What is a Proprietary Limited Company (Pty Ltd)?

One of the most frequent legal structures Australian businesses choose is the proprietary limited company or Pty Ltd. Similar to other company forms such as a company limited by shares or an unlimited company, Pty Ltd entities operating in Australia are regulated by the Corporations Act 2001 and have legal obligations associated with the Australian Securities and Investments Commission and the Australian Taxation Office. These rules have a direct impact on organisational governance and profit distribution.

What is a Proprietary Limited Company?

Pty Ltd Definition

The most common types of business entities in Australia are proprietary limited companies (pty ltd), limited companies (ltd), and no liability companies (NL) ¹. According to the Australian Securities and Investments Commission (ASIC) a company is “an entity that has a separate legal existence from its owners”. It is capable of performing the functions of a body corporate, including suing or being sued, acquiring, holding, or selling property.

Pty Ltd Characteristics

The names of proprietary limited companies indicate their legal status. For example, the word proprietary, abbreviated to Pty is included at the end of Barangaroo Pty Ltd. A Pty Ltd company can be smaller or larger in size. Being designated as a large proprietary company requires three things: an annual revenue of $10 million or more, assets of $5 million or more, and a staff size of 50 or more employees. A Pty Ltd business is obligated to submit annual accounts with ASIC. Under rare circumstances, proprietary companies can be unlimited, or incorporated Pty companies can receive a charter from the Queen.

Difference between Ltd and Pty Ltd

The table below describes the key differences between proprietary limited, limited, and no-liability companies.

Benefits of Forming a Pty Ltd in Australia

Operating a business through a proprietary limited company offers three main benefits. In Australia, Pty Ltd companies receive a lower tax rate. Any income generated from business activities is subject to a company tax rate, which is lower than the rate applied to individuals. For example, smaller Pty Ltd companies pay a base rate of 25%.

In addition, shareholders attached to proprietary limited companies have limited liability since in Australia a Pty Ltd business is considered a legal entity and is liable for debts as an organisation. The liability of members and owners is therefore limited, and individuals are not personally responsible. The exception is if a member has personally guaranteed a loan.

Another important benefit of setting up a proprietary limited company in Australia is that this allows you to sell the company when you retire or leave the business. Directors and shareholders in key positions of leadership can also be replaced rather than having to close the business down in the event of a founder’s death.

How to Set Up a Pty Ltd Company

What are the steps to forming your proprietary limited company? First, you will need to choose a legal name that includes the word ‘proprietary’ or its abbreviated form ‘Pty’. The name must be different than those already registered by existing businesses operating in Australia. To search for existing names, you may use the ASIC Connect page and search the company register. As an alternative, you can use the assigned Australian Company Number as your company name.

The next step is to choose a governance model and appoint officeholders. A key question to ask yourself is how you want your board to work and how you plan to measure their success. Author David Fishel identifies three primary models for organisational governance². The agency or stewardship model focuses on the interests of managers rather than the owners of the business. Board members are responsible for providing oversight to managerial work and ensuring the organisational resources are protected.

The next step to setting up a Pty Ltd company is to register with ASIC. Pty Ltd registration requires companies to have an annual review every year. Once registered, a company can conduct business throughout Australia.

Pty Ltd and the Corporations Act 2001

Corporate governance in Australia is above all influenced by the country’s legal framework. The Corporations Act 2001 establishes the rules related to companies’ document collection and management, roles and powers of the Board members and shareholders, how to run and document meetings, and how shareholder issues are resolved. The Board drives the decisions companies make about operations and performance.

In 2022, the Act was amended to allow companies to use digital platforms to submit company documents, sign meeting-related documents, and hold hybrid annual general meetings. Yet, the core elements of the 2001 Act remain largely unchanged. According to the Corporations Act 2001, proprietary companies are required to have at least one director but do not need to have a secretary, and the Board of Directors is obligated to describe internal governance rules and procedures in writing. For more information on Board governance strategies, visit Better Boards and find out about the Our Cat Herder board portal.

There are special rules for sole directors. They are not required to have a constitution unless new directors or members are appointed to the Board. In addition, shareholders can amend the rules by passing a resolution with at least 75% of the votes ³. Companies must also follow rules about share structure. A proprietary company can have no more than 50 non-employee shareholders and must either become a company limited by shares, or an unlimited company with share capital. In addition, Pty Ltd companies can only offer shares to employees and members of the company and their subsidiaries.

Additional Resources

To find out if your new company name is available, you can search the ASIC company register here.

To learn more about the recent taxation changes that apply to proprietary limited companies, and for examples on how to calculate base rate entity status, visit the Australian Taxation Office webpage.

References