The word “company” is often used to generally describe a profit-oriented organisation. However, being a company also has a specific meaning in law.

Broadly speaking, a company is an entity that is legally separate from its owners. This means that they can enter contracts, own assets, sue and be sued, just like an ordinary person. A company is one of the different ways a business can be set up legally. It gives the owners (known as shareholders) limited liability by allowing their personal assets to be isolated from the financial and legal assets of the company.

You can read more about the special duties and responsibilities of company directors and shareholders here.

How Did Companies Come About?

It isn’t exactly clear when the idea of a company originated, but it is believed that the concept may have originated with the ancient Greeks.

Companies started taking a shape close to their modern form after the Industrial Revolution. At this time, dealing with businesses began to mean more than simply entering into agreements with the business founder or their partner.

A separate “personality” – the “company” – was developed so that businesses as a whole could be kept accountable, while limiting the liability for loss from their owners. This formed the origins of the modern company.

What Is Limited Liability?

Limited liability is a key feature of the modern company. Limited liability means that the financial assets you personally stand to lose in a legal conflict are limited to the amount that you contributed to the company when you bought your shares. Crucially, your liability exposure is separated from your other financial assets.

For example, if your business was involved in a dispute, such as a contract gone wrong or an outstanding debt, then the maximum amount you could lose would be the amount you paid for the shares you own in the company involved.

For business owners, limited liability provides legal protection from claims on your personal assets, such as your house, vehicles or savings accounts.

Does Limited Liability Mean I Am Exempt From Penalties?

Having liability limited by shares does not mean you are completely exempt from legal penalties.

As a director of a company, your regular legal obligations still apply. You can still suffer personal financial losses and incur penalties if you have acted fraudulently or neglected your duties as a company director.

Do I Still Need Insurance If I Own A Company?

Directors and officeholders of companies have special duties and requirements that need to be maintained. If you are a director of a company, it is recommended that you get directors and officers insurance, also known as ‘D&O insurance’.

As we mentioned before, being a shareholder does not exempt you from incurring penalties because you have failed to follow your obligations as a director of a company.

While the duties of being a director are not particularly onerous, protecting yourself with D&O insurance is a step many take to make sure they are protected should they accidentally fail in their duties as a director and officeholder.

If you are unsure of what insurance cover you might need for your business or position, consider talking to an insurance coverage specialist. Our friends over at BizCover can help!

Still Wondering?

Need help understanding companies or wondering about the best legal setup for your new business? Contact the friendly team at Sprintlaw. We’ll be happy to help you find the solution that best suits you. Call 1800 730 617 or email us at team@sprintlaw.com.au.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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