Corporate simplification

The much-heralded Federal Government Corporate Law Simplification Act has been passed and cost savings will flow to small businesses. In essence, the Act streamlines statutory administration requirements and considerably reduces compliance costs.

Cuts can be more than 50 per cent of current costs, amounting to savings in legal and accounting fees for some small businesses of between $20,000 and $40,000 a year. In exceptional cases, savings would be higher.

What is now the Institute of Company Directors has been lobbying for almost 20 years for laws to cut red tape and the costs of operating small companies.

In the new legislation, proprietary companies will be classified as large and small. Passage of the Act was delayed by the need to clarify the criteria for these companies and the accounting and auditing requirements.

The definitions of small and large companies will be reviewed after two years, according to Ms Alexandra Kagis, senior associate, business law division at Corrs Chambers Westgarth.

A small company is defined as one not conforming to at least two of the following three criteria:

* Consolidated annual gross operating revenue of at least $10 million.

* Consolidated gross assets of at least $5 million at year-end.

* At least 50 employees.

A company classified as small will not have to prepare statutory accounts for the Australian Securities Commission, unless specifically directed to do so by the ASC or by its shareholders.

For small companies the Act axes the requirement for more than one shareholder and more than one director, and there will be no need to maintain shareholder, officer and equity registers, hold annual general meetings, or automatically file annual accounts with the ASC.

The director and shareholder can be the company secretary.

Ms Kagis explains that the Act is welcome because it addresses the problem that many of the obligations now imposed by the law on all companies are inappropriate for small businesses and out of touch with commercial reality.

One senior accountant says that changes can cut relevant annual accounting and legal bills up to $20,000 for each company, while the most common range of cost savings for accounting is between $3,000 and $12,000.

The legislation rewrites the rules for running small corporations. It puts direct control in the hands of owners, while removing some of the non-productive bookwork.

The company can be run, or sold, without board meetings, minute books or director, officer, and equity registers.

The annual general meeting, a mere formality in many small companies, is abolished – but records of company decisions must be kept.

The Attorney-General, Mr Michael Lavarch, expected the legislation to be passed before July 29 this year. It is now expected to be operational this December but is guaranteed to be proclaimed before April 17, 1996. As a result, accountancy savings will be available this financial year.

For large corporations, keeping and filing annual accounts – revealing current and non-current assets and liabilities, net assets, profit, and a schedule of shareholder equity – still applies. In most instances, accounts must be audited.

Small companies will not be obliged to keep these accounts, unless demanded by more than 5 per cent of shareholders or by the ASC.

Now the caveats. Changes in statutory accounting requirements should not encourage companies to act imprudently and dispense with record-keeping altogether. Budgets should still be prepared and meaningful financial records maintained.

A form of accounts should be kept to aid cash flow control, record company development (or lack of it), and provide an accurate financial history that can throw light on business problems and opportunities.

Proper company accounts are also needed as a basis of tax returns and to answer any Tax Office queries.

These accounts also assist in making loan applications, in supporting an asking price when trying to sell the company, or in demonstrating to a potential venture partner the company’s sound track record.

“Serious thought should be given to incorporating, regardless of the new law. It costs $1,090 to buy a shelf company package from us. There are additional Small Business Book Keeping costs if more legal advice is needed to establish the company,” Ms Kagis said.

“Corporate limited liability is rather illusory these days. People need to satisfy themselves that a company structure is the best for the activities of their business,” she says.

The ASC can demand filing of full accounts from a small company, but as yet the how, when and why of these demands are still not known.

What is known is that the ASC has full discretion on what it can demand from a company and there is no clarity on the status of a company that moves from small to large size during the course of its activities.

However, the ASC is influenced in its decision-making on company account requirements by the number of creditors and potential creditors the company has, and its liabilities.

The Act is Stage 1 of a three-pronged assault on the complexity and quantity of company law.

Stages 2 and 3 are of more concern to large corporations. These cover financial reporting to shareholders, defunct companies, accounts and audits, share capital, company formation, fund raising, takeovers, company officers and related party transactions. The objective is to make the legislation more understandable and cheaper for all to observe.

WHAT CHANGES MEAN FOR SMALL FIRMS

* No need to prepare accounts for ASC, but accounts must still be kept for tax.

* One person can be director and shareholder as well as company secretary.

