A company limited by shares (CLS) is one of the most common structures used to conduct business in Australia. As a company founder, the legal structure you choose determines the activities your organisation can legally carry out. Forming a CLS is a good option for organisations planning to conduct commercial activities and can help protect group owners from personal liability. The Corporations Act 2001 (Cth) defines a company limited by shares as “a company formed on the principle of having the liability of its members limited to the amount (if any) unpaid on the shares respectively held by them.” 1.
Listed vs unlisted companies
Under Australian law, there are two primary categories of companies: proprietary (private) and public. Public companies can either be listed or unlisted. Proprietary companies are always listed, meaning that they offer shares to members of the public rather than limiting shareholders to a small group of people. Listed companies make their shares available for trade on the stock exchange and to public investors. They are usually owned by a larger number of shareholders.
Unlisted public companies are different from proprietary companies which are privately owned. Their shares are not included on list of companies that trade shares and stocks through the securities exchange. Public companies limited by shares, unlimited public companies, and unlisted no liability companies are all examples of unlisted public companies. Public companies limited by shares are unlisted companies with no shares or stocks listed on any securities exchange. Unlisted companies are owned by a smaller group of private investors. They offer protection if the company goes into debt and is unable to pay.
Advantages of Company Limited by Shares
There are two main advantages to forming a company limited by shares. First, the structure offers limited liability to company members (shareholders), other than the amount of shares they already hold. Like other companies, a CLS is considered a legal entity, meaning that members are not personally liable for the debts incurred by the entity through its business activities.
Second, companies limited by shares have greater growth potential. A business operating under this legal structure has the advantage of attracting more investors since shareholder liability is limited and investment options are more flexible. Shareholders of CLSs have the right to sell or buy more shares than with other structures. If members plan to raise capital to conduct run their business, a company limited by shares may be a good choice.
CLS and types of share classes
A company limited by shares essentially operates under a share structure. One share represents a percentage of ownership of the company, and those who own it are called shareholders. Every CLS must have at least one class of shares available to investors and assign restrictions or special rights to those to purchase them. The share structure adopted by the group consists of two things: the number of shares the company has issued to shareholders or are outstanding, and the different share classes that can be issued.
Shareholders are considered members of the organisation and can pay the full amount purchased for the share or only a portion. The share class will determine the different rights assigned to each shareholder. Some may offer the right to vote during meetings, while others will pay out dividends. Australian companies must issue at least one share to one shareholder to be eligible for CLS status. A company must keep track of paid and unpaid amounts in the share structure. When deciding on how to distribute shares, company founders must determine the rights and restrictions they plan to assign to each share category. The two most common share classes are ordinary shares and preference shares.
CLS legal obligations in Australia
A registered company limited by shares (CLS) has several obligations under Australian law. Under the Corporations Act, it is required to have at least three directors, with a minimum of two who live in Australia. CLSs are obligated to provide a copy of their constitution to their shareholders when requested. Additionally, they must meet the following requirements to stay in good standing with the government:
Vote on and share any changes made to the constitution.
Prepare and submit financial statements for the company.
Share an annual report with all members.
Hold regular meetings and call a general meeting once a year.
Record minutes during meetings to document resolutions.
If included in the constitution, pay dividends to shareholders in the form of cash, shares, or the transfer of assets.
Unlisted public companies, including companies limited by shares, must be registered with the Australian Securities and Investments Commission (ASIC), the authoritative body responsible for regulating financial services and financial markets. ASIC administers the ASIC Act and ensures companies meet their legal obligations under the Corporations Act.
Companies Limited by Shares Register
To register a company limited by shares (CLS), the founders of the organisation must follow several steps with respect to the process ASIC oversees. First, the group must decide on a company structure, including whether to form a limited or unlimited company and how shares will be distributed. The next step is to create written rules in the form of a constitution. Some bodies may instead use a charter or memorandum to define the rules governing their organisation and members.
As a CLS, you must select your company officeholders (Directors), who will oversee the operations and governance, and decide on the purpose of the company and the activities you will be undertaking. The next step is to choose a legal name for the company, making sure it isn’t already being used by another. The legal name must be registered using the Business Registration Service (BRS). You must also obtain an Australian Business Number (ABN) for taxation purposes and a unique company number (corporate key). Once the company is registered, it will be added to the public company directory.
What is the difference between a company limited by shares vs company limited by guarantee?
Australia’s Corporations Act 2001 defines the terms ‘company limited by shares’ and ‘company limited by guarantee” as follows. A company limited by shares is “a company formed on the principle of having the liability of its members limited to the amount (if any) unpaid on the shares respectively held by them” . A company limited by guarantee, on the other hand, is formed to limit the liability of its members to the amounts that they contribute (or agree to contribute) to the property of the company if it is wound up. Public companies limited by guarantee are often used by not-for-profit organisations because they make reinvesting surplus profit into the non-profit entity possible.
What is the difference between ordinary shares vs preference shares?
Ordinary shares (ORD) are the most common type of share in Australia. They give shareholders the right to receive notice of and attend member meetings, vote on company matters, receive dividends if the company makes money. Ordinary shareholders also receive surplus assets if the company winds up. Preference shares (PRF) give shareholders priority to repayments if the company liquidates its assets. They also include the right to fixed and accrued dividends, and priority over the repayment of capital if the company files for bankruptcy. Dividends can be paid in the form of cash, shares, or the transfer of assets, depending on what is written in the company’s constitution.
What are shareholders in CLSs?
A shareholder essentially owns a percentage of the company for purchasing and holding shares. CLS shareholders are obligated to pay the company an agreed amount for each share they receive, and in exchange, become members of the organisation. A company member can make decisions about the company, including voting on resolutions during committee and annual meetings.
What is a share register?
A share register is a required document that lists each company owner and the company’s shares. The information recorded in the share register must include the number and class of shares each individual or corporation holds, and the amount paid or unpaid on their shares. Shareholders have the right to access the share register at any time. The shareholder register also documents all shares distributed to former and current owners and is a historical record of share transactions.
What liability do shareholders of a proprietary company vs public company have?
With proprietary companies, shareholders will have two likely scenarios when it comes to their liability: they are only liable for the value of their shares (limited by shares) or there is no limit place on their liability (unlimited share capital). Shareholders of public companies will have more possible outcomes when it comes to liability. They may only be liable for the value of their shares (limited by shares). They may be limited by a specific number that they are willing to contribute when the company winds up (limited by guarantee). They may have unlimited liability (unlimited public companies with a share capital), or, they can have zero liability.
Better Boards connects the leaders of Australasian non-profit organisations to the knowledge and networks necessary to grow and develop their leadership skills and build a strong governance framework for their organisation.