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Should I become a director? Part 1 – A Guide for New Directors – know your duties and risks

Directors - know your duties and risks

Author

  • Anthony Bagala

    Anthony’s career originally developed in the areas of business services, taxation accounting and insolvency working for boutique and middle tier SME’s in Perth and Sydney during 2000 and 2008.

(Part 1 of a 4-part series)

All business owners are advised at some point to register a company and become one of its directors to transact their business through a corporate structure. The question is should they become a director, and what are the implications?

Registering a company is a simple process. Individuals can register a company themselves online through ASIC or a third-party private service provider. There are no educational requirements or qualifications. The only requirement is that a director is over 18, is not an undischarged bankrupt and has not been convicted of an offence like fraud or a breach of their officeholder duty. There is also no mandatory training beforehand. 

Becoming a company director may also be a simple process, but it comes with numerous perils and traps for the unwary director, particularly if the company fails to succeed as hoped.

Most individuals who become a director are unaware of their duties and exposures and often find themselves in serious financial difficulty should the company’s financial situation take a turn for the worst. Furthermore, most directors need to comprehend the distinction between the corporate entity and themselves as individuals.

This article is part 1 of a four-part series.  It explores the various considerations an individual should consider before becoming a director and discusses their duties and roles.

Definition and profile of a company

Most small companies are ‘proprietary companies’ (Pty Ltd), and large companies are ‘public companies’ (Ltd). Proprietary companies can be as small as having just one director and a shareholder.

A company is a separate legal entity which, in the past, afforded the directors a wide range of protections.  A company can sue or be sued and is governed and regulated by the Australian Securities and Investments Commission (ASIC).

The Corporations Act (2001) is the governing legislation that sets the rules for companies and officers.

The company owns the assets, and directors cannot treat the property as their own. Unfortunately, many directors mistake the assets of the company as their own, which opens a host of potential problems down the track. 

Likewise, the liabilities of the company are not the liabilities of its directors and officers. However, in some circumstances, these liabilities can be deemed income to directors.

Should I become a director?

Individuals should ensure they have a good knowledge of the various responsibilities and risks associated with being a company director.

There are also many considerations an individual should take into account and the best approach is to consider whether the benefits of becoming a director outweigh the risks.

Following are some of the considerations:

  • Limited liability either to the limit of any unpaid amounts on shares or capital or guarantee depending on the corporate structure.
  • Compliance rules under the Corporations Act and other legislation.
  • Consider the tax advantages of starting up a company and being a director. The potential tax benefits will depend on the type of business, likelihood of profitability and numerous other factors – discuss with your accountant.
  • All directors must have a director identification number (DIN). Civil penalties apply for any director who has not registered for a DIN.
  • Increased expenses of record keeping, accounting and tax compliance if the purpose of being a director is to start up a company.
  • Starting up a company may be a viable asset protection strategy.
  • Licensing requirements – trading under a company structure is required in some industries.
  • Directors have a wide range of roles and duties as set out in the Corporations Act.
  • Directors have administrative and procedural requirements under the Corporations Act.
  • Risks of the company entering into an external liquidation such as liquidation if it cannot pay its debts.
  • Personal exposure that could result in the director being personally liable for a debt.
  • A director has a statutory obligation to guide and monitor the management of the company. Most directors of small proprietary companies will also be heavily involved in the management of the company.

You should only agree to become a company director or secretary if you are willing, able, and committed to upholding these important roles.

One notable trap

Be extra careful if you are being asked to be a director of an existing company. The new director will be as personally exposed as the previous or continuing directors.

Be wary of anyone who says you will not have to do anything for the company when persuading you to become a director. You could be exposing yourself to serious liabilities if you accept such a role.

In summary

It is more important than ever before for directors to understand their duties and risks because the level of personal financial exposure and risk directors face has increased dramatically as a result of legislative reform. 

Part 2 of this 4-part series will outline the duties and obligations of a director. 

If you are considering becoming a director or you are a director of a company experiencing difficulties and are concerned you may be personally exposed, please contact our liquidator and trustee in bankruptcy Anthony Bagala at dVT Group at (02) 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

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