A Due Diligence Primer for Clients and Practitioners
What Is a Company?
A company is a legal fiction. The law says: we will treat this thing as though it were a person. It can own land, sue and be sued, enter contracts and owe money.
Not All Companies Are the Same
The type of company determines who can own shares in it, how it is regulated, what it must report, and what the consequences are when things go wrong.
The Proprietary Company (Pty Ltd)
This is the workhorse of Australian business. A proprietary company is privately held, cannot have more than 50 non-employee shareholders, and cannot offer its shares to the public. It comes in two flavours.
A small proprietary company is one that satisfies at least two of three tests: consolidated revenue under $50 million, fewer than 100 employees, and consolidated gross assets under $25 million. The vast majority of Pty Ltd companies in Australia are small proprietary companies. They enjoy reduced reporting obligations. They do not need to lodge financial statements with ASIC or have them audited, unless ASIC specifically directs them to do so or shareholders holding at least 5% of the voting shares request it.
A large proprietary company exceeds at least two of those thresholds. It must prepare audited financial statements and lodge them with ASIC annually. This mirrors the obligations of a public company. Most trustee companies, family trading companies, and small business vehicles are small proprietary companies. The distinction matters. It determines how much of the company’s financial life is visible to the public.
The Public Company (Ltd)
A public company can offer shares to the general public and can have an unlimited number of shareholders. It must have at least three directors (rather than one for a proprietary company), must have a company secretary, and is subject to significantly heavier regulatory obligations including mandatory auditing, annual financial reporting to ASIC, and continuous disclosure requirements if listed on a stock exchange. Public companies are the ones you see on the ASX – the banks, the miners, the retailers. But not all public companies are listed; an unlisted public company is one that has the legal structure of a public company but has chosen not to list its shares on an exchange. These are less common but do exist, often in transitional situations or for specific regulatory reasons.
The Company Limited by Guarantee
This is the structure most commonly used by not-for-profit organisations, charities, sporting clubs, and industry associations. A company limited by guarantee does not have shares or shareholders at all. Instead, it has members who each guarantee to contribute a nominal amount – typically between $10 and $100 – in the event the company is wound up. There is no share capital, no dividends, and no economic ownership in the traditional sense. Members have voting rights and governance roles but do not “own” the company the way shareholders own a proprietary or public company. On an ASIC search, you will see the class listed as “Limited By Guarantee” rather than “Limited By Shares,” and there will be no share structure or share/interest holding sections at all.
The Unlimited Company
Rare and somewhat exotic, an unlimited company is one in which the members’ liability is not capped. If the company is wound up and cannot pay its debts, the members can be called upon to contribute whatever is necessary to cover the shortfall – without limit. Why would anyone choose this? An unlimited proprietary company not controlled by a limited company is exempt from lodging financial statements with ASIC. This gives it a degree of financial privacy that limited companies do not enjoy. They are occasionally used in professional services — particularly older accounting and legal partnerships that have incorporated. They also appear in certain financial structures where privacy of accounts is valued. In those cases, the risk of insolvency is considered negligible.
The Sole Director / Sole Shareholder Company
This is not a separate legal type but a permissible configuration of a proprietary company that is worth understanding. A proprietary company can have as few as one director and one shareholder, and that director and shareholder can be the same person. This is extremely common for sole traders who have incorporated, contractors, consultants, and single-person businesses. The ASIC search will show one director, no secretary, and one member holding all the shares. It is the simplest possible company structure, but it carries a particular risk: if that sole director dies or loses capacity, there is nobody left to manage the company, and the process of appointing a replacement can become complicated and expensive. This is why solicitors often recommend that even sole-director companies have at least a succession plan or a power of attorney arrangement in place.
Foreign Companies Registered in Australia
A company incorporated overseas but carrying on business in Australia must register with ASIC as a foreign company. This is required under Part 5B.2 of the Corporations Act.It will be given an ARBN (Australian Registered Body Number) rather than an ACN. Its ASIC extract will look noticeably different. The extract will show the company’s place of origin and its local registered agent. It will also show details of its foreign directors and constitution as lodged.Foreign company registrations are most commonly encountered in commercial property transactions, joint ventures, and resource sector dealings. They typically arise where an overseas parent operates through an Australian branch. This is done rather than incorporating a local subsidiary.
What Is a Trust, and Why Does It Need a Company?
A trust is not a legal entity. This is the single most important sentence in this article, and the one most frequently misunderstood. A trust cannot own property, sign a contract or open a bank account. A trust is a relationship – an obligation – whereby one person (the trustee) holds and manages assets for the benefit of other persons (the beneficiaries), according to the terms of a document (the trust deed).
The trust deed is the constitution of the trust. It is a private document, not registered with ASIC or anywhere else publicly which sets out who the trustee is, who the beneficiaries are, what the trustee can and cannot do, and how income and capital are to be distributed. It also typically names a person called the appointor (sometimes called the principal or guardian), who holds the power to remove and replace the trustee.
Because a trust is not a legal entity, someone has to actually do things on its behalf – sign leases, register vehicles, open bank accounts. That someone is the trustee. And while a human being can serve as trustee, the almost universal practice in Australia is to set up a proprietary company to act as trustee. Why? Because human beings die, go bankrupt, lose capacity, and get divorced. Companies do none of these things involuntarily. A corporate trustee provides continuity. It separates personal assets from trust assets, and makes the administrative life of the structure considerably simpler.
