Considerations for Limited Liability Companies

May 2017

In Limited Liability Companies, shareholders are not personally liable for debts of the company unless they have given personal guarantees. In the event of the company getting into financial distress, they may be obliged to pay the company any amount which may be unpaid on their shares (partly paid shares).

Directors oversee the operations of a company. Major decisions require resolutions to be signed. Sole directors will simply document and sign their decisions as they too are accountable to the shareholders.

It should be noted that directors may be liable for debts incurred by insolvent trading (where the company is unable to pay its debts as and when they fall due). If a director has given a personal guarantee, they have a potential liability to debts incurred by the company. If a director has been negligent or there has been a breach of duty then he may be sued for any losses sustained.

While you should never trade insolvent, it must be proved in court and even though creditors are reluctant to follow this up, all it takes is one. The onus is on the court not the liquidator who often recommend you trade insolvent, but nearly always say they don’t have funds to explore this.

Subject to this, if directors act honestly, in good faith and with due care and skill, and prevent insolvent trading, they generally will not be held personally liable in the event of company failure.

In this event, the liability of shareholders is generally limited to the unpaid capital on their shares. Normally this is not a consideration as in a small company shares are usually issued as “fully paid”.

There is also potential for an individual exposure where the ATO issues Directors’ Penalty Notices (DPNs) for a company’s unreported and for unpaid superannuation and PAYG Withheld from wages and these are not complied with. Contact us at TaxAssist Accountants as you need an understanding of this.

At TaxAssist, we are known as the small business champions for many companies. It is very important you engage an accountant to look after these companies to help you understand as it’s our experience that only people with a vision seem to do best with companies.

For more information, call in and visit one of our accountants along the East Coast.