One of the main reasons founders incorporate a company is limited liability — the idea that if the business fails, your personal assets are protected. And in most cases, that’s true. A proprietary limited company is a separate legal entity, and its debts are generally not your debts.
But “generally” is doing a lot of heavy lifting in that sentence. There are several well-established circumstances under Australian law where the corporate veil doesn’t protect you, and a founder-director can find themselves personally on the hook for company debts and liabilities. Some of these are obvious. Others catch founders off guard entirely.
Insolvent Trading: The Big One
The most significant personal liability risk for startup directors is insolvent trading under section 588G of the Corporations Act 2001 (Cth).
A company is insolvent when it cannot pay its debts as and when they fall due. As a director, you have a duty to prevent the company from incurring debts when there are reasonable grounds for suspecting insolvency. If you breach this duty, you can be held personally liable for the amount of those debts — meaning creditors (or a liquidator) can come after your personal assets.
The penalties are severe. Civil liability covers compensation equal to the debts incurred while trading insolvent. Criminal liability — where the director was dishonest — can mean up to five years imprisonment and fines exceeding $1 million. In practice, liquidators regularly pursue directors for insolvent trading claims, and the amounts can be substantial. In a recent Federal Court case, a sole director was held personally liable for over $2.4 million in debts incurred while the company was insolvent.
For startup founders, this creates a real tension. Startups frequently operate in the grey zone between solvency and insolvency — burning cash, chasing the next funding round, stretching payments to suppliers. The line between “optimistic but responsible founder” and “director trading while insolvent” isn’t always obvious. But the law requires you to know where it is.
The Safe Harbour Protection
Recognising this tension, Parliament introduced the safe harbour provision in section 588GA of the Corporations Act in 2017. Safe harbour protects directors from civil insolvent trading liability if, after suspecting insolvency, they develop a course of action that is “reasonably likely to lead to a better outcome for the company” than immediate administration or liquidation.
To access safe harbour, you need to show that you were actively working on a restructuring plan or turnaround strategy — not simply hoping things would improve. You also need to keep proper financial records and ensure employee entitlements (including superannuation) are being paid. It’s not a blanket protection, but it gives founders room to work through tough periods without the sword of personal liability hanging over every decision.
If your startup is burning cash and the next round isn’t locked in, safe harbour is something you need to understand and, ideally, document your reliance on.
Director Penalty Notices: The ATO’s Personal Liability Shortcut
Most founders know about insolvent trading. Fewer know about director penalty notices (DPNs), and they arguably pose a more immediate risk.
Under Schedule 1 to the Taxation Administration Act 1953, directors are personally liable for their company’s unpaid PAYG withholding, GST, and superannuation guarantee charge (SGC). The ATO enforces this through DPNs — formal notices that make you personally liable for the outstanding amounts.
There are two types:
Standard DPNs apply when the company has lodged its returns but hasn’t paid. The ATO sends a notice giving you 21 days to either pay the debt, place the company into administration, or begin winding it up. If you do nothing, you’re personally liable for the full amount.
Lockdown DPNs are more dangerous. If the company fails to lodge its PAYG, GST, or SGC returns within three months of the due date, the director penalty becomes “locked down.” This means you can’t escape personal liability by putting the company into administration or liquidation — the only way out is to pay the debt. The liability is also automatic: no notice is required.
The practical lesson for founders is straightforward: always lodge your BAS and superannuation returns on time, even if you can’t pay the full amount. Late lodgement is what triggers the lockdown penalty, and that’s the one that has no escape route.
New directors should note that you inherit existing DPN exposure. If you join a company’s board, you have 30 days to take action on any existing unpaid obligations — after that, you’re personally liable just like the other directors.
Personal Guarantees: Liability You Signed Up For
This one isn’t hidden in legislation — it’s in the contracts you sign. But it catches founders out because they don’t always appreciate what they’re agreeing to.
When a startup signs a commercial lease, takes on equipment finance, opens a line of trade credit, or borrows from a bank, the counterparty will often require a personal guarantee from the directors. This makes sense from the lender’s perspective: your startup probably has minimal assets and no trading history, so the personal guarantee bridges the credit gap.
