My small business

You may be risking your entire wealth if you’re a company director for a friend or family, writes Belinda Williams.

Some owners frequently risk their family finances because they don’t fully understand their legal obligations as company directors. Owners often structure a new business as a company (as opposed to a sole trader) for tax benefits and legal protection through limited liability. But legal experts say many SME directors do not understand how the law (Corporations Act) applies to them and the consequences can financially cripple them for life. A common scenario is directors being personally liable for outstanding tax and employee superannuation – even if it wasn’t their job to manage the bills. Malcolm Campbell, managing partner at Dooley & Associates Solicitors, said family or friend-managed companies were particularly vulnerable. People who go into business with ‘‘genuine third parties’’ were often cautious with their investment. ‘‘However, when people go into business with the family or close friends, they will often take a more relaxed approach to ownership, managerial and regulatory matters because of the pre-existing high degree of trust,’’ Campbell said. ‘‘This is evident by the very large percentage of family-run businesses that do not have shareholders agreements in place and are effectively run on trust and confidence in the other owners and directors. ‘‘This often flows onto many people leaving the more ‘financially savvy or literate’ director to manage the financial affairs of the company without bothering to check on a regular basis that major and critical financial and other matters are attended to, such as the payment of superannuation,’’ he said.

Latest statistics from the Australian Financial Security Authority reveal that 5175 Australians cited business-related reasons for their personal insolvency last financial year (2015-16).

Of these people, 4323 went bankrupt. The figure includes company directors, sole traders and others.

Louise Petschler, general manager – advocacy at the Australian Institute of Company Directors, said: ‘‘Limited liability doesn’t mean no liability.

‘‘Directors of a company can be personally liable for company losses caused by a breach of directors’ duties, debts incurred while insolvent, or outstanding tax and superannuation liabilities,’’ she said.

‘‘There are also criminal penalties for breaches of the Corporations Act.

‘‘Directors obligations are broadly the same regardless of whether you’re running a lawn mowing business, a small charity, an ASX-listed company, or even a self-managed super fund as more and more Australians are,’’ she said.

Common mistakes by SME company directors

Unnecessarily exposing personal and family assets.

‘‘Not understanding the concept of limited liability, and in doing so weakening the protections provided to them by using a company structure in the first place,’’ Campbell said.

Not understanding the different roles they play within the company.

‘‘Such as being an employee [someone paid to fulfil a specific task within the company’s business and answerable to the directors], being a director [a person responsible for the day-to-day management of the affairs of the company and answerable to the shareholders] and being a shareholder [owner],’’ Campbell said.

Not acting in the company’s best interests.

Melissa Sinopoli, of MacDonnells Law, said: ‘‘SME directors don’t always understand that although they are the director and possibly shareholder, the company is an entity distinct from them. As such, they are required to act in the best interests of the company when making decisions, rather than themselves.’’

Not being fully aware of the extent of their personal liability.

‘‘For example, directors can be held personally liable for breaches of duties as a director and under legislation relating to workplace health and safety and environmental laws,’’ Sinopoli said.

Trading while insolvent.

‘‘If directors are worried the company cannot pay their debts as and when they fall due, they should seek advice immediately,’’ Sinopoli said. ‘‘There have been cases where directors have continued to allow the company to trade whilst insolvent and have been personally liable for the debts of the company during that time.’’

Claiming ignorance.

‘‘Directors need to make sure they are across all issues of the company required to discharge their duties as a director,’’ Sinopoli said. ‘‘If the wife has been appointed as director, but the husband runs the SME day-to-day, the wife cannot later claim that she was not aware of what was happening and that she therefore shouldn’t be liable for breaching her duties as a director.’’

Not keeping records up-to-date.

Ursula Hogben, general counsel at Legal-Vision, said records must be updated if the company’s registered address or principal place of business changes, if directors are appointed, directors resign, or shareholders change.

Conflicts of interest.

‘‘This is particularly important for serial entrepreneurs with several companies to remember,’’ Hogben said. ‘‘For example, if an opportunity comes to company A, it should not be transferred to company B unless it is in the best interests of company A.’’

A common scenario is directors being personally liable for outstanding tax and employee superannuation.