Every company needs some ground rules. These rules decide how the company is run day to day – who can make decisions, how meetings work, and what happens with shares.
In Australia, a company gets these rules in one of two ways. It can write its own rules, called a company constitution. Or it can use a ready-made set of rules from the law, called the replaceable rules. Some companies use a mix of both.
What is a Company Constitution?
A company constitution is a document that sets out the rules for how a company is run. It works like a contract between the company and the people involved — its directors, its members (shareholders), and its company secretary.
A company can choose to write its own constitution instead of using the standard rules in the law. What happens next depends on the type of company:
- A proprietary company (a private company) doesn’t have to send its constitution to ASIC when it registers. But it must keep a copy with its records, in case anyone needs to check it.
- A public company must send a copy to ASIC when it registers, whether it’s using a full constitution or a mix of replaceable rules and a constitution.
If a company writes down its goals – called its objectives – in its constitution, it must stick to them. The only way to change them is through a special resolution, where at least 75% of members agree.
A constitution can set out legal rights, duties and limits for the company. Because it’s a legal document with real consequences, it’s worth getting proper legal advice before deciding what goes in it.
What Are Replaceable Rules?
Instead of writing a constitution, a company can simply use the replaceable rules already built into the Corporations Act 2001. There’s nothing to write yourself.
Section 141 of the Act lists these rules in a handy table. They cover things like:
- appointing officeholders
- checking the company’s books
- running meetings for directors and members
- handling shares and dividends
These rules are built to work for every company, so they’re broad and general on purpose. That’s the whole point of calling them “replaceable” – a company can swap out some, or all, of them by adopting its own constitution instead.
Usually, when a company does write a constitution, it spells out exactly which replaceable rules it’s changing – on top of setting its own rules for how the company, directors and shareholders work together.
What Does a Constitution Actually Do?
Think of a constitution as a contract. It links together:
- the company and each member (shareholder)
- the company and each director
- the company and the company secretary
- every member with every other member
That means everyone involved has to follow it, not just the company itself.
How Do You Adopt a Constitution?
A company can put a constitution in place either before or after it registers.
Before registration, every member has to agree to it in writing.
After registration, the company needs a special resolution – at least 75% of the votes cast in favour.
The same rule applies if the company wants to change or scrap its constitution later. It takes a special resolution to do that too.
Special Rules for Sole Director/Shareholder Companies
There’s one exception worth knowing. If a proprietary company has just one shareholder, and that same person is also the sole director, it doesn’t need a full set of internal rules at all.
Section 135(1) of the Corporations Act 2001 says the replaceable rules simply don’t apply to these companies.
That doesn’t mean they can’t have a constitution if they want one – some do. But they’re not required to. They just need a few basic rules to cover the essentials, and the law already provides those:
- Section 198E(1) sets out what powers the director has
- Section 198E(2) covers the director’s power to sign or handle things like cheques and other negotiable instruments
- Section 202C covers how the sole director/shareholder can be paid, and reimbursed for business expenses
- Section 201F sets out special rules for appointing directors in these companies
These particular rules – 198E, 202C and 201F – can’t be changed, even with a constitution.
One more thing worth remembering: if the company later appoints a second director, or someone else becomes a shareholder, the replaceable rules automatically switch back on – unless the company’s constitution says otherwise.
Frequently Asked Questions
1. What is a company constitution?
It’s a document that sets the rules for how a company is run – a rulebook that acts as a contract between the company, its directors, its members and its company secretary.
2. Do I need a company constitution, or can I use the replaceable rules?
Many companies just use the replaceable rules in the Corporations Act 2001 and never write their own constitution. A constitution makes more sense if you want custom rules, like extra shareholder protections or specific director requirements.
3. Does a proprietary company have to lodge its constitution with ASIC?
No. A proprietary company just keeps a copy with its own records. Public companies must lodge a copy with ASIC when they register.
4. How do you change a company’s constitution?
By passing a special resolution – a vote where at least 75% of the votes cast are in favour.
5. Do sole director/shareholder companies need a constitution?
No, not by law. Under section 135(1) of the Corporations Act 2001, the replaceable rules don’t apply to these companies, and they’re not required to adopt a constitution either, though they can if they want to.
Getting Help With Your Company Constitution
Choosing between a constitution and the replaceable rules is one of the first big decisions a new company makes. If you’re not sure which is right for your business, or you’re still weighing up which business structure suits you best, it’s worth getting proper legal advice before you register.
At Allied Legal, we help startups and scaleups set up the right structure from day one – including drafting a constitution where it’s needed, and keeping your company secretarial records in order as your company grows.
You should also review your constitution regularly, and update it if the law changes or your company’s needs change. Get in touch at hello@alliedlegal.com.au if you’d like a hand.
Related reading: Incorporating a Company in Australia · Understanding and Complying With Directors’ Duties · Why Do I Need a Shareholders Agreement?
This article is for general information only and doesn’t constitute legal advice. You should obtain advice specific to your circumstances before acting on anything discussed here.
