5 Things You Should Include in Your Company Constitution

A company’s constitution sets the rules for how ownership, decision-making, and control operate. It’s especially important when things change. For example, if you’re adding a co‑founder, issuing new equity, or preparing for an investor round, your constitution determines how these transitions unfold and who gets a say.

Most Australian companies operate either under replaceable rules or a customised constitution. This guide focuses on what to include if you decide to adopt a constitution. We’ll cover in detail the five clause areas that matter most for founders. 

What a company constitution actually controls (in practice)

Before diving into specific clauses, it helps to understand what a company constitution actually governs day to day. It acts as an internal rulebook that determines:

• Who can make which decisions — directors versus shareholders.
• How ownership changes are made and approved.
• How meetings, voting thresholds, and resolutions are managed.
• How money moves within the company — shares, dividends, or loans.
• How conflicts or special decisions are escalated.

In short, it’s the operating system for your company’s structure and decision‑making. Check out our professional constitution template if you want an easy, compliant start to adopting a company constitution. 

1. Share structure and how new shares can be issued

Why it matters: Prevents surprise dilution and confusion when equity is issued.

A clear share structure clause spells out what classes of shares exist (for example, ordinary, preference, or non‑voting shares) and how new shares can be created or issued. This is essential for managing investor relationships and setting expectations among founders.

Key points to outline:

• Different share classes: Ordinary shares usually carry both voting rights and dividend entitlements. Preference shares might include priority over dividends or liquidation proceeds. Clarifying this early avoids disputes when new investors arrive.
• Issuing new shares: Your constitution should specify who can approve the issue of new shares — typically, the board or shareholders through a specific resolution.
• Pre‑emptive rights: These give existing shareholders the first opportunity to buy new shares before outsiders, preserving their percentage ownership.

For example, if you issue shares to a co‑founder, advisor, or investor without these rules in writing, you risk accidental dilution or misaligned rights. While you’ll likely also have a shareholder agreement, the constitution clause applies to the whole company equally. 

2. Rules for transferring shares (and blocking the wrong transfers)

Why it matters: Protects ownership from accidental or unwanted changes.

The share transfer clause governs how existing shares may be sold or transferred. Without clear transfer rules, a founder’s shares could be sold to an unknown third party, disrupting business ownership.

A strong constitution typically addresses:

• Approval process: Who must approve any share transfer — often the board or majority shareholders.
• Restrictions: The company may require that shares be offered to existing shareholders first (a right of first refusal) or prevent transfers to competitors.
• Documentation: Clear instructions on recording transfers with ASIC and updating the share register.

This is one of the most common omissions in off‑the‑shelf or free-template constitutions. Without it, founders have limited control if a shareholder exits unexpectedly.

3. How decisions are made (and what needs higher approval)

Why it matters: Avoids disputes and “who actually had authority?” moments.

This section defines the company constitution clauses about decision‑making authority — what directors can do versus what requires shareholder approval. It also explains how your company handles ordinary and special resolutions.

The constitution might cover: 

• Director vs shareholder decisions: Directors manage day‑to‑day operations (hiring, contracts, and financial management), while shareholders handle structural or ownership changes.
• Ordinary resolutions: Usually require a simple majority (over 50%) and cover routine matters such as appointing directors or approving dividends.
• Special resolutions: Require at least 75% agreement and apply to major decisions such as altering share capital, changing the company name, or modifying the constitution itself.

Many founders opt to designate specific actions, such as issuing new shares, changing dividend rules, or selling key assets, that require special approval. This safeguards against unilateral decisions that could impact everyone’s stake.

Understanding replaceable rules vs the constitution matters here. Under the Corporations Act 2001, replaceable rules provide default resolution processes. But adopting your own constitution lets you adjust thresholds or require broader consensus, ideal for co‑founders wanting more customised control.

4. How director meetings and written resolutions work

Why it matters: Keeps decisions valid and defensible.

A constitution should clearly outline how board meetings work — especially quorum, notice, and alternatives such as written (circulating) resolutions.

• Director meeting quorum: Defines the number of directors required for a valid decision. For smaller companies, this may be two-thirds of directors, or just one if you have a replaceable rules sole director, sole shareholder setup.
• Notice requirements: Notices should be reasonable and clearly state the business you plan to discuss. This avoids claims of invalid meetings.
• Circulating resolutions: Allow directors to approve actions in writing or electronically instead of meeting in person. Ideal for remote teams or fast‑moving startups.

Consistent governance protects you if auditors, investors, or regulators later question decisions. Including these operational details in your constitution reduces grey areas and keeps your company compliant with the Corporations Act.

5. How money flows: dividends, loans, and distributions

Why it matters: Stops informal “we’ll sort it later” arrangements.

A good constitution clarifies when and how dividends can be declared and how money can flow between shareholders and the company.

