Why this matters for small business owners

Running your business through a company keeps your personal assets separate from business debts (pty ltd = proprietary limited = liability limited). You are not protected if you fail to perform your director duties. You can be personally liable. ASIC says the duties apply to all directors, including sole directors of small companies (ASIC).

The core duties

Duty	Where in the Corporations Act 2001	In practice
Care and diligence	s 180	Keep yourself informed about the activities and finances, ask questions, and act on risks.
Good faith, best interests, proper purpose	s 181	Decide based on what is best for the company, not for you, your family or friends (connected to conflicts).
Don’t misuse position	s 182	Don’t use your role to benefit yourself or harm the company.
Don’t misuse information	s 183	Use information about customers, pricing and contracts only for the company.
Declare conflicts	s 191	Disclose material personal conflicts of interest to other directors.
Prevent insolvent trading	s 588G	Don’t let the company take on new debts if there are reasonable grounds to suspect it can’t pay them.

Source: ASIC, Managing your director obligations.

ASIC also expects directors to make sure the company keeps proper financial records, avoids conflicts of interest and follows law (e.g. tax, employment and work health and safety) and directors can have personal liability under some of those laws (ASIC).

The company is separate from you

A company is a separate legal person, even when you own all of it. Money in the company’s account isn’t yours to spend personally. Many sole directors forget this. Moving assets or business out of a struggling company can breach your duties (ASIC).

Insolvent trading and safe harbour

A company is insolvent when it can’t pay its debts as they fall due. Checking once a year when you sign the accounts isn’t enough. You need to know the company’s position before each new debt (ASIC). This is where keeping good financial records is important – like having a bookkeeper.

If the company is in trouble, act early. Directors who start developing a genuine plan that is likely to lead to a better outcome may be protected by “safe harbour”. But this only applies if you keep meeting your other duties, including proper records and up-to-date employee entitlements and tax reporting (ASIC). Get advice early before assuming safe harbour will protect you.

Unpaid tax and super can become your problem

If the company doesn’t pay its PAYG withholding, GST or super guarantee charge, the ATO can recover those amounts from you personally as “director penalties” (ATO). You have 21 days after a director penalty notice to act. The ATO says lodging on time keeps more options open (ATO).

Before you become a director

• Apply for a director ID before you are appointed (ABRS).
• You must consent in writing to being appointed (ASIC).
• Read about directors’ duties.

Signing contracts as a director

Sign in the company’s name with its ACN or ABN, and show your role, for example “Director, for Smith Plumbing Pty Ltd”. If you sign only in your own name, you might be found to be personally bound. Read any personal guarantee carefully before signing it. A guarantee is a separate promise that you’ll pay the company’s debts. Obviously it undermines the ‘limited liability’ protection, but if you want a bank loan, or a lease, you have to give security.

A simple monthly routine

1. Look at the bank balance, debts due and money due over the next 3 months.
2. Check BAS, PAYG and super are lodged and paid on time.
3. Note any conflict of interest and how you dealt with it.
4. Keep the company’s money and your own separate.
5. Talk to your accountant early if cash flow is tight.

This guide is general information, not legal advice for your situation.