A company is a legal entity. It is distinct from its shareholders, directors and employees. A company constitution is a document that contains the rules governing the relationship between (and activities of) the company, its directors and shareholders. You may adopt a constitution for your company when you register it, or at a later stage.
What Is a Company?
A company is a legal entity. A company can:
- sue and be sued;
- enter into contracts; and
- acquire, hold and sell property.
Companies have perpetual succession, meaning that they continue to exist even if their shareholders or directors leave or die. Companies are managed centrally under a board of directors. Generally, companies have shared ownership by contributions of capital (i.e. shares). It is possible to have a one person company. However, a private company cannot have more than 50 members under the law. If a company has more than 50 members, it must convert to a public company.
Companies Limited by Shares
The most common type of company is a private company limited by shares. A company limited by shares must be formed with a capital in the form of shares (known as ‘share capital’). A company’s share capital is the total amount contributed or promised to be contributed by its members. The company can use the share capital as the directors and shareholders see fit.
Managing a Company
A company’s internal management is governed by:
- the replaceable rules contained in the Corporations Act;
- a constitution (plus the mandatory replaceable rules); or
- a combination of both.
If your company does not have a constitution, it will be governed by the replaceable rules.
Company Constitutions
A company constitution is a document that specifies the rules governing the company, its directors and shareholders. A constitution usually allows you more flexibility in managing your company. The replaceable rules generally contain more onerous obligations, which will apply unless a constitution overrides them. However, there are some replaceable rules which will always apply, even if the company has a constitution.
Adoption of a Constitution
A company can adopt a constitution on incorporation (ie registration with ASIC).
If a company wants to adopt a constitution on incorporation, all the initial members must agree in writing.
A company can also adopt a constitution after incorporation. The company must:
- Issue a notice. A company has to give notice of a special resolution and general meeting. A publicly listed company must give at least 28 days notice of the meeting. All other companies must give at least 21 days notice. The notice should include the time, date and place of the meeting, the general business that you will discuss and the intention to pass the resolution;
- Hold a general meeting. To adopt a new constitution, the company must pass a special resolution at a general meeting. At least 75% of the voting members of the company must vote in favour of the resolution for it to pass. However, you will also need to follow any other requirements for passing resolutions that are set out in the original constitution.
Replaceable Rules
Replaceable rules are provisions in the Corporations Act that apply to companies.
A company can displace or modify the replaceable rules with the company’s constitution. However, some of the replaceable rules are mandatory for all companies. A company’s constitution cannot displace these mandatory rules.
Altering the Constitution
If a company has adopted a constitution it can later modify or repeal it, in whole or part, by passing a special resolution at a general meeting of the company’s members.
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Key Takeaways
Before registering a company, you should decide whether the internal management will operate under replaceable rules, a constitution or a combination of both. If you do not put in place a constitution, your company will be governed by the replaceable rules. If you need help drafting a company constitution, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
The primary reason people set up companies is to protect themselves personally from incurring liabilities. A company has a separate legal existence, distinct from its owners (its shareholders), directors and employees. Only in limited circumstances can the directors of a company be held liable for any debts it incurs.
You do not need a constitution if you want to incorporate (or already have incorporated) a company. However, we usually recommend that you put one in place. If your company does not have a constitution it will be governed by the replaceable rules from the Corporations Act. These rules can be very onerous to comply with. Putting in place a simple constitution can make life much easier and give you a lot more flexibility which it comes to making decisions on behalf of company.
Even if you had an advisor (e.g. a lawyer or accountant) put in place a constitution when your company was first registered, you may not have looked at it since. It is important to review your constitution and understand the processes for making decisions and dealing with shareholders. If you do not comply with your constitution, those decisions will not have been validly made.
If your constitution appears overly complicated, you should consider putting a new constitution in place that reflects how you are actually making decisions.
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