Do you know what a proprietary limited company is? As curious individuals, there are several thoughtless questions that we have throughout our day - usually referred to as ‘shower thoughts’. One such question you might have could include “why does that company end in ‘Pty Ltd’ and that one doesn’t?”, and “what do those words even mean?”. This Business Kitz article will help to explain the meaning behind proprietary limited companies. 

What is a company?

A company is defined as a separate entity to their owners and legally possesses the rights as a natural person - meaning they can incur debt, sue, and get sued. The owners of the company are also referred to as members or shareholders of the company, as they own and hold a share of the company. Some owners don’t run their companies themselves, however, and assign directors and executives to do that job. Companies can distinguish themselves as a private or public company, depending on if they were listed on the Australian Stock Exchange (ASX), and this will make them a public company.  

What is Pty Ltd? 

“Pty Ltd” is an abbreviation for Proprietary Limited. This refers to a company’s business structure - in that there are a few number of shareholders within the company, and that the legal responsibilities of shareholders regarding company debt is limited. Under Australian law, this applies to companies with at least one shareholder and no more than 50 non-employee shareholders. As there are a limited number of shares and shareholders in the company, Pty Ltd is used for private companies. 

What does proprietary mean? 

Unlike a public company that can issue an unlimited number of shares to the general public, thereby increasing their shareholders, a private company cannot do the same. As such, although private companies have access to less capital and shareholders, they do not face the strict regulations and accounting standards that public companies must comply with to protect the public. 

As such, ‘Pty’ refers to the business structure of the company, in that they are a private company with minimal shareholders. 

What does limited mean? 

As previously mentioned, companies are responsible for certain legal and debt obligations. As such, if the company were to be insolvent or face certain legal obligations, these liabilities would naturally fall to the shareholders of the company. 

This is not the case for companies with ‘Ltd’, as the term refers to companies that place limited liability responsibilities to shareholders. Instead, the responsibility of the liability is related to the number of shares the owners possess within the company. 

For example, if a company were to be insolvent, the shareholders would only lose the amount they invested in the company, instead of bearing responsibility for financial distress costs. Likewise, if a shareholder has only paid off part of their shares, they will have to pay the remaining amount for their shares. 

How to I register for a proprietary limited company? 

There are several costs involved in associating your company as a Pty Ltd company. As of July 1 2019, there is a one-off incorporation fee of $495 that must be paid to the Australian Securities & Investment Commission (ASIC). Additionally, there is a review fee of $267 on the anniversary of the company’s incorporation. 

In addition, under Australian law, Pty Ltd companies are required to have a registered office and a principal place of business, as ASIC will send documents to the company’s registered office. In terms of personnel, Pty Ltd companies must have at least one director who ordinarily resides in Australia. 

Benefits: 

• Limited liability: the company’s legal liabilities are generally not passed onto shareholders and they will not be personally liable for any debts. However, owners and shareholders may still be liable if they have provided personal guarantees to borrow money.
• Attracting investors: limited liability provides security for potential shareholders.
• Transparency: company information must be up to date on the public ASIC register.
• Tax efficiency: company tax rate is lower than standard marginal rates for individuals and sole traders (depending on income level). Can also offset tax losses forwards or from business-to-business.

Cons: 

• Directors duties: must ensure directors actions and responsibilities are aligned with company’s goals and objectives, otherwise may face insolvency or conflicts of interest. 
• Tax: no initial tax-free threshold for companies - flat company tax rate of 27.5% from first dollar earned. 
• Initial registration and incorporation fees.

Legal advice

Pty Ltd companies are for private companies (as opposed to public companies on the ASX) and the business structure yields several advantages and disadvantages for the business owner. If you require assistance with registering as a proprietary limited company, our sister company, Legal Kitz can help. They offer a FREE 30-minute consult to assist with any of your legal queries and concerns. Additionally, our Business Kitz business specialists can assist! Book here now for your free consultation.