* No need for annual general meetings, though records must be kept of company decisions.

* No need for company registers to be kept.

Buying insurance: don’t make thoughtless, hasty decision on coverage

As you dream about your move to a new home or apartment and enjoy your visions of larger closets and a pleasant kitchen, don’t forget one of the most important purchases for the new place: insurance.

If you’re buying a house, condominium or townhouse, the mortgage company will insist you buy what’s called homeowner’s or hazard insurance. And if you’re renting, well, your landlord’s insurance won’t replace your couch, stereo or even one pair of designer jeans if they’re lost to burglars, fire or a tornado.

Your homeowner’s or renter’s insurance also will include liability coverage to protect you if someone is injured on your property. You’re also covered away from home, if, for instance, you bonk someone on the golf course with an errant swing of that five-iron.

Aaarrgh! So many things to think about – find a home, find a mortgage, arrange the move and shop for insurance!

“I think homeowner’s insurance is one of the biggest things that tends to get overlooked,” said Paul Myers, an independent insurance agent with the Maguire Agency in Roseville. “Too many times, especially people buying homes tend to run in at the last minute, even a few days or hours before closing, and just sign up for insurance, maybe the lowest-cost one they can find.”

And renters often don’t think they need insurance.

Hasty, uninformed shopping, Myers said, can lead to misunderstanding about what the insurance covers, overpayment for a policy or purchase of a policy that doesn’t include as much coverage as one with another company for the same price.

“It’s not like automobile insurance, where there’s a very generic policy,” he said. “Price is important, but coverage is more important, especially that you get as much coverage as you need for the things that are really important to you.”

Insurance shoppers, he said, should ask lots of questions, especially specific questions about what is covered and for how much:

– The buildings. Basic home policies cover repairing or replacing your home and garage. But ask your real estate peoria agent to help determine how much your property is worth minus the land – you don’t need to insure the land because that will still be there even after the worst disaster.

– Personal property. Basic policies also cover repairing or replacing lost or damaged personal possessions; that coverage is automatic, although its scope may vary from company to company. Be sure to ask, said Jim Copouls, president of Stan Copouls Services, an independent insurance agency in Richfield.

Some companies may cover your possessions up to 50 percent of the home coverage – or $50,000 on a $100,000 home policy. But some may cover up to 100 percent; that is, on a $100,000 policy, if your house is lost, you’re covered for up to $100,000 on your personal possessions. He suggests that insurance buyers try to get some idea of how much their possessions are worth (“And they’re always worth a lot more than you think, especially when you have to replace everything,” he said), so you can buy more coverage for personal possessions if you need it.

– Living costs. Most homeowners’ policies cover the costs for you to live and eat elsewhere temporarily if your home is uninhabitable.

– Riders. In addition, you might need to buy “riders” to cover some of your special possessions, such as antiques, collections (clothing, cameras, ceramics, pinball machines, baseball cards), or if you have more than $1,000 worth of jewelry. To be sure you’re covered, ask your agent if you need a rider and how much more the coverage will cost.

– How much replacement. Many insurers now automatically make the coverage “guaranteed replacement cost,” as opposed to “cash replacement cost,” which is a good thing, Copouls said.

With cash replacement, you may be covered only for today’s value of your 10-year-old sofa (maybe $25; $75 if it’s leather, perhaps). With guaranteed replacement cost, you can buy new a new sofa equal in quality to the old one. That guaranteed replacement cost coverage may add $35 to $75 to your annual premium, depending on your policy.

– Liability. Homeowner’s insurance policies also cover liability, but some companies may automatically include $100,000, and others may include up to $300,000 worth of coverage, said American Family Insurance agent Bill Kolb, owner of Bill Kolb Agency in Edina. Ask how much is included, and consider whether to add more. For instance, you might want to bump up your liability coverage if you’re likelier than most to hurt someone else accidentally, if you tend to have a lot of visitors and parties, if your walkways are particularly hazardous or your children are particularly rambunctious and likely to break things elsewhere.

Dave Cummings, executive director of the Minnesota Insurance Information Center in St. Paul, said his organization, funded by state-based insurance companies, recommends that shoppers get three bids – making sure they’re for exactly the same coverage – from agents recommended by friends or relatives.

Some may grumble about paying insurance premiums, expecting never to make a claim. “But pick up the paper any day and you see things happening all over the place – city and suburb and rural areas,” said Kolb.

