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Characteristics of Companies

Accounting (Year 12) - Characteristics of Companies

Christian Bien

Definition of a Company

Contrasting to a Sole trader and Partnership, a Company is an incorporated organisation - it exists as a separate legal entity from its owners in the eyes of the law that is registered under the Corporations Act 2001.

A Company since existing independently can enter into contracts under its own name, own property, sue and be sued in its own name and is obligated to pay taxes. Sole traders and Partnerships are unincorporated - the business does not have a separate legal existence from its owners.

Corporations Act 2001

The Corporations Act 2001 is a Commonwealth Act that regulates corporate activity in Australia, gives legal existence to companies, and provides shareholder protection.

This is done through the rules and requirements stated in the Act which cover:

  • The formation, naming and operation of companies

  • Duties of Directors and other office bearers

  • Raising finances from the public

  • Trading of shares

  • Reporting requirements

  • Appointment of company auditors

  • Liquidators and the process of winding up a company

Characteristics of a Company

Separate Legal Entity

A company exists as a separate legal entity from its owners, who are known as shareholders. A company is 'incorporated'- given separate legal existence when it is registered under the Corporations Act 2001. This then allows the company to own assets, sue and be sued in its own name. Continuity of Existence A company will exist up to the point it is wound up formally through a legal process and deregistered by the Australian Securities and Investments Commission (ASIC). Unlike the death of the owner in a sole trader and the death of a partner in a partnership, the death of a company shareholder does not affect the existence and running of a company.

Owners Equity

The owners equity is also known as capital, and is divided into units of shares. Shareholders transfer their portion of ownership over the company by buying more shares or selling a portion or all their existing shares. Ownership and Management Ownership and management of the company are kept separate. The shareholders are the company owners, and during the shareholders meeting they appoint a 'board of directors'. The directors are delegated by shareholders to this committee and in charge of managing company operations.

Limited Liability

The shareholders' responsibility for the company's debt is limited by the amount of owners equity they have contributed through their portion of owned shares. Shareholders contributed amount is the full extent at risk to settle the company's liabilities, and the shareholder cannot be expected to be liable for anymore. E.g. Tom owns 10,000 shares, costing $ 1 each.

His total capital contribution in the company is = 10,000 * 1 = $10,000. This amount is the only thing at risk in the event the company falls into debt, Toms personal assets are protected and Tom will not be expected to pay anything more to settle the debt other than his $10,000 worth of contributed capital. This is known as Limited Liability - the owners liability in company debts are limited to the amount of their capital contributions.

Internal Operations

Internal operations of a company are governed by a formal set of regulations which could either be:

  • the Replaceable Rules which are contained in the Corporations Act 2001; or

  • the company's Constitution which sets out their own governing rules; or - a combination of both Replaceable Rules and the Constitution.

Taxation and Regulation

The company is taxed as a separate legal entity, and therefore pays a flat rate of 30% tax on its profits. All companies are subjected to regulation from the government and the Corporations Act 2001.

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