A company is an artificial legal person, which has the ability to sue or be sued. The overwhelming majority of companies are established for the purpose of carrying on a business.

The main motives are:

  1. to take advantage of the flat company tax rate – either 30% or 27.5% depending upon your circumstances; and
  2. to limit liability.

Limitation of Liability

Where a company enters into a contract with another person or entity, as a matter of law it is only the company which is potentially liable to be sued under the contract. Such a contract might be for the purchase of stock or equipment for a business, or perhaps rent under a lease. As a general rule, neither the directors nor shareholders of the company are personally liable under that contract, unless the individual has given the creditor a personal guarantee.

Similarly, under the law of negligence, it is the company which is primarily liable. For example if a young shop assistant in a milk bar made a sandwich using out of date, contaminated, salami which poisoned a customer, it will be the company owning a business which is sued for negligence, not its director.

However it would be a mistake to assume that the establishment of a company provides blanket cover for all liability of every kind.

Examples of cases where directors personally can be liable in connection with company business activities include where:

  • the individual director in question has been involved in the negligent activity – for example if it is the director who makes the contaminated sandwich, both the director and the company will be sued;
  • the company is liable under the misleading or deceptive conduct provisions of the Consumer Law of Australia, the person who is involved in the breach is also liable. For example if the director of a company running a garage advised a customer to put the wrong type of fuel in his car, resulting in engine damage, again the director would also be liable;
  • a company is found to have traded while it is insolvent – that is, where it has insufficient resources to pay debts as and when they fall – a directors or persons acting in that role sharing the liability; and
  • a company has breached occupational health and safety laws.
There are many other examples, and the list is increasing. Because of this, it is critical to ensure that adequate insurance is taken out, and that contracts with customers are very carefully worded.