Australian Pty Ltd companies do not need a constitution to be established. Instead, the company can use the ‘replaceable rules’ in the Corporations Act. So why would you bother with a constitution if a company can exist without it? What are the advantages of a constitution?
Generally, the main advantages of a constitution are the flexibility for your financial arrangements and rules to give greater structure.
Examples include:
1. Share classes
Different classes of shares with different voting rights, dividend rights and rights to capital upon winding up. Different share classes can greatly assist if:
- If you want to grow your business by attracting investors. Eg, professional firms need to get junior partners involved in the business so share classes are very useful.
- If you start with a silent partner and you will control the business, then different classes of shares can separate out the voting rights. This can also be useful when you want to retain or create a governing vote to retain control in a sell down.
- If you want to split income and stream dividends. Different share classes allow income to be paid in different amounts to those different share classes.
These rights are not available under the replaceable rules.
2. Meeting rules
The constitution can provide rules and structure for meetings including attendance rights and requirements for quorum, calling for meetings, how to pass valid resolutions and the like. That structure can be very useful to minimise disputes. Such provisions are not provided for in the replaceable rules.
3. Management
The constitution can contain clearer guidelines on what directors can and cannot do. This can be very useful for absentee owners, such as foreign investors who want oversight on what the directors are doing. Eg, the shareholder (owner) may wish to avoid the directors appointing another director, which the directors can do under s201H Corporations Act.
4. Broad application
The replaceable rules do not apply to superannuation trustee companies or single director-single shareholder companies. A constitution avoids that problem.
5. Easily understood and modified
Constitutions are broadly understood and accepted by incoming investors, financiers and counterparties. The rules are usually written in concise and contained in an easily accessible document. Further, constitutions are easy enough to amend when necessary; much like trust deeds.
In conclusion, DW Legal generally recommends a constitution for your company. For questions about the replaceable rules, how a constitution can benefit you and setting up your company, please contact DW Legal on 07) 5503 1711.
This article is from the state of the law as at 1 December 2023. This article is for general information only and you should contact DW Legal for tailored advice specific to your circumstances.
