Becoming a company director

What is a company?

A company is a separate legal entity from the people who run or own it. It has its own property, rights and obligations. Other business structures – such as sole traders and partnerships – are not separate legal entities.

Companies are regulated under the Corporations Act 2001 (Corporations Act), which is overseen by ASIC. Directors must make sure the company complies with its legal obligations under the Corporations Act and other laws that apply to the business.

Understanding what a company is, and how it differs from other business structures, is an important part of deciding whether becoming a director is right for you.

Before you register a company, consider alternative structures

If you are starting a business, there are different business structures you may be able to use. These include:

• sole trader
• partnership
• trust
• company.

A company can be useful for some businesses, but it is not the right structure for everyone. Compared with some other business structures, a company usually involves more formal rules, more record keeping and more ongoing legal obligations.

If you choose a company structure and become a director, you will have obligations under the Corporations Act from the start. That’s true even if you are the only director and shareholder.

Having a company structure for your business will affect:

• How the business entity is taxed
  Companies are taxed differently from individuals or partnerships. This affects how profits are taxed, when tax is paid, and how money can be taken out of the company.

• How flexible the entity is to run
  Running a company involves more formal rules than some other structures. This can affect how easily you can change ownership, bring in investors, or alter how the business operates.

• Your personal exposure if things go wrong
  A company is a separate legal entity, which can limit personal risk in some situations. However, directors can still be personally liable in a range of circumstances, including if they breach their obligations.

• How much reporting and record keeping the company must do
  Companies have ongoing legal obligations, such as keeping financial records and lodging information with ASIC. This generally means more paperwork and compliance than other business structures.

• How decisions are made and who has authority
  In a company, decision making has to comply with legal rules relating to directors and shareholders. Some decisions must be made by directors, others by shareholders, and this can affect how quickly and informally decisions can be made.

You should compare other business structures before deciding to register a company.

See ASIC’s webpage Sole trader? Partnership? Company? Trust? for further information about different business structures.

The Australian Government website business.gov.au also provides useful information to help you decide which structure might work best for your business.

You should also consider seeking professional advice, such as from an accountant or lawyer, before choosing a business structure.

Questions to ask before registering a company

• Is a company the right structure for my business?
• Who will own the shares?
• What will be my obligations as a director?
• How will I keep company money separate from personal money?
• What records will I need to keep from day one?
• What tax, employee, superannuation and reporting obligations will apply?
• Will I need licences, insurance, leases, loans or finance?
• Could I be asked to sign personal guarantees and what does this mean?
• What happens if the business struggles financially?

The role of director

A director is responsible for managing and overseeing the company and making sure it meets its legal obligations. In many small companies the director is also closely involved in day-to-day management and decision making.

Legal responsibility means you must ensure that both you and the company comply with the Corporations Act and all other laws relevant to your business. This webpage focuses on directors’ obligations under the Corporations Act.

At a minimum, a director is expected to:

• Take an active role in running the business
  In most small companies, being a director means being directly involved in how the company operates, making decisions, and setting direction. You are expected to ask questions of those to whom you delegate tasks, stay across what is happening financially, and not simply assume that others are taking care of things, for instance your accountant or your lawyer.

• Understand the company’s operations and finances
  You must understand the company’s financial position and its ability to meet its financial obligations (i.e., pay its debts) as they fall due. You can delegate tasks, such as bookkeeping, but you cannot delegate legal responsibility for ensuring the company can meet its financial obligations – especially in a sole-director company.

• Act in the best interests of the company
  You must make decisions honestly, for a proper purpose, and in the interests of the company itself. This means putting the company’s interests first, even where they may differ from your own personal interests.

• Make sure the company complies with the law
  This includes complying with requirements under the Corporations Act—such as your obligations as a director, keeping proper records, meeting reporting requirements, and responding to ASIC when required—but also other laws that may apply to the business, such as work health and safety, employment, and tax obligations.

When you are a director, even if you use accountants, bookkeepers, or advisers, the legal responsibility for the company ultimately sits with you.

Eligibility to become a director

To become a director, you need to meet certain legal requirements under the Corporations Act. The rules exist to make sure directors understand the responsibility they’re taking on and that they are capable of carrying it out.

• You must be at least 18 years old.
  This ensures directors have the legal capacity to make decisions and be held accountable for them.

• You must consent in writing to being appointed.
  This protects you from being made a director without your knowledge. Your written consent shows you understand that the role carries legal duties and personal obligations.

• At least one director must normally live in Australia.
  This requirement ensures that every company has someone who is locally available and who understands and can meet Australian legal and reporting obligations.

• You cannot be disqualified, bankrupt, or otherwise prohibited from managing companies.
  People who are bankrupt, currently disqualified by ASIC, or have been convicted of certain offences in recent years cannot legally act as directors. This helps prevent misuse of directorships and protects the public, creditors and shareholders.

These rules apply whether you are joining an existing company or helping to set up a new one.

