Not all companies are the same, it is critical that you understand the differences. In this article we set out five key legal issues to keep in mind if you are considering a company.
1. There are Different Types of Companies
There is not just one type of company in Australia, there are several. The most common in business use are proprietary limited companies (private companies with limited shareholder liability) or public limited companies (public companies with limited shareholder liability). The “limited” liability means that the shareholder is not liable for debts and claims against the company, beyond what the shareholder has committed to invest in the company.
Private companies are more suitable for small and medium sized businesses with closed ownership. Shares in such companies can generally only be acquired by private negotiation. Public companies are typically open for investment from members of the public but have increased regulation.
Another reasonably common type of company is a public company limited by guarantee – these companies do not pay dividends or provide returns to their members and are typically used for charitable or not-for-profit purposes.
2. You Will Need a Director or Directors
Directors are the natural persons that control the Company. Resolutions and actions of the directors are actions of the Company, to the extent authorised by the company constitution (more on this below).
Private companies require at least one (1) director. Public companies required at least three (3) directors. In either case at least one of the directors of the company must ordinarily reside in Australia.
Since 2022, all Directors or proposed directors must have a Directors Identification Number. More information may be found in our previous article here.
Directors can be personally liable for some company debts – notably, where the company is trading whilst insolvent. Directors also owe special statutory and fiduciary duties to act in the interests of the Company and avoid conflicts of interests.
3. The Company Constitution Can Be Customised
Companies may adopt a company constitution setting out the rules, powers and rights that apply to the participants in the company. A company that does not adopt a constitution is governed by a set of default “replaceable rules” set out in the Corporations Act 2001 (Cth).
The constitution and/or replaceable rules take effect as a contract between the company its members and directors.
The constitution can be customised to deal with the following types of matters (without limitation):
- Powers of directors
- Remuneration of directors
- Appointment and removal of directors
- Share classes and share class rights
- Pre-emptive rights for existing shareholders
By having customised share classes, a company can have different types of shares which entitle shareholders to differential dividend and voting rights. For example, you may want a class of shares that receives dividends only (no voting rights), and reserve voting rights for a specific founding shareholder.
4. Important Ownership Control Thresholds
Subject to the company constitution and any other agreement between the shareholders, there are some important control thresholds to note.
Typically, shareholders that control over 50% of the voting shares in the company have the right to appoint and remove directors. This means that if you are a minority shareholder, it is important to be aware that you may have no ultimate control in the composition of the board the directors, and many other matters. Most ordinary decisions of shareholders are decided on this basis.
On the other hand, there are some fundamental matters that require a ‘special majority’, for example:
- Changing the company name
- Adoption, removal or modification of the company constitution
- Voluntary winding up of the company
This means that the resolution requires shareholders with more than 75% of the voting shares to pass.
Some of these thresholds, depending on the type of decision, may be adjusted in the company constitution.
5. A Company is A Separate Legal Person
The company is an autonomous legal person. It can enter into contracts, it can sue and be sued, and own property, just like a natural person. This is what makes a company ideal for ventures and enterprises between multiple parties – the shared interests of those parties can be manifested in a single legal business vehicle. For similar reasons, shareholders are usually personally protected against trading and business risks.
The directors and shareholders are distinct from the company itself, and intermingling of personal monies and assets with that of the company’s should be stringently avoided.
If you are looking to set up a company, contact our office to discuss your objectives in more detail. At NB Commercial Law we assist with company registrations, including custom corporate structures.
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About the Author
Daniel Dash has over ten (10) years of experience in commercial and corporate law and is a Director of Commercial Law team at No Borders Law Group. His areas of focus include contractual disputes, commercial transactions, finance, corporate advisory services and trusts.
His practice areas also include business structuring, shareholder contracts, corporate law, commercial litigation, commercial property, intellectual property, taxation and business succession planning.
Daniel works with company directors and business owners to achieve results that align with client objectives. In all matters, he endeavours to provide practical recommendations and develop clear and effective strategies.