In an earlier article I spoke about the rules that govern a corporation. These can be either a specifically designed set of rules called a “Constitution” or a set of standard rules call “Replaceable Rules” set out in the Corporations Act 2001.
The question arises which is better?
In my view using a specially designed Constitution has many advantages over being governed by the Replaceable Rules set out in the Act including:
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- A Constitution enables you to have several classes of shares with different voting rights, dividend rights and rights to capital upon winding up which can be useful in achieving objectives like income splitting, dividend streaming and selective control.
Companies formed after 1 July 1998 can have a simple set of rules known as “a Constitution” in place of what was previously called “Memorandum and Articles of Association”.
If a proprietary company does not adopt a Constitution, they will be automatically governed by the Replaceable Rules as outlined in the Corporations Act 2001.
Most companies have a Constitution which is drawn up prior to the registration of the company. The Constitution has the effect of a contract between:
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- the company and each shareholder;
- the company and each director;
- the company and the company’s secretary;
- a shareholder and each other shareholder.