One of the largest areas of confusion when people register a company is around company shares. Most people know that companies on the stock exchange have shares that can be bought and sold but don’t realise that most private companies also have shareholders.

The vast majority of Australian companies are proprietary limited. But what does that limited mean? It means limited liability, where liability is the legal obligation of a member of a business to pay the debts of the company. Limited means the extent of that liability is limited to the number of shares that a member has bought in a company.

The members of a company are also the owners of the company. So in a simple scenario if a company has 100 ordinary shares issued and Bill owns 50 of those 100 shares, then he owns 50% of the company. Conversely Susan who only owns 10 shares owns 10% of the same company. While owners of shares might not be the directors of a company they still hold decision making powers.

Share Types

Most companies, whether on the stock exchange or not, issue Ordinary shares. The ordinary means there is nothing special or different about the shares and there are no special rights attached to them. Other share types will have rights attached to them which need to be spelled out in the company constitution. If you wish to issue shares other than Ordinary you may need to engage a solicitor to specify the rights attached to those shares.

One example would be preference shares. Typically holders of preference shares receive back their capital before ordinary shareholders and have dividends paid before ordinary shareholders.

Share Holders

Only people and companies can be shareholders in a company. A trust can’t directly hold shares as it is not a separate legal entity like a person or company. This is a confusing point for applicants when they want to set up a structure with a trust owning shares in a company. The trick is that the trustee(s) of the trust, either a person or a company holds shares in the new company on behalf of the trust. When specifying a share parcel in the company registration form one of the questions is “Are these shares held on behalf of another individual, organisation, trust etc?” If the shares are to be held for the benefit of a trust the correct answer is yes.

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