Proprietary companies

What is a proprietary company?

Also known as a private company, a proprietary company is a separate legal entity that is registered under the Corporations Act 2001 (Cth) (Corporations Act) and is privately owned, meaning it:

• has at least one but no more than 50 (non-employee) shareholders (sometimes called ‘members’)
• does not sell its shares to the general public (via a stock exchange).

The most common type of proprietary company is a proprietary company limited by shares. These companies are generally recognised by ‘Pty Limited’ or ‘Pty Ltd’ after their name. References to a ‘proprietary company’ in this note means a proprietary company limited by shares.

The Corporations Act is the key legislation that governs the management and operation of proprietary companies. Among other things, the Corporations Act sets out rules in relation to the duties and responsibilities of directors, the rights of shareholders, issuing and transferring shares, and financial reporting requirements.

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General features of a proprietary company

Some of the general features of a proprietary company include:

• A proprietary company is a separate legal entity (unlike a partnership), meaning that it exists separately for its owners and directors, and can enter into contracts (for example, contracts of employment), sue and be sued, and own assets in its own name.
• The owners of a proprietary company (known as shareholders or members) may be individuals or other entities (such as companies or trustees of trusts or self-managed superannuation funds). They are issued ‘shares’ in the company (evidenced by a share certificate). The most common shares issued by proprietary companies are ‘ordinary’ shares, but other classes of shares with different rights (for example, non-voting shares) may also be issued.
• Liability of the shareholders for the debts and legal obligations of a proprietary company is limited to the unpaid value of that shareholder’s shares. This effectively means that the personal assets of the shareholders (ie the owners of the business/architecture practice) are not at risk if the company is sued or is unable to pay its debts.
• Proprietary companies must appoint at least one person as a director who is a resident of Australia, but commonly appoint multiple directors (collectively known as a board of directors). A director may, but is not required to, be a shareholder and/or employee of the company.
• The directors manage the company’s affairs and make decisions on behalf of the company. Directors have a range of duties and responsibilities under law and, in certain limited circumstances, may have personal liability arising from their role as a director of a proprietary company. See Acumen note Directors and officers insurance. It is important that all directors understand their legal obligations.
• Unless wound up, a proprietary company can exist indefinitely. Shareholders may sell or transfer their shares and directors may resign and other directors be appointed, without affecting the existence of the proprietary company.
• Money earned by the proprietary company belongs to the company. The profits of a proprietary company can be distributed among its shareholders as dividends, but only if the company meets certain legal requirements.
• Proprietary companies are required to keep accurate financial records, lodge company tax returns with the Australian Taxation Office and otherwise comply with tax legislation. The company tax rate is typically lower than it is for individuals. The tax benefits and liabilities applicable to proprietary companies are different to that of other business structures. It is important that you obtain professional accounting and tax advice to ensure compliance with financial and tax requirements and meet your strategic goals.
• Raising capital can be more easily accessible for a proprietary company compared to a sole proprietorship or a partnership, largely because proprietary companies:
  • can raise equity capital by issuing shares to current shareholders or external investors (including employees)
  • have (or are seen to have) a higher standard of governance.
• Proprietary companies must comply with all laws relevant to the business conducted by that proprietary company. For example, if a proprietary company employs staff, it assumes additional obligations such as payroll tax, superannuation, and workers compensation insurance. Proprietary companies should ensure they have appropriate insurances in place in respect of their businesses.
• Each proprietary company must have its own constitution or adopt the replaceable rules from the Corporations Act or use a combination of both. These are a set of specific rules adopted by a company relating to how the company will be governed.
• Although not legally mandatory, it is recommended for any proprietary company with multiple shareholders to have a formal shareholders’ agreement. A shareholders’ agreement sets out the rights and obligations of the shareholders of a company and is separate from the company’s constitution. A shareholders’ agreement typically establishes the procedures for decision-making, outlines mechanisms for resolving disputes or deadlocks, addresses the sale of shares and procedures for shareholder departure, and governs other critical aspects and decisions within the company.

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Professional registration

In all states and territories in Australia, architects are required to be registered with the relevant governing body (for example, in Victoria architects must be registered with the Architects Registration Board of Victoria) in order to practice. See Acumen note Architects Acts. When setting up a proprietary company, architects must check whether the company also requires registration or approval and any other specific requirements of the relevant governing body.

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Additional information

For additional information, refer to the Australian Securities and Investments Commission (ASIC) website, which provides a general guide to starting a company, as well as a guide on the legal obligations of officeholders (such as directors and company secretaries).

It is also important to seek legal, financial and tax advice before establishing a proprietary company to determine if it is the right structure for your architectural practice and to assist you in navigating the legal complexities, reduce risks and ensure compliance.

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