- What corporate law actually covers
- Why incorporate, and which structure fits
- Your internal rulebook: constitution or replaceable rules
- The four directors' duties that bite day to day
- Who can bind the company: signing and authority
- Staying compliant: meetings, minutes and ASIC filings
- The documents worth having from day one
- When to bring in a corporate lawyer
- Limited liability protects shareholders, not directors
Most of the law that governs an Australian company sits in one statute: the Corporations Act 2001 (Cth) (the Act). The Act runs to thousands of provisions, but the ones that touch a typical small or medium business are a much smaller set. They decide how many directors you need and where they must live, whether your company runs on default rules or its own constitution, who can sign a binding contract, what a director owes the company, and which records and filings keep you on the right side of ASIC. This guide works through that core, so you know what the law requires before a problem makes it urgent.
What corporate law actually covers
Corporate law is the set of rules for creating, running, managing and winding up companies in Australia. It is set out mainly in the Corporations Act 2001 (Cth) and administered by the Australian Securities and Investments Commission (ASIC), the national corporate regulator. At a practical level the Act governs how a company is registered, how directors and shareholders make decisions, how shares are issued and transferred, how meetings are conducted and how records are kept.
The foundation everything else builds on is that a company is a separate legal entity. Under s 124 of the Corporations Act 2001 (Cth), a company has the legal capacity and powers of an individual and all the powers of a body corporate, including the power to issue shares and grant security over its property. Because the company is a distinct legal person, its debts and liabilities sit with the company rather than with its owners. That separation is what makes limited liability possible, and it is the main reason small businesses incorporate at all.
Why incorporate, and which structure fits
Before trading, decide whether a company is the right vehicle at all. Sole traders and partnerships are simpler and cheaper to set up, but the business owner is personally liable for the debts of the business. A company offers limited liability: provided the company is trading properly, shareholders are generally not on the hook for its debts beyond what they have invested. A company also gives you a formal way to split ownership through shares, bring in investors and keep operating when individual owners change.
For most small and medium businesses, the proprietary company, the Pty Ltd, is the standard choice. Proprietary companies are restricted in how they can raise money from the public, which suits businesses funded by the owners, their networks and banks. Public companies can offer shares to the public and are the structure you would need before a listing, but they come with heavier obligations, including more directors and stricter governance.
The number of directors is set by the Act, and the residency requirement catches many founders out. Under s 201A of the Corporations Act 2001 (Cth), a proprietary company must have at least one director who ordinarily resides in Australia, rising to at least two directors, with one resident, if the company has crowd-sourced funding shareholders. A public company must have at least three directors, and at least two must ordinarily reside in Australia. If no director meets the residency requirement, the company is in breach from day one, so check this before you incorporate, especially if you are setting up from overseas.
Your internal rulebook: constitution or replaceable rules
Every company has internal rules about how it makes decisions, appoints directors and deals with shares. If you do not adopt a constitution, a default set of rules from the Act applies instead. Under s 135 of the Corporations Act 2001 (Cth), the replaceable rules apply to companies registered after 1 July 1998 unless the company has its own constitution. The replaceable rules are workable defaults, but they are one-size-fits-most: they may not match how you actually want the business to run, particularly around share transfers, director powers and meeting procedures.
A tailored constitution replaces or modifies those defaults. It deals with share classes, how directors are appointed and removed, how meetings are called and how decisions are made. Under s 140 of the Corporations Act 2001 (Cth), the constitution and any applicable replaceable rules operate as a contract between the company and each member, and between the members themselves.
A shareholders agreement is a different document with a different job. It is a private contract between the shareholders, and sometimes the company, that is not lodged with ASIC. It sets out how owners make decisions, how shares can be transferred, how disputes are resolved and what happens on an exit or a funding round. The constitution binds the company and its members; the shareholders agreement binds the people who signed it. Small companies often run on the replaceable rules plus a shareholders agreement, which works as long as the two do not conflict. Where they do, the agreement typically deals with matters between the shareholders while the constitution governs the company's internal machinery, so it is worth having both checked together.
