualify as a proprietary company, then it’s a public company and must comply with all the regulatory requirements associated with that. The minimum number of persons is one (shareholder and director).
2 – Public Companies
As above, if a company doesn’t qualify as a proprietary company, then it’s a public company. A public company must have a minimum of 3 directors, 2 of whom must ordinarily reside in Australia.
However, many enterprises structured themselves so that they just met the definition of a proprietary company to avoid regulatory provisions. The Government then redefined the proprietary company definition in s45A(2) of Corporations Act. The act now identifies smaller companies on the basis of value and size of the business.
A proprietary company is small if it satisfies 2 of the following criteria:
a) the consolidated gross operating revenue of the financial year of the company and any entities it controls is less than $10m
b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $5m
c) the company and any entities it controls have fewer than 50 employees.
6 classifications of companies
After all this, we arrive at the following possible combinations of different companies with the proprietary limited (‘pty ltd’) company being the most prevalent.
(no more than 50 non-employee shareholders)
1 – Limited by shares 98.2%
3 – Unlimited with share capital
(all non-proprietary companies: s9 definition of public company)
1 – Limited by shares 0.7%
2 – Limited by guarantee
3 – Unlimited with share capital
4 – No liability company (mining only) 0.09%
I acknowledge a student’s corporate law notes that I obtained while I was at Sydney University as a source and i welcome any comments from readers.
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