So you own shares in a company, but the company has gone into debt. You can’t help but worry that some of this debt may fall onto you. However, there aren’t many circumstances where a shareholder can be held liable for company debt. Below we will outline the circumstances in which Shareholders can Be Responsible For Company Debt, so you can make sure you don’t fall into a position where this could happen.
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One of the most important things to understand about a company is that it’s considered to have a ‘separate legal personality’ from its directors and members. This means that a company’s affairs are separate from those of its directors and shareholders, and operates independently.
If your business does not operate as a company, and you operate as a sole trader, then you and the business’s financial affairs are considered one and the same. Under this structure, your business’s tax obligations are your own, and any debts the business may run into become your personal responsibility. However, sole traders do not issue shares in their business, so shareholders cannot be responsible for the business debt of a sole trader in any event.
Limited Liability
A Limited company is one in which the shareholdings do not attach to any shareholders. The suffix ‘Ltd’ or ‘Pty Ltd’ indicates that the ownership of a company is distributed by its shareholdings. Those who have shares in the company have next to no liability if the company becomes insolvent or becomes indebted. The main difference between these two is that in one company, the shares are available for the public to trade, and the other, the shares are privately held. The most that a shareholder will normally lose is the amount of the capital invested to purchase the shares in the first place. This capital can be used to pay off company debts, but it will normally not extend into any dividends paid or other capital the shareholder has.
Circumstances where Shareholders can be responsible for company debt
Because of this, there are very few circumstances in which a shareholder will be held to be responsible for a companies debts. These include:
- If a guarantee was signed;
- If the price for the shares has not been fully paid.
If a company goes into liquidation, a shareholder may have to bear some of the financial responsibility if a guarantee was signed upon purchase of the shares, or if the shareholder still owes money for the purchase of them. Aside from these circumstances, shareholders are limited by what they are responsible for.
Conversely, if a company goes into debt, after all of the outstanding creditors have been paid, the funds that are left over (if any) will normally be distributed to shareholders.
Being a shareholder in a company carries less duties and obligations than being a director. However, it is important to ensure that you always comply with ASIC requirements and that you run everything by a lawyer.
Just because it’s not common that Shareholders Be Responsible For Company Debt, it doesn’t mean it can’t happen.
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