When starting a business, it’s essential to understand the various types of companies and their legal implications. This guide highlights the critical legal aspects you need to consider if you are thinking about establishing a company in Australia.
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Different Types of Companies in Australia
Australia offers several types of companies, each with distinct characteristics. The most common types are:
- Proprietary Limited Companies (Private Companies): These are private entities with limited shareholder liability. Shareholders are not personally liable for company debts beyond their investment in the company. Ideal for small to medium-sized businesses, private companies typically restrict share transfers to private negotiations.
- Public Limited Companies: These public entities also have limited shareholder liability but are open to public investment. They face more regulatory scrutiny compared to private companies.
- Public Companies Limited by Guarantee: These companies do not pay dividends and are commonly used for charitable or not-for-profit purposes.
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Directors: Key Roles and Responsibilities
A company must have at least one director for a private company and at least three directors for a public company. Importantly, at least one director must ordinarily reside in Australia. Since 2022, all directors or proposed directors must obtain a Director Identification Number.
Directors are personally liable for certain company debts, especially if the company trades while insolvent. They are also bound by statutory and fiduciary duties to act in the company’s best interests and avoid conflicts of interest.
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Customising the Company Constitution
A company’s constitution outlines the rules and rights governing the company’s operations. If a company does not have a constitution, it is governed by the default “replaceable rules” set out in the Corporations Act 2001 (Cth).
The constitution can be customised to address various matters, including:
- Powers of directors
- remuneration of directors
- Appointment and removal of directors
- Share classes and their rights
- Pre-emptive rights for existing shareholders
Custom share classes can offer different dividend and voting rights, tailored to meet specific needs, such as reserving voting rights for founding shareholders.
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Ownership and Control Thresholds
Ownership control thresholds are critical:
- Shareholders controlling over 50% of voting shares can appoint and remove directors. Minority shareholders may have limited control over board composition and other decisions.
- Certain fundamental decisions require a ‘special majority’ (more than 75% of voting shares). These include changing the company name, modifying the constitution, or voluntary winding up.
Some thresholds can be adjusted in the company constitution.
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A Company as a Separate Legal Entity
A company is an autonomous legal person. It can enter into contracts, sue, be sued, and own property, similar to a natural person. This legal separation protects shareholders from personal liability and helps manage risks associated with trading and business ventures.
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The Importance of a Shareholders Agreement
In addition to the company constitution, a shareholders agreement is crucial. This binding contract governs the relationship among shareholders and covers:
- Control and management of the company
- Protection of shareholders’ rights
- Procedures for exiting the company
Setting Up Your Company
If you are considering setting up a company, contact us at NB Commercial Law. We offer expert assistance with company registrations and custom corporate structures tailored to your business needs.