Financial and legal risks of being a director

Even though a company is a separate legal entity, there are circumstances where directors can be held personally responsible.

This can happen, for example, if:

• The company incurs debts it can’t afford to pay
  If the company continues operating when it cannot pay its debts as they fall due, directors may be personally responsible for the losses that result. This can happen even if the business is still operating day to day. This is commonly known as insolvent trading. See the companion guidance Experiencing financial difficulty.

• The director does not meet their legal obligations
  Directors must act with care and diligence, act honestly and in the company’s best interests, and use their position and information properly. Breaching these obligations can lead to personal consequences. See the companion guidance Managing your director obligations.

Directors' duties are designed to promote responsible decision-making and protect the interests of the company, shareholders, creditors and the wider community. Because of the importance of these responsibilities, directors who fail to meet their obligations may face significant consequences, including civil penalties, criminal prosecution, and may be required to repay losses, even where the breach was unintentional.

Lenders and trade suppliers often require personal guarantees or security (such as over a family home) when a company borrows money. If the company cannot repay the loan, the director may be personally required to do so.

While this page focuses on your obligations as a director under the Corporations Act, you should be aware that other laws may also make you personally liable in certain circumstances. For example, the Australian Taxation Office can recover some unpaid company tax and superannuation guarantee liabilities from directors personally through director penalties.

Further practical information about your obligations as a director can be found in the companion guidance Managing your director obligations.

Before you agree or decide to become a director

You may be asked to become a director when setting up a new company, joining an existing company, or running a company with others. You should only agree if you understand what the role involves and if you are willing and able to take an active role in the company. You should also understand the personal, financial and legal risks you are taking on.

A directorship is not just a title. There is no such thing as a ‘silent director’ or a director ‘in name only’. If you agree to become a director, you take on legal obligations. If you do not meet those obligations, you can face serious legal and financial consequences.

Do not agree to become a director in name only

Be cautious if someone tells you that you will be a director ‘on paper only’, ‘just for registration purposes’, or that you will not need to be involved in the business. A director is legally responsible for the company, even if another person is making the day-to-day decisions. You should not agree to be appointed unless you understand the company’s business, finances, risks and obligations.

If you feel pressured to become a company director

You should only agree to becoming a company director if your decision is voluntary and informed.

Before consenting to an appointment, take time to understand the role, the company and the responsibilities you will be taking on. Do not sign appointment documents, company registration forms, bank documents, Director ID information, personal guarantees or other documents if you feel pressured, rushed or unsure.

Pressure can come from a business partner, employer, adviser, spouse, family member or friend.

If you are uncomfortable or unsure, pause before signing anything and seek independent professional advice from an accountant, lawyer or financial counsellor.

Warning signs

Consider getting independent professional advice before agreeing to become a director, especially if:

• you are told the role is only a formality
• someone else will make all the decisions
• you are asked to sign documents you do not understand
• the company has unpaid tax, employee entitlements, rent, loans or supplier debts
• you are not given access to company records or financial information
• you are asked to sign a personal guarantee or provide security, or
• you feel pressured, rushed or unable to ask questions.

Questions to ask if you are considering becoming a company director

Before deciding to become a director, consider the following:

About the company

• Why is the company being set up, or why am I being asked to join it?
• If the company is already operating, what is its financial position?

About the role

• What will my legal obligations be as a director?
• What decisions will I be expected to make or approve?
• Will I have access to the information I need to perform my role effectively?

About running the business

• Who will manage the day-to-day operations of the business?
• What systems will be used to maintain financial records and meet legal obligations?
• If the company is already operating, are the company's records, accounts and tax lodgements up to date?

About other people involved

• Who are the shareholders?
• Are there other directors? If so, how will decisions be made and responsibilities shared?

About financial risks

• If the company is already operating, does the company owe money to the Australian Taxation Office (ATO), employees, suppliers, landlords or lenders?
• Will I be asked to provide a personal guarantee or use personal assets as security?

About the future

• What happens if I want to leave the company or resign as a director?

What to do if you are unsure or did not consent to being a director

If you have already agreed but are unsure

If you have already become a director but now realise you do not understand the company’s position, cannot access records, are not involved in decisions, or feel you were pressured, get independent professional advice as soon as possible.

You may need advice about your obligations, whether you should continue as director, the steps involved in correcting company records or, as a last resort, how to resign (see Add or remove a company officeholder ).

If you did not consent to being appointed

You must give written consent before being appointed as a director. If you discover you were appointed without giving written consent, or if you believe the appointment was made in error, take steps to correct the company records and remove yourself from the role (see If you did not consent to be a company officeholder).

Director ID requirements

All company directors, whether of a new or existing company, are required to have a Director Identification Number (Director ID) before being appointed to the role (see Director identification numbers (director IDs) ).

Each director must apply for a Director ID through the Australian Business Registry Services (ABRS). This requirement applies regardless of the size of the company or whether the person is a sole director or one of several directors.