Proprietary and public companies 

Every company registered under the Corporations Act 2001 (Cth) is one of a closed list of types (s 112),¹ and the type determines a great deal that follows: who may invest, what must be disclosed, how the board must be constituted, and whether accounts must be audited. The division that matters most is between proprietary and public companies, and it is a division about access to public capital rather than about size.

The defining limits

A proprietary company must have no more than fifty non-employee shareholders, and must not engage in any activity requiring disclosure to investors — in substance, it cannot raise capital from the public. Those two restrictions are the essence of the type. In exchange, it is relieved of much of the governance and reporting burden the Act imposes.

A public company faces neither restriction. It may have any number of members and may raise funds from the public through a disclosure document. That freedom is the reason for the heavier obligations that accompany it.

The types available are set by s 112: proprietary companies limited by shares or unlimited with share capital; and public companies limited by shares, limited by guarantee, unlimited with share capital, or no liability companies. A company limited by guarantee is the common form for not-for-profits; a no liability company is confined to mining.

Small and large proprietary companies

Within the proprietary type, s 45A draws a second line that governs reporting. A proprietary company is small for a financial year (s 45A) if it satisfies at least two of three thresholds — consolidated revenue, consolidated gross assets, and number of employees — and large otherwise.² The figures are set by regulation and have been revised over time, so they must be checked for the year in question rather than remembered.

The consequence is substantial. A large proprietary company must prepare and lodge audited financial reports; a small one generally need not, unless directed by ASIC or by members holding the requisite proportion of shares, or unless it is controlled by a foreign company.

What attaches to public companies

Public companies carry obligations proprietary companies do not:

• At least three directors, two of whom must ordinarily reside in Australia, against one for a proprietary company.
• An annual general meeting, which proprietary companies are not required to hold.
• Financial reporting and audit in every case, regardless of size.
• Restrictions on related party transactions, requiring member approval for financial benefits to related parties unless an exception applies.
• A company secretary, which is optional for a proprietary company.

A listed public company carries a further layer entirely — continuous disclosure and the ASX Listing Rules — but listing is a separate question from being public. Many public companies are unlisted.

Conversion

A company may change type by special resolution and lodgement with ASIC. A proprietary company that outgrows the fifty-member limit, or that wishes to raise capital publicly, must convert. Conversion is not merely administrative: it brings the full public-company obligations, and the company must satisfy the requirements of the new type from the point of conversion.

Practically, the trigger is usually the intention to raise funds. A proprietary company that attempts public fundraising contravenes the Act, and the answer is to convert first rather than to rely on the narrow exceptions to the disclosure requirements.

Registration and the effect of incorporation

A company comes into existence on registration, when ASIC issues a certificate and allocates an Australian Company Number. From that moment it is a body corporate with perpetual succession, capable of holding property, contracting, suing and being sued in its own name.

Registration requires a decision about the company's type, the state or territory of registration, the names and consents of directors, secretaries and members, the share structure, and whether the company will adopt a constitution or rely on the replaceable rules. A proprietary company with a sole director who is also the sole member is not governed by most replaceable rules, since they presuppose more than one person.

No-liability companies

A third type exists alongside proprietary and public companies. A no-liability company may be registered only where its sole objects are mining purposes, and it must have a share capital. Its defining feature is that a shareholder is under no contractual obligation to pay calls on partly paid shares — the consequence of non-payment is forfeiture of the shares rather than a debt.

The form exists because mineral exploration is speculative and historically depended on partly paid shares called up as work progressed. A no-liability company must include "NL" at the end of its name and cannot make a distribution unless its mining activities warrant it.

Companies limited by guarantee

Public companies may be limited by guarantee rather than by shares. Members undertake to contribute a nominal amount on winding up rather than subscribing capital, which makes the form the standard vehicle for not-for-profit and charitable organisations.

Such companies cannot pay dividends, are subject to reduced reporting obligations below prescribed revenue thresholds, and where registered with the ACNC report to that regulator rather than to ASIC for most purposes.

Choosing between them

The practical trade-off is access to capital against compliance cost. A proprietary company is cheaper to run, keeps its financial position private below the large-company thresholds, and suits a business funded by its owners and by debt. A public company can raise funds from the public and list, but pays for it with continuous disclosure, an audit, an AGM, board composition requirements, and the related-party approval regime.

Applying this in a problem question

1. Identify the company's type from the facts — the name is a strong indicator, since a proprietary company must include "Proprietary" or "Pty" in its name.
2. Test the two proprietary restrictions separately: the fifty non-employee member cap, and public fundraising.
3. If the company is proprietary, apply the small/large test and say what reporting follows.
4. Attach the public-company obligations only where the company is public, and note that listing is a further and separate matter.
5. Where the facts involve a capital raising, ask whether conversion was required before it.

Self-check

• Have I distinguished the proprietary/public line from the small/large line?
• Have I counted only non-employee shareholders against the fifty-member cap?
• Have I checked the s 45A thresholds for the relevant year rather than assuming figures?
• Have I kept "public" separate from "listed"?