What you need to know about being a Director of a small business
The first point to note is that by law a company director must now apply for a director identification number. The ATO provides more details here.
Now let’s look at how to become a company director and the most significant responsibilities for small business company directors.
Agreeing to become a company director
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’. For more information follow this link.
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.
You must be 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.
There’s more information here.
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 advice.
Any money invested 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 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 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 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.
For more information follow this link.
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,
deliver all the records of the company to the liquidator, and
provide assistance to the liquidator as and when requested.
For more information follow this link.
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. Here’s a link for more information. There’s more information here.
If you have any questions or would like help in this area simply contact me paul@congdonfuzi.com.au