What it means to be a director of a company

A director of a company is a person who is responsible for managing the company’s business activities.

Even small companies must have at least one director. Larger companies may have many directors who collectively manage the business of the company. They are often referred to as a 'board of directors'.

Your legal obligations

A company is a separate legal entity – that is, it exists under the law in its own right and can do nearly all of the things that a normal person can do such as enter into contracts, borrow money, and buy and sell assets.

If you become a director of a company, you must remember that:

  • the company owns the assets
  • the company is generally responsible for repaying company debts
  • any money invested in the company (e.g. through loans to the company or by owners or investors buying shares in the company) belongs to the company and must be used for a proper company purpose.

You cannot treat what the company owns – for example, company property, assets and funds – as if they are your own. They do not belong to you, they belong to the company.

Because the company exists as a separate entity, almost like a separate person, you must carry out your duties as a director in accordance with certain rules. For example, you must always act in good faith, in the best interests of the company (even where this may conflict with their personal interests) and for a proper purpose.

These rules are contained in the Corporations Act 2001 in the form of legal obligations that are imposed on company directors, which set out how directors must perform their duties and how they are expected to manage the affairs of the company.

Shadow directors

Under some circumstances, even if you are not formally appointed as a director, you may still be subject to the same duties and liabilities as a director.

For example, if you act as a director or give instructions to the appointed directors on how they should act, you may be considered a ‘shadow director’.

Shadow directors can still be liable for breaches of the laws relating to directors’ duties, even though they were never formally appointed as a director of the company.

The difference between directors and members

Members of a company, commonly referred to as ‘shareholders’, collectively own the company.

Directors, on the other hand, are responsible for the management of the company’s business activities.

When a person is acting as a director, they must act in the best interests of the company (even where this may conflict with their own personal interests). Members are generally free to act in their own interests.

Each type of company must have at least one member and the minimum number of directors (i.e. one director for a proprietary company and at least three directors for a public company). So, proprietary companies must have at least one director and one member.

A director can also be a member of a company, which is common with small types of companies. For example, small proprietary limited companies can sometimes have only one director who is also the sole member.

A director can also operate independently from the members, which is often the case with larger types of companies. Where the director is not also a member, the director’s role is to manage or control the affairs of the company without having any ownership of the company.

More about members of a company

Companies with one director and one member

A proprietary company must have at least one director who ordinarily resides in Australia. It is possible to have a single director who is also the sole member of a proprietary company.

The sole director and member of a company is responsible for managing the company’s business and may exercise all of the company’s powers. Similarly, a sole director and member of a proprietary company can appoint another director (by recording the appointment and signing the record).

Even the sole director and member of a proprietary company must keep minutes (a written record) of their resolutions concerning the management of the company. If you are the sole director and member of a company you may pass a resolution by recording and signing your decision.

Protect your business from unfair contract terms

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Find out more about the new law applying from 12 November 2016 that aims to protect small businesses from unfair contract terms.

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Last updated: 23/03/2016 03:08