In today’s business environment, the main form of trading entity for a small business is a limited liability company. There are numerous advantages of doing business through a limited liability company. For example, a company is a separate legal entity from the people who govern it, it is the most easily understood and recognised way to trade, and there may be tax advantages.

Many small businesses won’t seek advice or assistance from a lawyer when incorporating their company. Given the ease with which incorporating a company can be done, many smaller business owners choose not to delay this process or incur what they see as “extra costs” by seeking professional advice. Unfortunately, by doing this they may inadvertently breach the Companies Act 1993 (the Act).

The Act provides various default rules and regulations that apply to all companies. Some of these rules and regulations are quite onerous. By having a company constitution, these rules and regulations can be altered. Without a constitution, the default rules apply.

For example, one default rule is that even if everyone in the company agrees to a transaction, the company is under a legal obligation to have these decisions ratified through various mechanisms, such as Director or Shareholder resolutions. While this may be standard practice for larger corporations, many smaller companies either don’t see the need (or do not have the time) to adhere to these requirements. Without a constitution in place to vary or alter these default rules, it is likely many small companies are breaching the Act in the ordinary course of business.

A flow on effect from this is that directors of these small companies may be inadvertently acting outside the scope of their authority by not complying with the rules imposed by the Act. Doing so can result in fines against directors personally and may expose them to other risks and claims.

For that reason, simply adopting a standard form constitution template does not always address these issues. Many templates simply repeat and copy the provisions found in the Act. Without proper thought put into a constitution, you will be no better off than you would be without a constitution in the first place.

One size does not fit all; each company is different. Therefore, constitutions need to be tailored to the individual requirements of each company. Such matters are fundamental to the operation of the company now and into the future and will be worth the investment.

If you have any concerns regarding your company’s constitution or wish to implement one, please do not hesitate to contact us – Principal Hamish Douch (DDI 03 343 8387 / Hamish@mmlaw.co.nz) or Law Clerk Joshua Hitchcock (DDI 03 343 8588 / Joshua@mmlaw.co.nz).