Company set up for a new business Question.

[Terryw]

If the company buys something on credit and no personal guarantees are given and the company doesn't pay for the goods then only the company can be sued.

in this scenario, Mike Smith is the sole owner of the company MS PTY LTD

Is he more protected than if he were a sole trader ?

In a one man show, is being a company / sole trader much different I guess is the question ?

Yes, the shareholder is totally protected.

It is like owning Telstra shares - if the company telstra is sued or goes under the shareholders can't be held liable in any way.

In this case Mike Smith as director will be safe too. He could, as director, just decide not to pay the bills. The creditor could then sue the company, but not the director. He could let the company go into liquidation and come out relatively pain free. He may have a slight blemish on his craa as it may show he was a director of XYZ Pty Ltd and futher searching could reveal the liquidation.

But this is way better than being a sole trader. A sole trader would be sued and all their personal assets will be at risk.

 

[jaycee]

Thank you, he penny finally dropped and I go it.


I take it then, you would not yourself, or suggest to too many people to run a business as a sole trader ?

 

[Terryw]

Yep - i would advise not to be a sole trader as it is too risky. Forming a company is relatively cheap and the ongoing costs are not too much either so why take the risk of being a sole trader.

 

[jaycee]

Thanks again Terry, a whole page of answering my questions....

 

[Piston Broke]

He could, as director, just decide not to pay the bills.

A director has many responsibilities, it's pushing a fine line saying he can "just decide not to pay the bills".
They have a duty of care towards the company and shareholders, if the bills can't be paid (ie insolvent) it's illegal to keep trading.
A company is a seperate legal entity, and you have responsibilities towards it.

The creditor can also bankrupt the company and the the administrator can look back into the transactions and may reverse anything done to avoid creditors, or find some personal negligence & liabiity to go after.

 

[Terryw]

A director has many responsibilities, it's pushing a fine line saying he can "just decide not to pay the bills".
They have a duty of care towards the company and shareholders, if the bills can't be paid (ie insolvent) it's illegal to keep trading.
A company is a seperate legal entity, and you have responsibilities towards it.

The creditor can also bankrupt the company and the the administrator can look back into the transactions and may reverse anything done to avoid creditors, or find some personal negligence & liabiity to go after.

Insolvent trading, if it occurs would mean that directors could be personally liable - but whether a liquidator (or asic) would go after the directors or not is another matter.

an eg of not paying the bills would be a situation where the bill is disputed. The creditor could sue the company, get a judgment and then bring in the liquidators if the judgment isn't paid. No insolvent trading and the director's personal assets would very likely be out of reach.

 

[jaycee]

Terry,

In the example of the disputed bill..... wouldn't the creditor sues the company for the bill amount and then some, and then it be up to the cmpany (owned by Mike Smith) to pay ?

In the case of a sole trader, would they not do the same and then it be up to Mike Smith the sole trader to pay ?

Wouldn't the creditor ask for the same amount of damages form a non paying customer ?

 

[Terryw]

Terry,

In the example of the disputed bill..... wouldn't the creditor sues the company for the bill amount and then some, and then it be up to the cmpany (owned by Mike Smith) to pay ?

In the case of a sole trader, would they not do the same and then it be up to Mike Smith the sole trader to pay ?

Wouldn't the creditor ask for the same amount of damages form a non paying customer ?

Yes to both. But the difference is that with the company the company is at risk but not the person. The person's own assets are not, generally, at risk.

If the sole trader has a house and is then sued the judgment creditors could get his house. If the company is sued then the assets of the company are at risk, but usually companies don't hold any assets of value - or shouldn't for this reason.

 

[jaycee]

Right.... but would an unpaid bill scenario be an example of when assets of the sole trader would be sought after ? I guess if the buisness assets aren't enough to pay the debt they would.... Where as in a company, there may not be enough to pay the creditor so end of story(?)