So when you see a company acting as trustee of a trust, you are looking at two different things that operate as one. The company is the legal vehicle. The trust is the beneficial arrangement sitting behind it. The company is the glove. The trust is the hand.
Not All Trusts Are the Same
The word “trust” gets thrown around as if there were only one kind. There are several, and the differences matter enormously.
The Discretionary Trust (Family Trust)
This is by far the most common structure for Australian families and small businesses. In a discretionary trust, the trustee has discretion over how much income and capital each beneficiary receives in any given year. The trust deed defines a broad class of potential beneficiaries – typically the primary person, their spouse, their children, their grandchildren, related entities, and sometimes even charities – but nobody in that class has a fixed entitlement to anything. Each year, the directors of the trustee company sit down and decide: who gets what, and how much.
This flexibility is the discretionary trust’s greatest strength. It allows income to be distributed to whichever beneficiaries are in the lowest tax brackets. It also offers a degree of protection from individual beneficiaries’ creditors. This is because no single beneficiary owns anything until a distribution is actually made. However, this protection is not absolute. It can be overridden in family law proceedings. or where where assets were transferred into the trust to defeat creditors. It also keeps the family’s options open as circumstances change. The trade-off is that beneficiaries have no guaranteed entitlement. They have a mere expectancy – a hope, not a right – that the trustee will exercise discretion in their favour.
The Unit Trust
A unit trust works more like a company in terms of ownership. Instead of the trustee having discretion over distributions, the trust’s property and income are divided into fixed units, and each unitholder is entitled to a share of income and capital proportional to the number of units they hold. If you own 40 of 100 units, you are entitled to 40% of the income. Unit trusts are commonly used when unrelated parties go into business together – say, two families jointly purchasing an investment property – because each party wants certainty about their share. They are also used in larger commercial and investment structures. The downside is obvious: you lose the tax planning flexibility of a discretionary trust. Income must follow the units, regardless of whether that produces the most tax-effective outcome.
The Hybrid Trust
As the name suggests, a hybrid trust attempts to combine features of both. It might have fixed units for some purposes but give the trustee discretion over income distributions, or it might allow the trustee to create and cancel units at will.
The Fixed Trust
A fixed trust is one in which every beneficiary’s entitlement is fixed and defined from the outset. Unlike a unit trust (which is a type of fixed trust), a fixed trust might not use “units” at all – it might simply state that Beneficiary A receives 50% and Beneficiary B receives 50%, full stop. The trustee has no discretion to vary those proportions. Fixed trusts are relevant in certain tax contexts because the ATO treats them differently from discretionary trusts when applying anti-avoidance provisions and trust loss rules.
The Testamentary Trust
A testamentary trust does not exist until someone dies. It springs into existence under the terms of the deceased’s will, and its primary advantage is a significant tax concession: income distributed from a testamentary trust to children under 18 is taxed at ordinary adult marginal rates rather than the punitive penalty rates that normally apply to minors’ trust income. For families with young children or grandchildren, this can deliver substantial tax savings over many years. Like any trust, a testamentary trust can be discretionary or fixed depending on how the will is drafted.
The Cast of Characters
The Director
The Director is the person (or persons) who manage the company’s affairs. They make the decisions, sign documents, authorise payments, and bear the legal duties imposed by the Corporations Act – duties of care, diligence, good faith, and the obligation not to trade while insolvent. In a trustee company, the directors are the ones who actually exercise the trustee’s powers under the trust deed. Directors are appointed by the shareholders, and their details – name, address, date of birth, appointment date, and cessation date – are recorded on the ASIC register.
The Secretary
The Secretary is an officer of the company whose role is primarily administrative and governance-related. A proprietary company is not required to have a secretary, but many do. Like directors, their personal details are on the public register.
The Shareholder (or Member)
The Shareholder or Member owns the shares in the company. In a trustee company, the shares are a control mechanism, not an economic one. The trustee company does not trade for its own profit; it holds assets on trust. Owning the shares means you control who the directors are, and therefore who exercises the trustee’s powers. This is why the shares in a trustee company are typically held by the key family member – not because those shares are worth anything financially, but because they carry voting control.
The Beneficiary
The Beneficiary does not appear on the ASIC search at all. Beneficiaries are creatures of the trust deed, not the Corporations Act. They are the persons for whose benefit the trust assets are held. They might be named individually or described as a class. In a discretionary trust, they have no fixed entitlement – only a hope that the trustee will exercise discretion in their favour.
The Settlor
The Settlor creates the trust by settling a nominal sum – traditionally $10 or $20 – on the trustee, accompanied by execution of the trust deed. The settlor’s role is ceremonial and finished once the trust is established. Importantly, the settlor should never be a beneficiary.
The Appointor (sometimes called the Principal or Guardian)
The Appointor is named in the trust deed and holds the power to remove and replace the trustee. This person does not appear anywhere on the ASIC register, yet they are arguably the most powerful person in the entire structure. Estate planning in family trusts frequently revolves around who holds this role.
Why Any of This Matters
None of this is academic. These structures determine who owns what, who owes what, who can sign what, and who is liable when things go wrong. A solicitor who does not understand the structure cannot advise on it. A client who does not understand the structure cannot give proper instructions. And a transaction built on a misunderstanding of who controls the company, or what type of trust sits behind it, is a transaction built on assumptions that may turn out to be wrong.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Article Written by Hayden Nelson, Solicitor
