Incorporating a company requires careful planning. This article provides a step-by-step guide on how to…
Company Constitution: Do You Need One?
Company constitutions in many ways represent the company rulebook. They set out how the company is managed and the rights of the shareholders. It is worth taking the time to get them right.
Do you need a company constitution? When you start a company with other people you are full of goodwill towards each other. While that may last, there are always going to be disagreements about how things should be done. Even with the best will in the world, some of these disagreements are going to be hard to resolve. Luckily, there are ways to resolve differences built into the Corporations Act 2001, being the legislation that governs all registered companies.
The Corporations Act 2001 contains a set of rules that companies must follow. They provide a minimum standard for the governance and good running of the company.
These rules describe the workings of the Board of Directors and rules about shareholder rights. They are called `replaceable rules’ because they can be replaced by a company constitution. The company constitution will override the replaceable rules in part or wholly. If you only want to change some of the replaceable rules you will have to explicitly state which ones you are replacing in the constitution.
So, Why a Company Constitution?
The company constitution can be tailored to fit your company. For example, if you are setting up a company to run a charity, the constitution will contain a clear description of the charitable purpose. This is important if you want the charity to be registered with Australian National Charities Commission (ACNC) and so allow donations to be tax deductible.
You may want a company constitution so that you change the rules on how the shares operate. For example, your company may want issue shares to existing shareholders first without offering them to the general public or to issue partly paid shares so that the company can call on the shareholders to pay the full amount of the shares at need.
The company constitution sets out the rules that govern the company in one place. This makes it easy for people to follow the rules. While the replaceable rules are set out in the Corporations Act 2001, they are not all in one place and are not easy to find and digest.
It is important to remember that the constitution is a public document and is available to any member of the public to read. This is useful if you want to set out the purpose of the company clearly for everyone to understand.
There is another document that may have an impact on how your company is run. The shareholders agreement is a private contract between the shareholders. The rules set out in the shareholders agreement will override the rules set out in the company constitution. For example, if you are setting up a startup, you may want to have a shareholders’ agreement to limit how the founders can dispose of their shareholdings.
How Do I Setup a Company Constitution?
You can find a model constitution at the Australian Institute of Company Directors web site here. This provides a template that you can use to build your own company constitution. Once you have drafted the new company constitution, you need to have the constitution ratified by a meeting of the members or shareholders. Be careful how you draft the constitution as you will require a 75% majority to change the constitution.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.