How to Create a Board of Directors: A Guide for Australian Startups

Learning how to create a board of directors is a key step for any startup that plans to grow or raise capital. A board gives your company strategic oversight, accountability and a structure that investors trust. It also brings legal obligations that every director must understand. This guide covers what the law requires, the steps to set up your board, and how to manage it well.

Does Your Startup Need a Board of Directors?

The law sets a low bar. A proprietary company needs at least one director, and that director must ordinarily live in Australia. Public companies need at least three directors, and at least two must ordinarily live in Australia. Crowd-sourced funding shareholders raise the minimum to two directors for a proprietary company.

So a one-person board is legal. Most startups still build a larger board as they grow. A board adds experience and challenge that a lone founder cannot supply. It also reassures investors, who often ask for board seats or observer rights before they invest.

Three signs suggest it is time to expand. You are raising funds, your business is growing fast, or you plan to scale into new markets or products.

How to Create a Board of Directors in Australia

Follow these five steps.

Step 1: Decide the Size and Mix

Start with the number of seats. Many early-stage boards have three directors, which avoids tied votes. A typical mix includes one or two founders, an investor nominee and, later, an independent director. An independent brings impartial views and industry experience. Record who can nominate each seat in your shareholders agreement.

Step 2: Check Each Person Is Eligible

A director must be an individual who is 18 or over. Undischarged bankrupts and people disqualified from managing companies cannot act without permission from ASIC or a court. Each director must also apply for their own director identification number before appointment.

Step 3: Appoint the Directors Correctly

Obtain each person’s written consent before you appoint them. They must sign it, and you should keep it on file. Under the replaceable rules, members can appoint a director by resolution at a general meeting. Directors can also appoint a director. In a proprietary company, members must then confirm that appointment within two months. Your constitution may change these rules, so check it first. Our guide to the company constitution and replaceable rules explains how they work.

Then tell ASIC about the change within 28 days. You can add or remove an officeholder online using Form 484.

Step 4: Build Your Governance Framework

Governance simply means the rules for how your board makes decisions. Put them in a written board charter. Cover the board’s purpose, its voting and quorum rules, and each director’s role.

The replaceable rules supply defaults. Two directors form a quorum, and the chair has a casting vote. Directors can also pass a circulating resolution if every director entitled to vote signs it. Your constitution or charter can change these defaults.

Record each meeting and resolution in the minutes within one month. Share the agenda and papers before each meeting. Our tips for making the most of startup meetings can help. The law does not require committees such as audit or remuneration for private companies. Add one only when a specific area needs focused attention.

Step 5: Agree Investor Rights in Writing

Investors who join the board are usually nominee directors. No statute gives an investor a board seat or an observer right. Those rights come from a shareholders agreement or investment agreement, so negotiate them early.

A nominee director owes their duties to the company, not to the investor who nominated them. An observer has no vote. But the law can treat a person as a director if the directors habitually follow their wishes, even without an appointment. Our article on investor-founder conflict explains how to manage these relationships.

What Duties Do Directors Owe?

Directors owe their duties to the company. The main duties sit in the Corporations Act 2001 (Cth).

Directors must act with the care and diligence of a reasonable person in the same role. The business judgment rule can protect an honest, informed decision made for a proper purpose without a personal interest in the outcome. Directors must also act in good faith in the best interests of the company. They must not misuse their position or company information for personal gain.

Conflicts need special care. A director with a material personal interest in a company matter must tell the other directors, and the board should record it in the minutes. In a proprietary company, the director can usually still vote once they disclose the interest, unless the constitution says otherwise. Directors of public companies face stricter voting limits.

Directors must also avoid trading while the company is insolvent. A breach of these duties can lead to disqualification, compensation orders and civil penalties. The maximum civil penalty for an individual is the greater of 5,000 penalty units or three times the benefit gained. At today’s penalty unit value, that is roughly $1.8 million. ASIC explains these director obligations for small business. Our guide to directors’ duties goes into more detail.

What Protections Do Directors Have?

Directors have protections too. A company can agree to indemnify its directors, but the Corporations Act limits this. A company cannot indemnify a director for a liability owed to the company or for a penalty or compensation order under the Act. It also cannot pay insurance premiums for a wilful breach of duty to the company.

Most startups cover the gap with directors and officers insurance. Read our guide to D&O insurance for the details. Directors can also inspect the company’s books and financial records, which helps them make informed decisions.

How Do You Manage a Board Effectively?

Set a meeting calendar for the year, and agree the key decisions the board will make at each meeting. Keep agendas short and focused on strategy, performance and risk.

Review the board’s performance once a year. Directors can complete a self-assessment against the company’s goals. As the company grows, an external review can uncover blind spots. Neither review is a legal requirement for a private company, but both are good practice.

Plan for succession early. Identify who could join the board as the company scales, and brief them before they join. Some startups also build an advisory board, which offers advice but makes no binding decisions. Advisers should stay out of decision-making, because acting like a director carries director-level risk.

Frequently Asked Questions

1. How many directors do I need to set up a company in Australia?
A proprietary company needs at least one director, who must ordinarily live in Australia. Public companies need at least three, and two of them must ordinarily live in Australia. Crowd-sourced funding shareholders raise the minimum to two for a proprietary company.

2. Can a startup have only one director?
Yes. A proprietary company can have a single director. As you raise funds and grow, you will probably add directors to bring in experience and meet investor expectations.

3. Do I need a board charter?
No law requires one for a private company. A charter still helps. It records how the board makes decisions, who does what, and how meetings run, which prevents disputes later.

4. What is the difference between a board and an advisory board?
A board of directors makes binding decisions and carries legal duties under the Corporations Act. An advisory board only offers advice. The law can still treat advisers who start to direct the company as directors.

5. Can an investor appoint a director to my board?
Only if your agreements allow it. The right to nominate a director usually comes from a shareholders agreement or investment agreement. A nominee director still owes their duties to the company.

6. Do directors need a director ID?
Yes. Every director must apply for their own director identification number before appointment. A director keeps the same ID for every company they act for.

Allied Legal advises startups and scaleups on setting up and running their boards. We prepare director consents and appointment resolutions, draft board charters and constitutions, and negotiate investor board rights. We also advise directors on their duties and on conflicts of interest.

Read about our advisory board services and corporate governance support, or contact us on 03 8691 3111 / hello@alliedlegal.com.au.

This article is provided for general information only and does not constitute legal advice. You should obtain legal advice specific to your circumstances before acting on any information contained in this article.