The problem is that a personal guarantee survives the company. If the startup fails and can’t meet its obligations, the landlord, bank, or supplier pursues you personally. Personal guarantees are typically “joint and several” where there are multiple directors, meaning each director is liable for the full amount — not just their proportionate share.
Founders should treat every personal guarantee as a serious financial commitment. Before signing:
- Cap the amount where possible. A guarantee of up to $50,000 is very different from an unlimited guarantee.
- Limit the duration. Try to negotiate the guarantee falling away after a period of trading or once certain financial thresholds are met.
- Negotiate alternatives. A larger bond, bank guarantee, or security deposit may be acceptable to the counterparty in lieu of a personal guarantee.
- Get independent advice. It sounds obvious, but many founders sign personal guarantees as part of a larger transaction without separately considering what they’re personally committing to.
Australian Consumer Law: Accessory Liability
Directors can be personally liable for contraventions of the Australian Consumer Law (ACL) if they were “involved in” the company’s conduct. Under section 236 of the ACL (found in Schedule 2 to the Competition and Consumer Act 2010 (Cth)), a plaintiff can recover damages from both the company and any individual who was knowingly involved in misleading or deceptive conduct, unconscionable conduct, or other ACL contraventions.
For startup founders, this is particularly relevant in the context of fundraising representations, marketing claims, and product descriptions. If your company makes statements to customers or investors that are misleading — and you were the person making or approving those statements — you can be personally liable for damages. The ACCC also has the power to seek pecuniary penalties against individuals who are accessories to ACL contraventions.
The key word is “involvement.” Simply being a director doesn’t create liability. But being the person who wrote the marketing copy, approved the pitch deck, or signed off on the product claims does.
Work Health and Safety
Under the model Work Health and Safety Act 2011, which applies in most Australian jurisdictions, directors are “officers” who owe a positive duty of due diligence to ensure the company (as a Person Conducting a Business or Undertaking, or PCBU) complies with its WHS obligations.
This isn’t a passive duty. It requires actively keeping up to date with WHS matters, understanding the hazards and risks of the business, ensuring appropriate resources and processes are in place, and verifying compliance. Maximum penalties for officers who fail this duty can exceed $600,000 for a Category 1 offence (reckless conduct exposing someone to a risk of death or serious injury), and imprisonment is possible for the most serious breaches.
Most tech startups won’t face the same WHS risks as a construction company. But if you have a physical workspace, run events, or have employees doing fieldwork, the duty applies to you.
Practical Steps to Limit Your Exposure
The theme across all these liability categories is the same: personal liability typically arises from ignorance, negligence, or inaction — not from ordinary business risk-taking. Here’s what founders should do:
- Know your financial position. Review cash flow, debts, and solvency regularly. If you suspect insolvency, document the steps you’re taking to address it (safe harbour).
- Lodge everything on time. BAS, SGC, PAYG — even if you can’t pay, lodge. Late lodgement is what triggers lockdown DPNs.
- Read what you sign. Personal guarantees should be a conscious, informed decision with professional advice — not a checkbox in a larger deal.
- Be careful with representations. Marketing claims, fundraising materials, and investor communications should be accurate. If you wouldn’t defend the statement in court, don’t publish it.
- Get D&O insurance. Directors and officers insurance won’t cover everything (it typically excludes fraud and intentional breaches), but it provides meaningful protection for many of the liability scenarios discussed above.
- Take professional advice early. The cost of a lawyer or accountant identifying a problem before it crystallises is always less than the cost of defending or settling a personal liability claim.
Conclusion
Limited liability is real, and incorporating a company does protect your personal assets in most situations. But the exceptions are significant, well-established, and enforced regularly. Founders who understand where the boundaries are — and take straightforward steps to stay on the right side of them — will be far better positioned if things go wrong.
If you have questions about your personal exposure as a director, or need help reviewing your current arrangements, get in touch. It’s always better to have this conversation early.
