Director duties in a startup: what actually creates personal liability in your company

15 Apr

You set up a Pty Ltd. The company is its own legal entity. Your personal assets are protected. Right? Mostly, yes. But there are specific situations under Australian law where the corporate structure will not save you, and you can be held personally liable for the company's debts, penalties, or failures. If you are a founder who is also a director (which is almost every founder), you need to know where these risks actually sit.

Your core duties as a director

The Corporations Act 2001 (Cth) sets out a number of duties that every director owes. The four key general duties are found in sections 180 to 183 of the Act. In plain terms: you must act with care and diligence (make reasonable decisions based on the information available to you); act in good faith and in the best interests of the company, not yourself; avoid using your position for personal advantage; and not misuse information you obtain through your role.

These are objective standards. It does not matter that you are a first-time founder. A court will ask what a reasonable director in your company's situation would have done. Breach any of these and you can face civil penalties of up to $1.65 million per contravention (5,000 penalty units), compensation orders, and disqualification from managing a company. If your conduct was dishonest or reckless, criminal penalties apply, including potential imprisonment.

Insolvent trading: the big one

This is the single biggest personal liability risk for startup directors. Under section 588G of the Act, you have a duty to prevent the company from taking on new debts when it cannot pay its existing ones as they fall due.

In a startup, this gets murky fast. Many early-stage companies operate with negative cash flow, relying on the next funding round to keep going. That is not automatically insolvent trading. But if you keep incurring debts (wages, rent, supplier invoices) while knowing, or while you should reasonably know, that the company cannot pay them, a liquidator can pursue you personally for every one of those debts.

There is a safe harbour defence (section 588GA). If you suspect insolvency but take a genuine course of action that is reasonably likely to lead to a better outcome than winding up the company, you may be protected. But the safe harbour has conditions: your employees must be getting paid, your tax lodgements must be up to date, and your financial records must be in order. Many startups do not meet those preconditions when they need to.

ATO director penalty notices: the one founders miss

The ATO has its own separate regime for making directors personally liable. If your company fails to pay its PAYG withholding (tax withheld from employee wages), superannuation guarantee charge, or GST, the ATO can issue you a director penalty notice (DPN). Your personal liability actually arises automatically when the company misses the due date.

The critical distinction is between two types of DPN. If your company lodged its BAS and super statements on time but did not pay, you get a non-lockdown DPN: you have 21 days to pay the debt, place the company into administration or liquidation, or appoint a small business restructuring practitioner. But if your company failed to lodge on time, you get a lockdown DPN: the only way out is to pay the debt in full. You cannot escape by winding up the company.

This catches startups constantly. A founder focused on product and fundraising who is not checking whether BAS lodgements are being submitted on time can end up with a personal tax debt that follows them even after the company is gone.

WHS, personal guarantees, and shadow directors

Three other sources of personal liability deserve a quick mention. Under work health and safety legislation, directors owe a personal duty of due diligence to ensure the company complies with its WHS obligations. Even with a small team, you are on the hook. Penalties for officers are severe and vary by state, but can include fines in the millions of dollars and imprisonment for reckless conduct.

Personal guarantees are not technically a director duty issue, but they are the most common way founders actually end up paying company debts. Landlords, banks, and equipment financiers almost always require them. The advice: negotiate a cap, a time limit, and a release trigger tied to a funding milestone. Do not sign without reading.

Finally, the Act catches people who are not formally on the board. If you are an investor or adviser who is effectively directing the company's decisions, you may be treated as a shadow director and owe the same duties as a registered one.

What to actually do about it

None of this is meant to scare you out of being a director. Most of these risks are manageable with basic discipline. Here are the practical steps that matter most.

Review your cash position at least monthly so you know early if the company is approaching insolvency. If you cannot pay debts as they fall due, get advice immediately. Do not wait until the situation is critical.

Always lodge BAS and super statements on time, even if the company cannot pay the amount owing. This is the single most important thing you can do to avoid a lockdown DPN. Late lodgement is what converts a manageable problem into an inescapable personal debt.

Document your decisions in writing, especially during periods of financial stress. The paper trail is what makes the safe harbour defence and the business judgment rule work. If it is not written down, it may as well not have happened.

Get directors' and officers' (D&O) insurance from day one. It is not a luxury for later-stage companies. And if you are signing a personal guarantee, treat it like you are signing a personal loan, because that is effectively what it is. Negotiate a cap, a time limit, and push for a release tied to a fundraising milestone.

How Zed Law can help

Zed Law advises startup founders and directors on governance, compliance, and liability management. Whether you need a governance health check, safe harbour advice, or help responding to a director penalty notice, we bring practical legal advice built for early-stage and growth companies.

Contact Zed Law at hello@zed.law to arrange a consultation.

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Disclaimer: This article is intended as general information only and does not constitute legal or tax advice. The information in this article is current as at March 2026. Specific advice should be obtained in relation to your particular circumstances.

Phillip Kilazoglou

With a background in both Law and Business (Finance), and currently leading the Corporate and Commercial function at Zed Law, Phillip is well placed to advise on a broad range of corporate transactions and general commercial matters. Working across a diverse client base, from startup founders seeking to raise capital through to established businesses navigating complex transactions, Phillip provides commercially focused legal support tailored to each stage of growth. With a particular focus on corporate advisory, mergers and acquisitions, venture capital and private equity, Phillip assists clients in structuring transactions, negotiating key agreements and achieving their strategic objectives, and is developing a reputation for delivering pragmatic, commercially sound advice aligned with broader business goals.