Introduction
In this globalised age where a company is now a 24/7 enterprise rather than just a “nine to five” job, many couples are choosing to both live together and work together. Whilst there are many personal advantages to these family companies, the question becomes does it also make commercial sense to work together? This issue becomes particularly interesting if both you and your partner are directors of the company.
Many family businesses are incorporated entities in order to maximise possible taxation benefits and minimise potential financial liability. In many respects however legislation has now caught up with this family company model and a number of the protections that it used to offer have now been eroded. Accordingly there can be significant disadvantages if you and your partner are directors of the company.
Erosion of protection against personal liability
Although directors of companies are afforded a limitation of liability, overtime this principle has been eroded.
These erosions can be seen in a number of places including:
- Director Penalty Notices – The Australian Taxation Office often holds directors personally liable for the certain tax debt of the company (e.g. PAYG withholding). If both partners are directors then this means that both may become personally liable for its unpaid taxation debt.
- Contractual Arrangements – In purchasing goods, particularly where companies open accounts with goods and services providers, many directors are required to provide personal guarantees that they will pay any debts that are incurred by the company, should the company itself not pay its debts. Again if both partners are directors of the company then it increases your exposure to personal liability.
- Financial Arrangements – In situations where banks provide loans to the company they too often require personal guarantees. Again if both partners are directors it could mean you place all of the assets owned by the directors at risk.
- Occupational Health and Safety /Workers Compensation – These laws also impose specific duties on directors and by having both partners as directors of the company, this would mean that in the event of prosecution, both may be equally liable should an unsafe workplace lead to an employee being injured.
- Insolvency Events – if payments or assets are transferred just before the company goes into insolvency, then such transfers can be set aside under the Corporations Act 2001 (Cth). Further such transfers may also have implications in terms of bankruptcy laws as can be seen in the developing case against solicitor Russel Keddie who transferred his Double Bay home into his partner’s name before declaring bankruptcy.
Consequently it may be preferable to have one partner outside of the company so that assets can be maintained by a partner who has no links to the company, and who is not potentially exposed.
Credit Reference Risk
In deciding to make your partner a director of the company, you should also consider the adverse effects on your credit history should things go wrong. In particular if both of you are directors of a company that goes into liquidation or administration then this may be recorded against you as an adverse credit event. This could potentially make it harder for both of you to gain credit in the future.
Directors’ Risk
Under section 206F of the Corporations Act 2001 (Cth) if a person is a director of two companies that are wound up within a 7 year period, then the Australian Securities and Investment Commission may disqualify that person from managing a company for up to 5 years. If both of you are disqualified from being directors then not only does this prevent you from running a company but it could also have a detrimental impact on your income levels in the future.
The Strain of a Company on Your Personal Relationship
All the financial and commercial pressures that come from running a company can often leak through from your corporate life into your personal life. This leak becomes even bigger if both of you are collaboratively running the company. If you and your partner share different goals for the future of the company, or disagree over a choice the company has to make then this could potentially be a great strain on your personal relationship, which may ultimately have detrimental effects on your company.
Conclusion
Ultimately many of the advantages of having your partner as a director of the company have been eroded over time by commercial practices and law reforms. It now seems that having both partners as directors essentially potentially increases you liabilities without any increased benefits.
