A lot of small private companies have more than one director. But why is this? And should your company only have one director to minimise risks including the risk of ATO Director Penalty Notices.
What are the reasons for having multiple director companies?
There can be certain reasons for having multiple directors of small private companies. The main reason being when there are two or more unrelated parties both owning and managing the company. In these circumstances there can be a good reason for those parties to all be directors so they can exert some control over the company and so that a party who both owns and runs a company cannot unreasonably be locked out of managerial decisions.
For larger companies there are also other good reasons for having multiple directors. However, this article’s main focus is on smaller companies and the risks to their directors.
When should you not have multiple directors
There is generally no reason to have both a husband and wife or de facto partners as directors of a company. We come across this problem all the time when clients are referred to us. There will be both a husband and wife as directors of a failed company and they BOTH will be liable for various debts including Director Penalty Notice debts and debts owed under personal guarantees.
This often means that both the husband and wife directors will be forced into bankruptcy and because of this the family will lose everything. Further, once your company is insolvent, it’s probably too late to remove one party as a director. This is because the debts which they are personally subject to have already been incurred and resigning as a director won’t get around this.
What are the ATO risks for directors of companies
Company directors can be personally liable for unpaid superannuation, PAYG Tax and from 1 April 2020, GST. This liability arises under the ATO’s Director Penalty Notice provisions. We have written about the ATO’s Director Penalty provisions for superannuation and PAYG Tax in this article and then subsequently about their extension to GST in this article.
However, in summary, a director will be liable for superannuation, PAYG Tax and GST if those debts aren’t paid and either lodgements are not made within required timeframes or a Director Penalty Notice is issued and the company is not placed in liquidation or voluntary administration within 21 days.
You also can’t escape ATO director penalty debts by resigning as a director. This is because you are or can be liable for all such debts up until the date you resign. You can avoid future debts incurred after the date of your resignation though.
Are there any other risks
Other risks for company directors, which will apply to “unnecessary” directors include:
- Risks associated with personal guarantees, which often multiple directors have to sign;
- The risk of insolvent trading; and
- For QBCC licensed companies, various other risks including relating to Deeds of Covenant and the home owner warranty scheme.
If you have more than one director of your company, what you should do
If your company is solvent, you should resign any ‘unnecessary’ directors and also consider getting professional advice about what else needs to be done. However, this needs to include if resigning directors have given personal guarantees they should notify any trade creditors who hold guarantees that they no longer accept future liability. Different rules will apply for other types of guaranteed debts such as lease or finance agreements.
If your company is having difficulty paying its debts, then you should urgently get professional advice. And TAX DEBT SOLVED can help. So, in these circumstances please contact us for a free, no-obligation consultation, contact us here.