 

[Terryw]

Right.... but would an unpaid bill scenario be an example of when assets of the sole trader would be sought after ? I guess if the buisness assets aren't enough to pay the debt they would.... Where as in a company, there may not be enough to pay the creditor so end of story(?)

It would depend on how big the bill is I guess.

And remember the sole trader is not separate from the business - they are the same entity so if they are sued their 'business' assets and personal assets are at risk. Once someone has a judgment against you they can then have the sheriff send around to seize assets to be sold to satisfy the judgment.

With a company it is the same. Assets of the company can be seized, but if it is an empty $2 company there is no real point in even suing the company - as you can win and still be left with nothing but legal bills.

 

[Piston Broke]

You forget to point out the ramifications of a company being bankrupted and liquidated.
And if judgement is awarded against the company, any transactions made to avoid creditors will be reversed.

Maybe no real point, but there cheap ways of making their financial life hell which can be very satisfying.

 

[Terryw]

Transactions done to defeat creditors could be undone in some circumstances, but you have to distinguish these transactions from the company not being able to pay creditors.

If a company doesn't have funds to pay a judgment, then there is no requirement for shareholders or directors to pour money into the company so as to enable it to pay.

If a company has a judgment against it and then the company starts selling its assets and paying dividends, or selling assets cheaply to related parties then these are the sorts of transactions that can be unwound - in theory anyway. In practice this doesn't really happen.

At the moment I know of a woman who invested about $250,000 into a restaurant and owned shares in a company that ran the restaurant. unbeknown to her the director sold the business to someone else, took all the money (fleeing the country too) and left her owning shares in a worthless company. (I also know another guy who lent $1mil to a developer and obtained personal guarantees from 5 directors and other related companies. The whole thing has collapse and they will get nothing back. every director is now bankrupt)

 

[Terryw]

I should also point out that if the company is acting as a trustee then directors can be personally liable for transactions and debts of the company in some cases - s 197 corporations act i htink.

 

[jaycee]

So a tradie, running a one man show.... still reckon go the company vs. sole trader ?

 

[Terryw]

So a tradie, running a one man show.... still reckon go the company vs. sole trader ?

Yes. Never sole trade.

 

[Piston Broke]

every director is now bankrupt

Bingo!!!!

Once again, for the hard of hearing, bankruptcy is a last resort.
You don't "just go bankrupt" you cripple your whole financial life afterwards.

 

[jaycee]

yes. Never Sole Trade.

Ok !......

 

[Terryw]

Bingo!!!!

Once again, for the hard of hearing, bankruptcy is a last resort.
You don't "just go bankrupt" you cripple your whole financial life afterwards.

But bankruptcy isn't as bad as euthenasia - there is an afterlife.

I had another friend who had $200,000+ on credit cards and she was trying to remain afloat, struglling for years under enormous pressure. She went bankrupt and said she should have done it sooner. Debt removed, all pressure gone and she was able to negotiate early release from Bankruptcy with about 6 months. She will have a hard time borrowing money again (for a while anyway, and there are ways around this) and may have problems holding professional qualifications (such as mortgage broker, fin planner etc, but not soliicitor), but for her this doesn't matter.

 

[Piston Broke]

but for her this doesn't matter.

It matters for anybody who is an investor
It matters for anybody with other loans
It matters for anybody owning or running other businesses
It matters for anybody who owns other assets, regardless of holding structure
It matters for anyone who has other financial interests

In the 90's it was trendy to "just go bankrupt", dont have to pay debts and start again.
I'm sure people here rent them housing, and it wont be easier this time around.

But sure, if you have nothing to lose, and dont want to have nothing for quite a while, it dont matter.

 

[jaimeandrenee]

Bingo!!!!

Once again, for the hard of hearing, bankruptcy is a last resort.
You don't "just go bankrupt" you cripple your whole financial life afterwards.

or u could go int voluntary administration and negoitiate terms of repaying your creditors not as bad as bankrupcy??