The four directors' duties that bite day to day
Directors owe their duties to the company itself, not to individual shareholders. The core duties are civil penalty provisions, meaning a contravention can bring fines, compensation orders and disqualification, and in serious cases criminal exposure. In practice four duties matter most to SME directors:
- Care and diligence: Under s 180 of the Corporations Act 2001 (Cth), a director must exercise their powers and discharge their duties with the degree of care and diligence a reasonable person would use in the company's circumstances. This is why records of decisions matter: a director who can show they informed themselves before acting is far easier to defend.
- Good faith and proper purpose: Under s 181, a director must act in good faith in the best interests of the corporation and for a proper purpose. The classic breach is a director using their power to entrench themselves or to favour their own interests over the company's.
- No improper use of position or information: Under ss 182 and 183, a director, officer or employee must not use their position, or information obtained through it, to gain an advantage for themselves or someone else or to cause detriment to the company. The information duty continues after a person stops being an officer or employee, which matters when a founder or director moves on.
- Prevent insolvent trading: Under s 588G, a director must not allow the company to incur a debt when the company is insolvent, or when incurring the debt would make it insolvent, if there are reasonable grounds for suspecting insolvency at the time. This is the duty that most often becomes personal liability, because a liquidator can seek compensation from directors personally for debts incurred while trading while insolvent. If you suspect the company cannot pay its debts as they fall due, this is the moment to stop, take advice and consider the options before signing anything else.
The business judgment rule in s 180(2) gives directors breathing room. A director who makes a business judgment is taken to have met the care and diligence duty if they made the judgment in good faith and for a proper purpose, had no material personal interest in it, informed themselves to the extent they reasonably believed appropriate, and rationally believed the judgment was in the company's best interests. It protects honest, considered decisions that turn out badly. It does not protect decisions made on the fly without information.
Who can bind the company: signing and authority
A contract signed by the wrong person, or signed the wrong way, can leave a company exposed or a deal unenforceable. Two sections of the Corporations Act are the everyday tools.
Section 127 sets out how the company itself executes documents without a common seal. A document is validly executed if it is signed by two directors, or by a director and the company secretary, or, for a proprietary company with a sole director, by that director where they are also the sole secretary or the company has no secretary. Execution under s 127 gives counterparties the benefit of statutory assumptions that the document was duly executed, which is why it is the standard, low-friction way to sign company documents. Electronic signing is generally available under the Act's technology-neutral signing provisions.
Section 126 lets the company contract through agents. An individual acting with the company's express or implied authority can make, vary or discharge contracts, and execute documents including deeds, on the company's behalf, without a common seal. This is how operational staff bind the company day to day, but it depends on authority actually being given, whether expressly through a written delegation or impliedly by holding a person out as authorised.
The practical discipline is to make authority visible. Adopt a written delegation of authority covering who can sign what and up to what value, and record board approvals for major transactions. If a dispute later turns on whether someone had authority, the paper trail decides it.
Staying compliant: meetings, minutes and ASIC filings
Good governance for a small company is mostly a habit of recording decisions. Directors' meetings can be held in person or by other means, and many decisions in a small company are made by circulating a written resolution for directors or shareholders to sign rather than holding a formal meeting. Keep minutes or signed resolutions for significant decisions: they are the evidence that the care and diligence duty in s 180 was met.
Maintain the statutory registers the Act requires, including registers of members, option holders and charges where applicable, and keep financial records for the period the Act requires. Update ASIC promptly when officeholders change, when the registered address changes and when the share structure changes, and pay the annual review fee. These are administrative tasks, but they are legal obligations, and getting them wrong is the most common way a company falls out of good standing. A calendar of filing deadlines and a central list of trigger events, such as director changes, share issues and address changes, is enough for most businesses.
The laws that sit alongside the Corporations Act
Running a company means engaging with several regimes beyond the Act.
Consumer law
If you sell goods or services, the Australian Consumer Law (ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), applies. Section 18 of the ACL prohibits misleading or deceptive conduct in trade or commerce, a prohibition that reaches marketing, advertising, sales scripts and even silence where it misleads. The ACL also sets out consumer guarantees on goods and services and rules on pricing and refunds.