It should specify:

• Dividend rules: Dividends may only be paid from profits, and the board normally decides the amount and timing. Clear dividend policies prevent future shareholder tension.
• Loans to directors or shareholders: These should comply with the Corporations Act and be transparently approved and recorded.
• Distribution clarity: Outline how your company distributes profits and capital if shares carry different rights.

For many small companies, dividend and loan provisions intersect with how founders extract income. Having this defined ensures that decisions later match accounting and compliance requirements.

Here is a quick overview of the key clauses and who needs to include them in their constitutions: 

Clause area	Best for	If this is you, read this next
Share structure	Growing teams, future investors	A guide on raising capital for your small business
Share transfers	Multiple shareholders, family businesses	Share sale agreements
Decision thresholds	Co‑founders, boards	Customising a co-founder agreement
Director meetings	Remote teams, busy founders	Documents for director meetings
Dividends & loans	Profitable companies, founder‑drawn income	Structuring company payments and income
Deadlock protection optional	50/50 founders	Dispute resolution for your company

What most founders forget to include (until it’s too late)

Even the most polished templates often miss the nuances that matter when your company grows. Three common oversights stand out. 

1. Deadlock clauses: In 50/50 founder setups, disputes can stall decisions indefinitely. A deadlock resolution clause, such as buy‑sell or mediation steps, prevents paralysis.
2. Reserved matters not defined: Founders sometimes assume every major decision automatically requires shareholder approval. Unless defined in your constitution, directors may act unilaterally within their powers.
3. Over‑reliance on templates: Standard constitutions rarely anticipate adding investors or employees with equity plans. Always consider future fundraising, employee share schemes, or convertible notes.

A constitution is a crucial document. Consulting a lawyer early on is a good idea so that the document can grow with you throughout your business journey. 

When a standard constitution is enough — and when it isn’t

A standard company constitution template in Australia works well if your structure is simple.

When it’s usually enough:

• You’re a sole director and sole shareholder, using the replaceable rules or a basic constitution.
• Your business doesn’t plan to raise outside capital or issue different share classes.
• You want minimal complexity with clear alignment between control and ownership.

When you need something tailored:

• You have multiple shareholders or co‑founders.
• You plan to issue equity to employees or investors.
• You want to set different voting thresholds or dividend rules.
• You’re preparing for a potential exit or investment round.

In those cases, drafting a custom constitution ensures decision‑making and ownership truly reflect your operational reality — not just legal defaults.

How to update or adopt a company constitution

You can adopt or amend a company constitution at any time, provided the necessary approvals are in place.

• When it’s adopted: Usually at incorporation, using a constitution prepared by your adviser or a digital platform like Lawpath.
• Changing it later: Requires a special resolution (at least 75% shareholder approval).
• Practical step: Once passed, lodge the updated constitution with ASIC or maintain it internally for reference.
• Key consideration: Make sure the new document aligns with how your business actually operates. For instance, it should reflect how you conduct meetings, appoint directors, or pay dividends. Discrepancies between practice and documentation can lead to disputes under corporate law.

Changes in constitutions are not uncommon, but you shouldn’t be doing them frequently. Make sure to consider potential changes early on so you can keep modifications to a minimum. 

FAQs

Do I need a company constitution if I’m just starting out?

Not necessarily. Under Australian law, a proprietary limited company can rely on the replaceable rules in the Corporations Act instead of adopting a constitution. However, if you expect growth, new shareholders, or investor involvement, a constitution lets you tailor rules to your business. 

Can I change my company’s constitution later?

Yes. A company can amend its constitution by passing a special resolution of shareholders, requiring at least 75% of the votes to be in favour. Changes might update share structures, incorporate new dividend clauses, or adjust directors’ powers as the company evolves.

What’s the difference between replaceable rules vs constitution?

The replaceable rules are default governance provisions set out in the Corporations Act 2001. They automatically apply if you don’t adopt a constitution. By contrast, a company constitution is a private, flexible document that can override or expand those defaults. 

How does a company constitution differ from a shareholders’ agreement?

Think of the company constitution vs shareholders agreement distinction like this:

• The constitution is a public document lodged with ASIC that binds the company and its members under corporate law.
• The shareholders’ agreement is a private, enforceable contract between shareholders, often covering broader issues such as funding obligations, exit pathways, and valuation methods.

Both documents can coexist — the constitution provides corporate structure; the shareholders’ agreement handles commercial relationships and expectations.

Get your constitution documents right with Lawpath

A well‑crafted company constitution isn’t just a legal formality — it’s foundational governance that shapes how your business makes decisions, raises funds, and distributes returns. Whether you’re adding a co‑founder or planning for investment, defining clear clauses on shares, decisions, meetings, and dividends avoids confusion later.

For Australian founders seeking an affordable, up‑to‑date constitution that meets ASIC requirements, consider Lawpath. We offer lawyer‑reviewed templates from the moment you register your company and throughout ongoing growth. 

We are here to help you stay compliant and confident as your business evolves!