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Why Your Company Needs a Constitution

Starting a company means many important decisions. We’re here to help you with one of the first – whether to set your company up with replaceable rules or a constitution. You’ll need one or the —other (or a combination of both) in order to legally govern the operations of your company; however, the two approaches are quite different. A constitution may cost you more money and effort up front, but you’ll soon see why your company will reap the rewards going forward.

What are replaceable rules?

Replaceable rules are a set of standard rules defined by Section 141 of the Corporations Act 2001. They come into effect automatically when you register your company with ASIC, so you could think of them as the default option. Because of this, the rules are designed to apply to a broad range of Australian companies and are very general in nature.

Areas of a company governed by replaceable rules include officeholders’ appointments, inspections of the company’s books, directors’ and members’ meetings, and dealing with the company’s shares and dividends. These provisions are outlined in the Corporations Act 2001 but can change over time, so it’s important to regularly refer to a current copy of the Corporations Act 2001 to stay up to date.

What is a constitution?

A constitution specifies the governing rules of a company in order to manage the relationship between its activities, directors and shareholders. The rules are not prescribed by the Corporations Act 2001 (though they are often modified versions of the replaceable rules) but rather are customised and agreed upon by the shareholders of your company with guidance from lawyers or compliance experts. Your constitution then works in conjunction with your company’s shareholder agreement.

Benefits of a constitution

A constitution is tailored to suit your company’s individual operations. This means it gives you much greater flexibility and certainty in your governance, and allows you to have more control as your company grows or changes over time.

Replaceable rules are simple, but sometimes too simple. Too often we see companies purchased online with replaceable rules that soon require changes. While replaceable rules can be replaced (go figure!) a constitution is required to outline any changes. Setting up a constitution as part of your company registration package is usually more cost-effective because when a constitution is adopted after registration, your company must pass a special resolution. According to ASIC, a special resolution needs at least 28 days notice for publicly listed companies and 21 days notice for other company types. For the resolution to pass, at least 75% of the votes cast must be in favour. This can be an expensive and time-consuming process.

In other – more disastrous – cases we see companies set up with replaceable rules and incorrectly classed shares. This means that shareholders find they can’t vote for changes to the company – not even to change their company address! Resolving this requires lawyers and – you guessed it – expense. A constitution can allow share classes to be tailored accurately and specifically to your needs.

A constitution may also work well to amend the balance of power between owners/shareholders and directors/management when there is a perceived or evident gap in control. For example, shareholders can be empowered to give directions to, or overturn decisions of, the company’s directors.

Because replaceable rules do not apply to proprietary companies where the sole director is also the sole shareholder, a constitution is always required in this instance too.

So, it really is a case of ‘a stitch in time saves nine’. If you have any questions around replaceable rules or constitutions, feel free to get in touch with CCASA’s highly qualified team. And remember that if you buy your company through CCASA, you get a constitution and free shareholders agreement as part of the package.

Next steps

Order your company quickly and easily online now! We recommend you seek legal and/or accounting clarification on the documents and how they can be used in your personal circumstances.

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