Company — What It Is and Key Obligations
Written byMatt LeeburnA company is a legal entity formed under the Corporations Act 2001 that exists separately from its owners. In Australian lending, the company structure is one of the most common ways businesses borrow — and the structure you use to borrow affects your personal liability, the security a lender can take, and the types of finance available to you.
What is a company?
A company is a separate legal person that can own property, enter contracts, incur debts and be sued in its own name. The people who own the company (shareholders) are generally not personally liable for the company's debts beyond their investment. This is the principle of limited liability, and it's one of the main reasons businesses choose to operate as a company rather than as a sole trader or partnership.
The most common type in Australian business is the proprietary limited company (Pty Ltd), which has restrictions on the number of shareholders and cannot raise funds from the public. Public companies (Ltd) can list on the ASX and raise capital from the public, but come with heavier reporting and governance obligations.
How companies borrow
Companies access a wide range of finance products, including:
- Business loans — term loans for working capital, expansion, acquisitions or specific projects.
- Equipment finance — chattel mortgages, finance leases, hire purchase and operating leases for vehicles, plant and machinery.
- Commercial property loans — secured lending for purchasing business premises or investment property.
- Lines of credit and overdrafts — revolving facilities for managing cash flow.
- Invoice discounting — funding secured against outstanding receivables.
The company borrows in its own name, and the loan obligation sits with the company, not the directors or shareholders personally — unless personal guarantees are involved.
Personal guarantees and director liability
While limited liability protects shareholders from the company's debts in principle, lenders almost always require directors to provide personal guarantees for company borrowings. A personal guarantee means the director is personally liable to repay the loan if the company defaults.
This effectively pierces the limited liability protection for the guaranteed debt. Directors should understand exactly what they're guaranteeing, whether the guarantee is limited (capped at a specific amount) or unlimited, and whether it extends to future facilities or only the current loan.
Lenders may also take security over directors' personal assets — such as a mortgage over the family home — to support the guarantee. This is common for small business loans and start-up lending where the company has limited assets of its own.
Company structure and lending decisions
The way your company is structured affects how lenders assess your application:
Trading history — lenders typically want to see at least 12–24 months of trading history for the borrowing entity. New companies with no track record may face higher rates, lower limits or requirements for additional security.
Financial statements — companies must prepare financial records, and lenders will assess these when considering a loan. Key metrics include revenue, profitability, debt-to-income ratios, asset backing and cash flow adequacy.
Director and shareholder structure — lenders review who owns and controls the company. Changes in directorship or ownership during a loan term may trigger review clauses or require lender consent.
ABN and GST registration — an active ABN is a basic requirement for business lending. GST registration confirms the business is operating above the registration threshold, which lenders view as a sign of trading activity.
Trust structures — many Australian businesses operate through a company acting as trustee of a family or discretionary trust. This adds complexity to lending because the trustee company borrows on behalf of the trust, and lenders need to assess both the company and the trust deed to understand liability and security.
Security and charges
Lenders take security over company assets to reduce their risk. Common forms of security in company lending include:
- Fixed charge — security over specific assets like property, equipment or vehicles. The company cannot dispose of the asset without the lender's consent.
- Floating charge — security over the company's assets generally, including inventory and receivables. The charge "floats" over changing assets and "crystallises" (becomes fixed) on default.
- General security agreement (GSA) — a broad security interest registered on the Personal Property Securities Register (PPSR) that covers all of the company's personal property.
- Real property mortgage — a mortgage over commercial or residential property owned by the company or its directors.
Security interests in personal property must be registered on the PPSR to be enforceable against third parties. Lenders search the PPSR before lending to check for existing security interests over the company's assets.
Director obligations when borrowing
Directors have legal duties under the Corporations Act that are relevant to company borrowing:
- Duty to act in good faith — directors must act in the best interests of the company, not for personal benefit.
- Duty to prevent insolvent trading — directors must not allow the company to incur debts when it is insolvent or likely to become insolvent. This is critical when considering new borrowings — if the company cannot service the debt, directors may face personal liability for the shortfall.
- Duty of care and diligence — directors must exercise reasonable care when making borrowing decisions, including understanding the terms, costs and risks.
If a company enters liquidation or administration, the liquidator or administrator will examine the circumstances of the company's borrowings and whether directors breached their duties.
FAQ
Does a company protect me from personal liability on a business loan?
In theory, yes — the company is the borrower. In practice, most lenders require directors to provide personal guarantees, which make you personally liable if the company defaults.
Can a new company get a business loan?
It's possible but more difficult. Lenders prefer companies with established trading history. New companies may need to provide additional security, higher deposits or personal guarantees to secure finance.
What is a general security agreement?
A GSA is a broad security interest over all of a company's personal property (equipment, inventory, receivables, intellectual property). It's registered on the PPSR and gives the lender priority over unsecured creditors if the company defaults.
Do I need financial statements to apply for a business loan?
Most lenders require at least two years of financial statements (profit and loss, balance sheet) for company borrowers. Some lenders offer "low-doc" options based on BAS statements or bank statements for simpler applications.
What happens to my company's loans if the company goes into liquidation?
Secured lenders are paid first from the proceeds of their security. If the loan is personally guaranteed, the lender can pursue the guarantor for any shortfall. Unsecured debts are paid from remaining assets after secured creditors, employee entitlements and other priority claims.
Key takeaways
A company structure provides limited liability and access to a wide range of business finance products, but personal guarantees mean directors are often personally exposed to the company's borrowing obligations. Lenders assess the company's trading history, financial position and asset base when making lending decisions, and take security over company assets through fixed charges, floating charges and PPSR registrations.
This article is general information only and is not legal, tax or financial advice.