Corporate Law

Which corporate forms might not be appropriate for charitable purposes? Explain which corporate forms might in fact be the best use?

Unlimited companies (public or proprietary) definitely not appropriate because there is no limit placed on liability of members: s 9 (definition), s112(1). These companies resemble partnerships in that a single member can be liable for full amount of any shortfall between company’s assets and its debts if other members cannot pay.

No liability companies is also not appropriate because it caters for companies formed for mining purposes only: s112(2)(b).

Companies limited by shares can be used but is not the best option. This is the most common corporate form. The corporation is a separate legal entity that is owned by shareholders. A shareholder’s personal liability is usually limited to the amount of investment in the corporation and no more: s.9 and s.516. Although it is easier to raise funds through sale of shares and debentures, but it will require members to contribute capital by buying shares and often directors will be asked to provide personal guarantees in addition to security over company’s assets for loans. It is more suited for profit-making enterprises.

Best choice is company limited by guarantee because no injection of working capital is needed and s150 provides avenue to drop use of word Ltd for companies limited by guarantee formed solely for charitable purposes. Limited by guarantee means the liability of the company’s members is limited to the amount the members undertake to contribute to the property of the company if it is wound up. From 28 June 2010 the law now defines a small company limited by guarantee. Unless directed by a member or ASIC, it does not have to:

• prepare a financial report or have it audited

• prepare a directors’ report, or

• notify members of annual reports

2. What defences are available to a director who is accused of allowing a company to trade while insolvent?

There are...