How you choose to set up your business structure from the beginning is an important consideration (and yes, it’s possible to change it along the way).
When setting up a company, this can be more complex compared to a sole trader or partnership arrangement. However, one of the benefits of a company business structure is that it limits your liability.
A company has specific rules to follow and it’s important to remember the following:
- It’s a separate legal entity
- It’s a more complex business structure to start and run
- It involves higher set up and running costs than other structures
- It requires you to understand and comply with all obligations under the Corporations Act 2001
- This means that business operations are controlled by directors and owned by the shareholders
- Company members have limited liability
- Money the business earns belongs to the company
- Requires an annual company tax return to be lodged with the ATO
- Requires you to complete an annual review and pay an annual review fee
- Directors are required to compete a declaration of solvency each year
- Means wider access to capital
As well as;
- Your company must register for goods and services tax (GST) if your turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000
- The Australian Tax Office (ATO) has more detailed information on your obligations as a company
- Companies and directors have key legal and reporting obligations they must comply with. Some of the more common obligations include:
+ Update ASIC within 28 days of key changes to company details
+ Keep financial records
+ Understand and comply with all your obligations as a director
Key Documents:
There are many key documents that play a role in the governing of a company. Two of the most critical are:
A Shareholder’s Agreement
A Company Constitution
What is a Shareholder’s Agreement?
A Shareholders’ Agreement is a legal document that outlines the relationship between the shareholders of a company and specifies:
- Who controls the company
- How the company will be owned and managed
- Details how shareholder’s rights are protected
- How shareholders can exit the company
What is a Company Constitution?
This is a legal document used to govern the internal management of a company. It’s a fundamental component of the governance framework.
A constitution is a contract between:⠀
- The company and each member⠀
- The company and each director⠀
- The company and the company secretary, and⠀
- A member and each other member.⠀
A company can adopt a constitution before or after registration. If it is adopted before registration, each member must agree (in writing) to the terms of the constitution. If a constitution is adopted after registration, the company must pass a special resolution to adopt the constitution.
A company’s internal management may be governed by:
- Provisions of the Corporations Act 2001 that apply to the company – known as replaceable rules
- A constitution, or
- A combination of both.
Replaceable rules are in the Corporations Act and are a basic set of rules for managing your company. If a company doesn’t want to have a constitution, they can use the replaceable rules instead.
There are certain conditions that govern replaceable rules and company constitutions.
For more information head to ASIC’s website here.
What’s the difference between a Shareholder’s Agreement and a Company Constitution?
While it seems that both of these documents are similar, they play a significant role in the governance of your company. The company constitution is all about the internal governance and the shareholder’s agreement is all about the relationships between shareholders.
They work together to ensure the smooth functioning of a company.
Ultimately, both documents can also help to minimise disputes between shareholders.
Shareholder Disputes
“The keys to preventing catastrophe include sound shareholder agreements and effective dispute resolution policies.”
Shareholder disputes are a common occurrence in business. A shareholder refers to an individual or legal entity that is registered by a corporation as the legal owner of shares of the share capital of a public or private corporation.
A majority shareholder is a single shareholder who owns and controls more than 50% of a company’s outstanding shares. A minority shareholder on the other hand, is a single shareholder who holds less than 50% of a company’s stock.
Shareholder disputes are disruptive, time consuming and costly if not effectively managed from the beginning. They can stem from any number of reasons including:
- A breach of fiduciary duty
- Financial mismanagement
- Unfair prejudice
- Relationship breakdown
- Difference of opinion
One of the best ways to prevent or minimise the effects of any shareholder disputes is by having a Shareholders’ Agreement.
Check out this article from Forbes here which has great tips for preventing shareholder disputes.
