(PRIVATE) COMPANY LIMITED BY SHARES VS (PRIVATE) COMPANY UNLIMITED WITH A SHARE CAPITAL

Company Limited by Shares

  • A 'company limited by shares' is a company formed on the principle of having the liability of its members (otherwise known as its shareholders or owners) limited to the balance amount (if any) which remains unpaid on the shares held by its members - sections 9 and 516 of the Corporations Act 2001.

    Accordingly, if the members have paid for their shares in full and the company gets into financial strife (for example by owing more than the total value of its assets) then, even so, the members will not*** be required to contribute any further money to the company to go towards paying for any such shortfall.

    However, if the members do have amounts remaining unpaid on their shares, the most those members can be required to contribute to the shortfall is the amount remaining unpaid on their shares.

    ***A note of warning: If the members are also directors of the company, they may be exposed to further liability (for example, if they allowed the company to incur the debts at a time when they knew the company would be unable to repay those debts - sections 588G , 588J(1) and 588K(1) of the Corporations Act 2001 - and may have additional civil and criminal liabilities - sections 588G(3) and 1317G of the Corporations Act 2001)

  • Companies limited by shares are vastly more common than companies unlimited with share capitals.
  • Companies limited by shares have various restrictions on the reduction of share capital and on share buy-backs - see Chapter 2J of the Corporations Act 2001.

Unlimited Company with a Share Capital

  • An 'unlimited company' is a company whose members have no limit placed on their liability - section 9 of the Corporations Act 2001.

    Accordingly, even if the members have paid for their shares in full and the company gets into financial strife (for example, by owing more than the total value of its assets) then the members could be required to contribute further money to the company to go towards such a shortfall.

    You may reasonably wonder why anyone would want to form such a company. Sometimes, for example, a group of professionals' governing body or governing legislation may only allow them to incorporate their business on the condition that the resulting company has no limit placed on the liability of its members (i.e. the professionals). Despite the lack of limited liability for the professionals, the incorporation of the business as an unlimited company may still suit the professionals for tax or other reasons.
  • Unlimited companies are far less common than companies limited by shares.
  • Unlimited companies must always have a share capital - section 112(1) of the Corporations Act 2001.
  • In contrast to the various restrictions on reductions to share capital and on share buy-backs which apply to companies limited by shares, an unlimited company may reduce its share capital in any way it chooses - section 258A of the Corporations Act 2001.

 

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