What are the Different Company Classifications?

If you want to establish a company, you should consider the different company classifications under the law. More broadly, a company is an entity that can act in its own right. That is to say; a company has a separate identity from its owners (the shareholders). Consequently, a shareholder’s liability for the company’s actions is limited to the amount paid for their shares. This makes the company an attractive entity to conduct business through. This article explains what are:

• proprietary companies; and
• public companies. 

Proprietary Companies

The majority of corporate entities trading in Australia are proprietary companies. Proprietary companies have fewer reporting requirements to ASIC and its shareholders. Additionally, proprietary companies are generally cheaper to run. 

Proprietary companies are also classified as either small or large, depending on their size. 

Small Companies

If your company classifies as a small proprietary company, it will be simpler to run. This is because it will have fewer regulatory requirements. As such, they do not need to:

• appoint auditors;
• prepare and submit audited financial reports; or 
• hold annual general meetings. 

Large Companies

Conversely, large proprietary companies are subject to more stringent regulatory requirements. Unlike small proprietary companies, they must appoint auditors, prepare and submit audited financial reports and hold annual general meetings. 

Large proprietary companies also have more onerous disclosure requirements, representing more complicated accounting and business analysis. One of the main disclosure requirements is preparing a directors’ report. This report reviews the company’s:

• financial position; 
• operations; and 
• any risks facing the company.

Public Companies

A public company is a larger form company than a proprietary company. The main difference between a public and a proprietary company is the ability of public companies to raise funds from the general public through issuing shares. 

Listed

A publicly listed company has been listed on the Australia Securities Exchange (ASX). Listed companies can openly trade their shares to the public and have more onerous auditing and reporting requirements than most other company types.

Publicly Unlisted 

Generally speaking, a publicly unlisted company is a classification based on the shareholder structure of the company. A proprietary company becomes publicly unlisted once it exceeds 50 non-employee shareholders. As such, it is a public company but does not list its shares on the ASX. Whilst being publicly unlisted does not come with many stringent ASX listing rules, they have the costly burden of appointing an independent auditor.

Raising Funds and Disclosure Requirements

While starting out, the capital required to develop and scale your product or service will often be more straightforward. Namely, you will likely be able to raise capital from family and friends before pitching to angel investors and venture capital funds. However, once you reach a certain stage, the level of capital you need to continue your growth will likely become exponentially larger than when you started. 

When a public company makes a public offer for investors to acquire shares, the company must produce and issue a disclosure document, such as a prospectus or an offer information statement. Issuing disclosure documents is expensive and timely, requiring complex legal and financial advice. 

As a proprietary company, you cannot raise capital by making offers to the public at large. The only options available to raise capital are where your:

• capital raise is a personal offer; and
• the offer does not require a disclosure document for one of the reasons listed in the table below. 

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Key Takeaways  

The business and capital raising decisions you make will determine how your company is classified. While starting out, you will likely want to continue operating as a small proprietary company to avoid the more onerous reporting obligations placed on large proprietary and public companies. 

If you would like to discuss your current and future status or how you can raise capital from third parties, our experienced capital-raising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page. 

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