Understanding Your Role as a Director in a Company

Legal

A company director has a business role very similar to a parent's - she navigates the direction, enjoys the business success as her own but also takes on most of the legal responsibility.

Let's start real simple here.

If you are legally savvy business owner, you might want to skip this paragraph to save time but I wouldn't recommend it for anyone who hasn't got any legal training:

Not all businesses have directors in the sense that we're discussing here. Company Director is a legal term that applies to a certain business structure - a company. This business structure carries limited liability for the owners and is an entity that is legally separated from them. The owners are most likely to be shareholders. If you have chosen a company for your business structure, you will need to appoint a director.

What is a company director?

Many people consider a business manager and a company director to be virtually the same thing. Of course, that's another legal urban myth.

A company director carries responsibility for the management and compliance of the company. This means that the appointed person not only needs to make sure the business is managed in the way that is most profitable to shareholders but also that all legal requirements are kept (something most managers are only vaguely concerned with). And the real risk comes from the fact that company directors are legally responsible for compliance. If you don't know your role and responsibilities you might face serious legal liabilities!

Liabilities and risks

The biggest liability a director has is knowing the company they are employed by. This is necessary as a director is legally responsible for what's going on in the company. There are a few specific reporting requirements by ASIC (Australian Securities and Investment Commission):

  • pay an annual review fee;
  • pass solvency resolution;
  • inform of any changes in company details (for example, a new director)
  • keep a number of financial reports that vary according to company specifics (for example the requirements for publicly traded companies are more detailed)
  • make sure that the company doesn't trade while insolvent

The biggest risk that a director faces is personal liability. If a director is found guilty of negligence she might be personally liable and undergo serious sanctions. Penalties might include but aren't limited to fines, damages payments, or even jail.

Your rights as a director

The rights of a director come from the nature of her responsibilities. The most important right a director has is of full disclosure of information regarding finances and corporate governance.

Corporate governance is the documented way things are done in a company and has two main components - monitoring and planning.

Each company director needs to have full access to the information regarding planning and monitoring the operations of the company. In this way she will be signalled in time if the company is becoming insolvent and operations need to be put on pause.

Being a director is not scary, however. Apart from making sure the company is solvent and keeps good records, the other responsibilities of a director are to act to the best interest of the company:

  • making sure you are properly informed on all financial transactions and the economic situation of the company
  • not using the information and position of a director for personal gain (as insider trading, for example)
  • exercise your powers and duties in good faith in the best interests of the company and for a proper purpose
  • communicating with staff about the way the company is managed and performs

Do you feel overwhelmed by your director responsibilities? Or you might want to know what will be expected of you as a director of a new venture? Maybe you want to know what are your decision-making rights and benefits. All of this is natural but pretty confusing when you are all on your own.

To make sure you understand your rights and responsibilities as a director make sure you have a brief meeting with a trusted business lawyer. If you are just starting a company, ask your lawyer to advise you if you'll be able to take the responsibilities of a company director or maybe choose a more flexible business structure.


Katherine Hawes

Director of Education and Training at Digital Age Lawyers (formerly New Age Legal Solutions)

I am the founder of New Age Legal Solutions and Aquarius Education. This is a different type of law firm as we believe everyone should have access to quality legal services with no hidden costs or expensive 'charging by the minute' for a reassuring chat. Small Business Owner? Find out more about our Small Business Packages to gain access to legal expertise on a routine basis for a fixed affordable rate.


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Comments (2)

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Jef Lippiatt

Jef Lippiatt , Owner at Startup Chucktown

This article doesn't really apply to me not being organized in Australia, but I still found it interesting to learn about the differences in business structure in other places around the globe.

Lina Barfoot

Lina Barfoot , Editor at SavvySME

Great information. Interesting to read about the balance between obligation and rights as a director, so important that to remember that you still have rights even though you're the one in charge.