1

CORPORATE LAW
LECTURE 2
Business planning and setting up companies
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Choice of form of business

• You need to distinguish between:
• unincorporated entities; and
• incorporated entities
• Unincorporated entities have no legal personality separate
from their participants eg sole traders,clubs, partnerships
• Incorporated entities (‘corporations’, ‘companies’) are
separate legal persons
• Associations can be incorporated under state laws
• Our subject concentrates on companies incorporated
under Corporations Act 2001 (Cth)
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Relevant considerations - choice of

form
• In deciding whether to incorporate a company or not,
consider:
• Will you make a profit or is it a non-profit?
• Do you want limited or unlimited liability for shareholders?
• How big do you want your business to be?
• Do you want to raise equity capital?
• Are you willing to comply with formalities and pay expenses
• Are you willing to submit your business to audit and reporting
requirements?
• Do you want a particular tax treatment?
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Choosing a company (cont)

• Advantages:
• can have more than 20 members (outsize partnerships prohibited
by s 115)
• may have limited liability
• may be easier to raise capital
• different tax treatment – dividend imputation
• company law as standard form contract
• flexibility
• Disadvantages:
• Usually greater expense in formation and compliance
• May have to reveal information to the public
• The decision must always depend on the individual
circumstances of the business
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‘Piercing the corporate veil’

• Shareholders normally don’t have to pay company debts
• What is the policy reason for this?
• Piercing the corporate veil means making shareholders
liable for corporate debts – very limited
• Avoiding a legal duty
• Gilford Motor Company v Horne
• Jones v Lipman
• Statutory veil piercing – s 588V – look at in lecture 6 as part of
insolvent trading
• FYI only - Also note recent Fair Work Act amendments to impose
liability on holding companies and franchisors for worker
underpayments.
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Types of companies
• Corporations formed under the Corporations Act are
“companies”
• Companies are classified:
• as public or proprietary – Ltd or Pty Ltd
• by reference to basis and extent of the members’ liability
• Company limited by shares
• Company limited by guarantee (public only)
• Unlimited company
• No liability company (public only)

• Some provisions of the Corporations Act apply only to

certain types of companies
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Classification as public or
proprietary
• Proprietary companies
• s 113:
• no more than 50 non-employee members
• no fundraising activity requiring a disclosure document under Chapter
6D
• Must have one or more directors – s 201A
• may be a company limited by shares or an unlimited company with
share capital – s 112
• Some different rules for proprietary companies under the Act or the
company’s internal governance rules eg removal of directors
• More flexibility, more privacy
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Classification (cont)
• Public companies:
• everything other than proprietary companies: s 112
• Must have three or more directors: s 201A(2)
• Sometimes have different rules eg dividends – s 254W; disclosure
• Allowed to have an unlimited number of shareholders
• Can raise funds from ‘the public’
• but in return, public companies are subject to stricter rules
• More procedures eg compulsory annual general meetings
• More publicity eg published financial statements
• Aim is greater shareholder protection through transparency and
accountability
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Corporate groups
• Companies can be shareholders in other companies
• Often different aspects of the business are owned or
carried out by different companies in a group
• Holding companies & subsidiaries (s 46) and related
bodies corporate (s 50)
• Controlled entities – s 50AA
• Law treats them as separate entities with a few
exceptions – piercing the corporate veil discussion above
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Registering companies
• Companies created through registration by ASIC
• Procedure in s 117; ASIC Form 201
• Names – s 148
• Public companies – LTD
• Proprietary companies – PTY LTD
• No liability – NL
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How are the internal workings of each

company regulated?
• Every company can decide how to manage their internal
workings, with some limits: These rules are called their
internal governance rules
• Found in:
• the ‘replaceable rules’ [RR], or
• the company’s own constitution, or
• a combination of the two.
• Corporations Act s 134
• RRs apply unless they are displaced or modified by a
constitution – s 135(2)
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Replaceable rules (RRs)

• Introduced in 1998
• Companies formed prior to 1 July 1998 may still have their
old memorandum and articles of association (which were
required under the old law)
• Many companies used “Table A”
• If so, this will be their constitution
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Adopting a constitution
• Can be done when the company is registered, or later: s
136(1)
• Adopting, amending or repealing a constitution after
registration requires a special resolution of members:
s136(2)
• Special resolution – s 9: 75% vote of those present who
are entitled to vote
• Entrenching a rule: constitution can contain extra
requirements for changing its rules: s 136(3)
• This entrenching clause can only be changed if it is itself
complied with eg a larger % required, or approval of a
particular person
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Replaceable rules
• Listed in s 141 and scattered throughout the Act
• There are rules covering:
• Officers and employees, eg appointment and removal of directors
• Directors’ and members’ meetings, eg voting, quorum, proxies
• Shares, eg how many votes per share?
• Not all RRs apply to all companies
• s 249X (proxies) - mandatory for public companies; replaceable for
Pty Ltds
• S 203C (removal of directors by members) is an RR for proprietary
companies only
• S 254D (pre-emption) is an RR for proprietary companies only
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Legal effect of the internal governance

rules
• Section 140 – A company’s constitution (if any) and the
RRs that apply to it have effect as a contract between:
• the company and each member
• the company and each director and secretary
• a member and each other member
• Eley v Positive Govt Security Life
• Breach of contract – so use contract law rules for
interpretation and remedies
• Oppression – s 232 to s 234 – looked at in Lecture 11
• Procedural irregularity – Lecture 4
• NOT a breach of the Act – s 135(3)
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Single director/shareholder companies

• Special type of company in which the only member is also
the only director
• Only allowed for proprietary companies (as public
companies must have at least 3 directors)
• RRs do not apply – s 135(1)
• Some special rules apply – s 198E, 201F and 202C