Water pipes burst. The grandchildren try out their crayons on someone’s new white linen wallpaper. Ice dams on the roof create moisture problems and ruin a closet.

“A lot of times people don’t know they’re covered, or they’re too embarrassed to call,” Kolb said. “But there isn’t a stupidity exclusion written into homeowner policies. If it’s accidental and sudden, call the insurance agent.”

In mid-December, when Gene and Mary Hagl came home after a few hours away to find their Brooklyn Center house filled with thick, black smoke, Mary Hagl’s first thought, after turning off the stove that had turned the pot roast to cinders, was what a chore it would be to clean up after the mess.

“But I said, well, let’s call the insurance company, and it was covered,” said Gene Hagl. “We thought we had turned the stove off when we left, but there was this awful greasy black smoke into and on top of everything.”

His insurance company, Minnesota Mutual Insurance, recommended a professional cleaning service. “They cleaned everything in the house, including the soup cans in the pantry,” he said. Insurance covered all costs, including an hourly wage to Mary Hagl when she insisted on cleaning some delicate fabrics herself.

“We know a lot more now, and we’re lucky we had good insurance and a good agent,” Hagl said. “But I’d sure advise people to shop well for a good company, good agent and good coverage. And to be sure of exactly what you have. That’s hard to do, but you can take pictures.”

Once you have your policy, Kolb said, an inventory – written or in photos or videos – is important, but not essential to the insurance company. When you make a claim, you’ll have to tell the insurance company what is lost or damaged, so if you’ve done a predisaster inventory, your job will be easier.

“In those emotional weeks after a loss, you might not remember all your summer clothing if it’s winter, or all of your tools, or Tupperware,” Kolb said. “But you’ll need to replace it, and the insurance company can’t replace it if you’ve forgotten you lost it.”

Insurance shopping tips

Shop early, months or weeks before your closing, not days or moments before. Shop around. You’re likelier to get better, cheaper coverage from an agent you really like if you have time to shop around. When you get price quotes from several companies, make sure the different plans include the same amount of coverage. Ask lots of questions about what personal possessions will be covered – your personal computer or collection of bowling balls or tea cozies. Ask about coverage that includes a place to live while your home is being repaired. Ask about replacement cost coverage. Are you covered for the actual cash value of an old item or for the cost of a new one? Ask about cost controls. You may get a reduced premium for: -A higher annual deductible. -A secure home with deadbolt locks, working fire detectors and a security system. -A fully updated electrical system. -Carrying both your home and auto insurance with that provider. -Being a longtime customer. -Negotiating with your mortgage company. Some mortgage companies insist the house be covered for full market value, but remember that the market value includes the land value, which likely won’t be lost to most perils. -Being a “mature” homeowner, age 55 and retired. -Being a nonsmoker.

What type of policy do you need?

House buyers: Lenders require you to have protection against loss or damage from perils such as fire and lightning, windstorm or hail, explosion, riot or civil commotion, smoke, vandalism, theft, burglary, damage from weight of ice, snow and sleet. Such insurance includes liability coverage, usually up to at least $300,000.

You can get bare-bones (HO1) coverage, but most homeowners opt for broad (HO2), special (HO3) or comprehensive (HO5) policies, with coverage and premium increasing as the numbers go up.

Some things aren’t covered in typical policies – flood, earthquake, war and nuclear accidents, for example, but you can buy special riders.

Insurance costs vary according to location, age and condition of your home, the amount of coverage and the deductible. Deductible choices generally range from $250 to $1,000. You’ll pay less on annual premiums with a higher deductible.

Condominium or townhouse buyers: You also must buy homeowners insurance – an HO6 policy, but it covers only personal property and the area within the home, including light fixtures, wallpaper, carpeting and appliances. The community association will insure the exterior and structure of the buildings, and get liability insurance for common areas. HO6 policies vary so greatly that most agents are reluctant to offer cost estimates. Premiums depend on the type of home; the type and extent of association insurance; the size, age, location and quality of the structure, and the individual owners’ insurance responsibilities.

Renters: Renters can buy insurance that covers replacement or repair of personal possessions if they are lost or damaged, plus liability coverage for accidents in their unit. A renter’s policy, or HO-4, costs about $70 to $120 a year for $15,000 to $20,000 worth of coverage.