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.
Proprietary Limited Company (most common)
No more than 50 non-employee shareholders.
Company cannot offer shares to members of the public, new employees, or new investors.
Company limited by shares. Personal assets of shareholders are not at risk if the company winds up.
Public company that may or may not be listed on the Stock Exchange.
Ownership of company by members of the public is unrestricted (company can offer unlimited shares).
Company required to submit annual financial records to ASIC.
No Liability Company
Public company created for the mining industry.
Shareholders who don’t pay shares forfeit them. Those who partially pay shares are not bound to pay for unpaid capital.
Company may or may not be listed on the stock exchange.
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.
What is the difference between Ltd vs Pty Ltd company?
Proprietary limited companies are the most common type of business in Australia. They can have no more than 50 non-employee shareholders, are unable to distribute shares to new investors and members and are therefore considered companies limited by shares. This means the personal assets of shareholders are not at risk if the company winds up its operations. Limited companies, on the other hand, are public companies that can choose to be listed or not listed on the Stock Exchange. These companies are owned by members of the public and are unrestricted when it comes to share distribution.
Do Pty Ltd companies need to register for GST?
It depends. All companies must register for GST if they have an annual GST turnover of $75,000 or more, are providing taxi, ride-sourcing, or limousine services, and want to claim fuel tax credits. GST registration in Australia is optional if your business doesn’t meet these criteria. Companies that do register for a GST number will need an Australian Business Number first. Companies choosing not to register may need to pay interest or penalties on taxes owed. To learn more about how to register for GST, visit the ATO website.
What are the tax obligations for Pty Ltd companies?
All companies have tax obligations and a proprietary limited company is no different. However, there are specific rules the Pty Ltd entity must follow. A Pty Ltd company is responsible for filing an annual income tax assessment, obtaining a Tax F Number and an Australian Business Number, and registering for GST under certain conditions. In addition, because a Pty Ltd company cannot distribute profits to shareholders through dividends, it must attach franking credits to any financial benefits they receive. To learn more about the tax obligations of a proprietary limited company in Australia, visit the ATO website.
What are franking credits?
Franking credits are unique to Australia’s taxation system. They are a form of tax rebate paid to investors with shares in companies. As a Pty Ltd company, your shareholders should not need to pay taxes on dividends twice. They may obtain credit in the form of a rebate (tax credit) when filing their taxes. Franking credits are often used by retirees and can help stakeholders create additional income from their shares by reducing an investor’s tax burden.
What is a base rate entity?
According to the Australian Taxation Office, a company is classified as a base rate entity for an income year if its turnover is less than the threshold and it has 80% or less of its assessable income for that year. The base rate entity’s (passive) income can include corporate distributions, franking credits, royalties, rental income, interest income, net capital gains, gains on securities, and amounts listed on the income tax submission of a partner or the beneficiary of a trust.
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.
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