Privacy
The Privacy Act 1988 (Cth) and its Australian Privacy Principles apply to businesses with annual turnover above $3 million, plus certain businesses regardless of turnover, such as health service providers and businesses that trade in personal information. The Act defines a small business as one with annual turnover of $3 million or less in the previous financial year, and many small businesses fall outside the Privacy Act's main obligations. But the exemption is narrower than it sounds: if you are not exempt, you need a privacy policy and compliant handling of personal information, and even exempt businesses should handle customer data carefully, because customer contracts and state laws can impose their own obligations.
Workplace law
Hiring staff brings obligations under the Fair Work system, including minimum pay and leave entitlements, any applicable modern award or enterprise agreement, and work health and safety duties. Award classification and minimum entitlements are where employers most often get it wrong, and the cost of a mistake is usually back pay plus penalties, so it is worth a specific review of your employment contracts and payroll settings rather than assuming a template will do.
Raising capital
Issuing shares to raise money is regulated by the fundraising chapters of the Act. The main exemption for private companies is the small-scale personal offer in s 708: personal offers to no more than 20 investors in any 12 months, raising no more than $2 million, made personally rather than by public advertising. The sophisticated investor test is a separate route. Cross either ceiling and the offer may require a disclosure document, and issuing securities without disclosure once the ceilings are breached is an offence. Before any share issue, check that your constitution and shareholders agreement allow it and record the board approval.
Intellectual property
Your brand and the IP your staff create are assets the company should own, not the individuals. Consider registering a trade mark for your brand name or logo with IP Australia early, and put written IP assignment in place for work created by employees and contractors, so ownership is clear before it matters.
The documents worth having from day one
Not every company needs every document below on day one, but most will need several of them as they grow:
- Constitution: your tailored rulebook for share classes, director appointments and decision-making, replacing the default replaceable rules where needed.
- Shareholders agreement: clarifies how owners make decisions, transfer shares, resolve disputes and handle exits and funding rounds.
- Directors' service agreements: set expectations, IP ownership and restraints for executive roles.
- Employment contracts: set out duties, entitlements, confidentiality and IP for each employee, aligned with the applicable award.
- Privacy policy: required if the Australian Privacy Principles apply to you, and good practice regardless.
- Customer terms and supplier agreements: lock in pricing, scope, deliverables, warranties and liability with clients and suppliers.
- Non-disclosure agreements: protect confidential information during negotiations and collaborations.
- IP assignment and licence agreements: ensure the company, not individuals, owns the IP created for your products, brand and software.
- Board and shareholder resolution templates: streamline approvals and recordkeeping for key decisions.
Keep your contracts consistent with your constitution and shareholder arrangements so they do not conflict. Where there is a clash, update the internal documents or adjust the contract terms before signing.
When to bring in a corporate lawyer
Nothing in this guide is a substitute for advice on your specific situation, and several decisions are genuinely judgement calls. Whether to incorporate at all involves tax, asset protection and succession considerations that depend on your circumstances. A constitution and shareholders agreement should be drafted to fit your ownership structure rather than pulled from a generic template. If the company is close to insolvent, whether further trading is defensible is a question for a lawyer and an insolvency practitioner to assess before you sign anything else. Fundraising, shareholder disputes and director removal are all situations where the cost of getting the process wrong far exceeds the cost of advice. The team at Artificer Legal can review your structure, draft the governance documents and help you work through those judgement calls.
Limited liability protects shareholders, not directors
The most misunderstood line in corporate law is the one between limited liability and personal exposure. Incorporation limits what shareholders can lose; it does not shield directors. A director who lets the company trade while insolvent, or who makes decisions without informing themselves, can be personally liable even though the company is a separate legal entity. The discipline that protects you is cheap: record your decisions, keep informed, monitor solvency and keep authority clear. That habit costs minutes a week and is the difference between a defensible board decision and a personal liability.
To recap: corporate law in Australia is built on the Corporations Act and ASIC's administration of it. Choose a structure that fits how you will fund and grow the business, decide whether the replaceable rules or a tailored constitution govern your company, understand the core directors' duties and the business judgment rule, sign documents under s 127 or through properly authorised agents under s 126, keep minutes and ASIC filings current, and know which of the neighbouring regimes, consumer, privacy, workplace, fundraising and IP, apply to you. If any of those questions is live for your company, that is the moment to get specific advice.