Director Duties and Obligations: What Company Directors Need to Know
Business & Company Update
Many small-business owners are both the shareholder and director of their company. Because these roles are often held by the same person, it is important to understand that they have different responsibilities.
A shareholder owns shares in the company, while a director is responsible for managing and overseeing the company. The company is also a separate legal entity, so company money and assets do not automatically belong to the director or shareholder personally.
Key Responsibilities of a Director
Directors should:
- Act in the best interests of the company and make decisions for a proper purpose.
- Take an active role in the company and understand how the business is being operated.
- Keep company and personal funds separate and properly record any funds transferred between company and personal accounts.
- Understand the company's financial position, including its cash flow, debts, tax liabilities and other obligations.
- Not trade while the company is insolvent, or incur new debts when the company is unable to pay its debts as and when they fall due.
- Keep tax and superannuation obligations up to date, including GST, PAYG withholding and superannuation, as certain unpaid liabilities may potentially become the director's personal liability.
- Keep proper financial and company records and ensure important transactions are properly documented.
Directors Need to Know What Is Happening in Their Company
Being a director is an active legal responsibility. A director cannot simply say "I didn't know what was happening" if they have failed to take reasonable steps to understand and monitor the company's affairs.
Directors should understand the company's business, financial position and key obligations, ask questions and take reasonable steps to monitor how the company is being managed.
Directors can delegate tasks to employees, accountants, bookkeepers or other professional advisers, but they cannot delegate their legal responsibility as a director. Using professional advisers does not remove the director's responsibility to remain informed and make appropriate decisions.
When Can a Director Become Personally Liable?
A company is generally responsible for its own debts. However, in certain circumstances, a director may become personally liable for some company debts.
This may include:
- trading while the company is insolvent;
- providing a personal guarantee for company loans, leases or other obligations; or
- becoming personally liable for certain unpaid company tax and superannuation liabilities under the tax laws.
One area directors should be particularly aware of is the ATO Director Penalty Notice (DPN).
Where a company fails to meet certain obligations, including PAYG withholding, GST and Superannuation Guarantee Charge (SGC) liabilities, the ATO may, subject to the applicable requirements, issue a DPN to a director. This can result in the director becoming personally liable for the relevant amounts.
If a company has significant overdue tax or superannuation liabilities, directors should not ignore the issue. They should understand the company's actual liabilities and seek professional advice promptly.
A Simple Checklist for Directors
As a company director, ask yourself:
- Do I understand my company's current financial position?
- Do I understand how the business is being operated?
- Are company and personal funds kept separate?
- Are transactions and funds transferred between the company and personal accounts properly recorded?
- Are GST, PAYG withholding and superannuation obligations being monitored?
- Can the company pay its debts when they fall due?
Being a director is more than simply having your name registered with ASIC. Directors remain responsible for the company's management and compliance, even when professional advisers are engaged.
Ace Solutions Accounting & Taxation
This article provides general information only and does not constitute legal, accounting, taxation or financial advice. Directors should obtain professional advice relevant to their particular circumstances.