Persons engaged in business have a choice as to how they will establish their business. Options include carrying on business as a sole trader, in partnership or as a company. A company is essentially a mechanism to create a separate legal entity to carry on business.
Every company has certain basic elements:
A company may have limited (most common) or unlimited liability – refer to the section below headed Why Form a Company for more information about these liability types.
A company comes into existence after it is incorporated under the Companies Act 1993. Once incorporated it is recognised in law as an independent legal entity (a Body Corporate). This means it is treated as being a separate “person” from its directors and shareholders. It can therefore do many of the same things as a natural person – e.g. hold property in its own name, enter contracts, sue and be sued, etc.
There are a number of reasons why people choose to incorporate a company rather than one of the other business types.
Limited Liability – The primary reason is the protection that limited liability affords to shareholders. All companies are limited liability companies unless the particular company’s constitution provides otherwise (Note: this is very rare). Although it is common to speak of a “limited liability company”, it is in fact the liability of the shareholders that is limited. The company is liable in full for all obligations that it incurs.
This concept of limited liability becomes important if the company is unable to pay its debts, and a liquidator is appointed. Shareholders of a limited liability company are not liable for the business debts of the company (subject to any personal guarantees given) – they are only liable (to the liquidator) for any unpaid money owing on their shares. If they have fully paid for their shares prior to the company being placed in liquidation, they will have no further liability to the company’s creditors.
By contrast a sole trader, or a person trading in partnership, will be personally liable for business debts that cannot be met by business funds.
Some other reasons for incorporating a company include:
Every company must hold an annual meeting of shareholders once in each calendar year. Generally the meeting must be no later than 6 months after the company’s balance date and no later than 15 months after the previous annual meeting.
A company does not have to hold its first annual meeting in the calendar year of its incorporation, but must hold that meeting within 18 months of incorporating.
All companies are required to file an annual return in a designated month.
A company is not required to file an annual return in the calendar year of its incorporation (i.e. a company incorporated in 2016 will file its first annual return in 2017).
The Registrar of Companies is responsible for the approval and reservation of company names.
A New Zealand company (or an overseas company intending to carry on business in New Zealand) cannot be registered under a name unless that name has been approved and reserved by the Registrar (Sections 20 and 333(1) Companies Act 1993
A company may choose to change its name. It must first apply to the Registrar of Companies to reserve the name it has chosen. After the company has been notified that the new name has been reserved, the director(s) must pass a resolution to change the name and then notify the Registrar of the change. There is a $10 fee for reserving a company name online ($25 if you apply using a paper form) but there is no fee for changing a company name.
Registration of a company name only provides limited name protection – that is, it will prevent another company being incorporated under an identical or almost identical name.
Every company must have a registered office and address for service in New Zealand.
The registered office and address for service need not be at the company’s place of business, nor in the same place. However they must be at a physical location not a postal centre or document exchange. The Registrar also seeks an address for communication. This can be a postal address and for online applications the applicant for incorporation must supply an email address. These addresses are first notified to the Registrar on the application for incorporation.
If a company wishes to change its registered office or address for service, the change, and the date upon which it is to take effect, must be notified to the Registrar. The notice must be registered at least 5 working days before the change takes effect and changes can be notified either online using the company key or by using a paper form.
It is very important to recognise the distinction between shareholders and directors.
Shareholders are investors in the company. They pay money into the company in return for shares. The amount shareholders pay for shares is determined by agreement with the company. They do not participate in the management of the company, other than by voting on the appointment and removal of directors.
Directors are responsible for managing the company’s day-to-day business. In doing so, directors owe duties to the company, to its shareholders, and to others dealing with the company. Directors must act honestly in what they believe to be the best interests of the company and with such care as may reasonably be expected of them in all the circumstances.
Directors must not carry on the business in a manner likely to create a substantial risk of serious loss to the company’s creditors (so-called “reckless trading”).
A person cannot be a director of a company if he/she is:
Any changes in the director(s) of a company or information relating to the director(s) must be notified to the Registrar and can be notified either online using the company key or by using a paper form.
New director appointments or resignations must be notified within 20 working days of an appointment being made or a resignation taking effect. The other changes (e.g. new director’s address) must be notified within 20 working days of the company first becoming aware of the change or event. It is an offence under the Companies Act if these requirements are not complied with (Section 159).
A new director must consent to act as a director and certify that he or she is not disqualified from being appointed or holding office as a director.
After incorporation a company must issue to any person named in the application as a shareholder, the number of shares that the application says the shareholder will receive. After the first issue of shares, the board of a company may issue shares at any time, to any person, and in any quantity it sees fit. This power is subject to the provisions of the Companies Act 1993 and any provisions in a company’s constitution that may modify its right to issue shares. The Registrar must receive notice of the share issue either online, using the company key, or on a paper form filed with the Companies Office within 10 working days of the issue.
The board of a company may authorise a distribution by the company at any time, and of any amount, and to any shareholders it sees fit. But before doing so it must:
Directors who vote in favour of a distribution must sign a certificate stating that the company can satisfy the solvency test and give the grounds for that opinion. A company satisfies the solvency test if:
The Companies Act 1993 requires every company to keep and maintain certain records:
1 . Company Records
[Section 189 Companies Act 1993]
A company must keep a variety of documents at its registered office including the constitution (if it has one), minutes of shareholders and directors meetings, financial statements and accounting records and the share register.
Note: The records may be kept at another location in New Zealand provided that location is notified to the Registrar with 10 working days advance notice of the change.
2 . Share Register
[Sections 87-94 Companies Act 1993]
A company must maintain a share register that records the shares issued by the company and states:
The share register must also record an alphabetical list of the:
The register must also show the date of share issues, repurchases or redemptions and share transfers.
An agent (such as a professional share registry) may maintain the share register of any company.
Subject to a company’s constitution, a share register may be divided into 2 or more registers and kept in different locations. A notice of the location of each register must be delivered to the Registrar within 10 working days after the share register is divided. The share register, if undivided, is the company’s principal register and must be kept at its registered office. If divided, the share registers may be kept elsewhere.
3 . Accounting Records and Appointment of Auditors
[Sections 194 and 196 Companies Act 1993]
Every company must prepare financial statements annually. These must be audited unless all shareholders in the company agree otherwise (Auditor Resolution). If an auditor is to be appointed, the appointment is made at each annual meeting. There are some companies that must always appoint an auditor (ie. those that are required to file financial statements under the Financial Reporting Act 1993).
The board of a company must ensure that the company keeps accounting records. These records must:
You do not need to register any financial documents with the Companies Office each year unless your company:
If your company is caught by either 4a or 4b, the “large” test is applied. A “large” company is defined as having at least two of the following three characteristics:
Companies and other entities that fall into any of these categories must file a full set of financial statements with the Registrar along with the filing fee of $250.00. An additional late filing fee of $100 applies if the financial statements are filed out of time (i.e. later than 5 months and 20 working days after the balance date).
Historically companies were required to maintain a register of charges. This provision was removed with the introduction of the Personal Property Securities Act 1999 – although it would be considered good practice for companies to maintain details of their security interests.
Security interests over personal property (e.g. secured loans, leases or hire purchases) can be registered and searched on the Personal Property Securities Register (PPSR) ww.ppsr.govt.nz.
The shareholders of a company without a constitution may adopt one by special resolution. Shareholders may also alter or revoke a constitution by special resolution. The board of a company must ensure that notice of an adoption, alteration or revocation is filed with the Registrar within 10 working days of the event taking place. There is no fee to adopt, alter or revoke a constitution.