Small business company directors
New ID requirement for directors
Company directors are now required by law to apply for a director identification number (director ID). Find out more at our Director ID information page.
While running a company, directors must personally comply with obligations under Australian law. On this page we set out how to become a company director and the most significant responsibilities for small business company directors.
- Agreeing to become a company director
- Key responsibilities of company directors
- How directors should manage assets, debts, employees and investments
- Director duties if a liquidator has been appointed
- Responsibilities of shadow directors
Agreeing to become a company director
As a company director, you must be in a position to guide and monitor the management of your company. Most directors of small proprietary companies will also be heavily involved in the management of the company.
You should only agree to become a company director or secretary if you are willing, able and committed to holding these important roles.
You should not agree to be appointed as a director or secretary of a company on behalf of others who promise that ‘you won’t have to do anything’ and ask that you ‘just sign here’. You could be exposing yourself to serious liabilities if you accept such a role.
Find out more about how to become a company director.
Key responsibilities of company directors
As a director, you are responsible for overseeing the affairs of the company. You must comply with your legal obligations as a director under the Corporations Act 2001. This is the case even if you appoint an agent to look after your company’s affairs.
You must be fully up to date on what your company is doing, including its financial position. You should regularly speak with managers and staff about the affairs of the business and take an active part in directors’ meetings.
You must not use your position, or information obtained because of your position, to cause detriment to the company or to gain an advantage for yourself or someone else.
When you make a business decision as a company director, you must, among other things, ensure that you:
- make the decision in good faith and for a proper purpose
- do not have a material personal interest in the decision and make it in the best interests of the company
- find out and assess how any decision will affect your company’s business performance, especially if it involves a lot of the company’s money or could have a material impact on the company’s reputation
- keep informed about your company’s financial position and performance, ensuring your company can pay its debts on time
- get trusted professional advice when you need assistance to make an informed decision
- make full and frank disclosure about any material personal interests you do have.
There are penalties and consequences – including civil penalties, compensation proceedings and criminal charges – for directors who fail to comply with their obligations under Australian law.
All the duties and responsibilities listed on this page are the minimum obligations for directors and officers of small propriety companies.
How directors should manage assets, debts, employees and investments
As a company director it is important you understand that:
- The company owns the assets, so you cannot treat company property, assets or funds as if they are your own.
- The company is generally responsible for paying debts incurred by the company, which may include trade creditors, employees and statutory bodies such as the Australian Taxation Office (ATO).
- If there are grounds for suspecting that the company is insolvent, you must not trade, incur debt, or continue to conduct business as usual. Instead, you should immediately seek trusted professional business advice. For general information on insolvency for directors see Information sheet 42 (INFO 42) and also refer to Regulatory Guide 217 for information on your duty as a director to prevent insolvent trading.
- 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.
- The owners or members (shareholders) of the company are entitled to take a dividend payment (e.g. money) from the company, but only after the company has ensured it has the ability to pay its debts owing to trade creditors and other types of creditors who have lent money to the company, employees and statutory authorities.
- While a company is usually responsible for paying its debts, a director may become personally liable. This generally occurs when a director breaches their legal obligations (e.g. the company continues to trade while it is insolvent) or when members or directors have provided personal guarantees when borrowing money.
If your company has employees, you should find out if the company owes any Pay As You Go (PAYG) withholding or Superannuation Guarantee Charge (SGC) amounts to the ATO.
If you fail to meet a PAYG withholding or SGC liability or lodge returns by the due date, you may become personally liable for a penalty equal to the unpaid amount under the ATO’s Director Penalty Regime.
Illegal phoenix activity
Illegal phoenix activity occurs when a new company continues the business of an existing company that has been liquidated or otherwise abandoned to intentionally avoid paying outstanding debts, which can include taxes, creditors and employee entitlements.
This illegal practice usually happens when company directors abandon the company or transfer the business of an existing company to a new company without paying true or market value, leaving debts with the old company. Once the assets have been transferred, the old company is placed in liquidation or abandoned. If the liquidator is appointed, there are no assets to recover, which means creditors cannot be paid.
Find out the warning signs of illegal phoenix activity.
Director duties if a liquidator has been appointed
If a liquidator has been appointed to the company, the director has an obligation to give the liquidator:
- a statement about the company’s business, property, activities and financial circumstances – see Form 507 Report on company activities and property (ROCAP)
- deliver all the records of the company to the liquidator
- provide assistance to the liquidator as and when requested (e.g. by responding to the liquidator’s letters).
Find out more about director duties during liquidation in Information Sheet 42 Insolvency for directors (INFO 42).
Responsibilities of shadow directors
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.
- Director liabilities when things go wrong
- Removing or resigning as a company director
- Alternate company directors
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