Corporate Governance Laws and Practices for Australian Start-Ups

The Australian start-up ecosystem is thriving, with innovative ideas turning into promising businesses daily. However, to sustain and grow, start-ups must navigate the complex legal landscape surrounding corporate governance, contracts, and regulatory compliance. For founders, understanding these legal foundations is vital to avoid pitfalls and ensure long-term success.

GENERAL CORPORATE GOVERNANCE

Corporate governance refers to the framework of rules, practices, and processes by which a business is directed and controlled. Effective governance is critical for start-ups as it builds investor confidence, enhances decision-making, and ensures compliance with the law. In Australia, corporate governance is primarily regulated by the Corporations Act 2001 (Cth) (Corporations Act) and various industry-specific regulations.

ESTABLISHING A LEGAL STRUCTURE

The first step in corporate governance is choosing the appropriate legal structure for the start-up, such as a sole trader, partnership, or company. Start-ups often use the form of company in Australia called ‘proprietary limited’, namely, ‘Pty Ltd’ as the abbreviation. This business structure means that a limited number of shareholders own the shares in the company and have limited legal responsibility for the company’s debts. As a private company, it cannot offer its shares to the general public, which contrasts with a public company that uses ‘Ltd’ as the abbreviation, has an unlimited number of shareholders and can offer its shares to the general public.

Key compliance requirements for companies includes:

1.??? Register with the Australian Securities and Investments Commission (ASIC);

2.??? Maintain up-to-date records, including company details and financial statements and submit Business Activity Statements to the Australian Taxation Office (ATO).; and

3.??? Appoint at least one director who ordinarily resides in Australia.

Depending on the circumstances and the need for asset protection or other purposes, a dual company structure may be used, namely, incorporate a holding company along with an operating company or even a trust (if needed).

DUTIES OF DIRECTORS AND OFFICERS

Directors and officers play a central role in governance and are bound by statutory and common law duties under the Corporations Act, which may include, among others:

1.??? Duty of care and diligence, namely, directors must act with the care a reasonable person would exercise in similar circumstances;

2.??? Duty to act in good faith, which means decisions must benefit the company as a whole, not personal interests;

3.??? Avoiding conflicts of interest, that is, any potential conflicts must be disclosed and managed; and

4.??? Preventing insolvent trading, namely, directors must ensure the company can meet its financial obligations.

GOVERNANCE POLICIES AND PRACTICES

Start-ups should establish governance policies early, even with a lean team. These may include:

1.??? Board Charters, which outline the responsibilities of directors and decision-making processes;

2.??? Risk Management Policies, which Identify and mitigate potential risks;

3.??? Whistleblowing and Ethics Policies, which foster transparency and integrity; and

4.??? Anti-Money Laundering and Counter-Terrorism Financing (if applicable).

KEY LEGAL AGREEMENTS

Contracts are the backbone of any start-up, governing relationships with employees, customers, suppliers, and investors. Poorly drafted contracts can lead to disputes and financial losses.

1.??? Employment contracts must clearly define roles, responsibilities, and remuneration as well as comply with the Fair Work Act 2009 (Cth) and relevant awards.

2.??? Non-disclosure agreements (NDAs) will protect sensitive information and intellectual property.

3.??? Supplier and client agreements comprise detailed terms of service, payment terms, and dispute resolution mechanisms, which ensure compliance with the Australian Consumer Law (ACL).

4.??? Shareholders’ agreements will govern the rights and obligations of shareholders, including dispute resolution and exit strategies.

5.??? Investor/ investment agreements usually outline funding terms, equity distribution, and investor rights, including exit rights.

REGULATORY COMPLIANCE

Start-ups must navigate a variety of regulatory requirements depending on their industry and operations.

GENERAL COMPLIANCE OBLIGATIONS

1.??? ASIC reporting, including filing annual statements (depending on the size of the proprietary limited company) and notifying ASIC of changes to company details.

2.??? Taxation, including registering for an Australian Business Number (ABN), Tax File Number (TFN), and Goods and Services Tax (GST) if applicable.

3.??? Employment law compliance will include complying with superannuation, leave entitlements, and workplace safety requirements.

4.??? Industry-specific regulations will apply to start-ups in sectors like fintech, health, or energy, which may require additional licenses or compliance with specific laws, such as the Privacy Act 1988 (Cth) (Privacy Act) for data protection.

PRIVACY AND DATA SECURITY

In an increasingly digital world, start-ups must prioritise data protection. The Privacy Act and Australian Privacy Principles (APPs) regulate how businesses handle personal information. Non-compliance can result in severe penalties.

Best Practices includes,

1.??? Develop a robust privacy policy;

2.??? Implement secure data storage and access protocols; and?

3.??? Educate employees on data security obligations, including reporting duties.

SCALING AND INVESTOR RELATIONS

As start-ups grow, governance becomes more complex. New challenges like securing funding, managing larger teams, and complying with additional regulations arise.

STEPS FOR SCALING GOVERNANCE

1.??? Implement Employee Share Schemes, which is an essential tool to attract and retain talent by offering equity-based compensation.

2.??? Strengthen corporate internal controls by Introducing systems for financial reporting, auditing, and compliance tracking.

3.??? Engage with investors by regularly updating investors and adhering to agreed-upon reporting standards.

?LEGAL SUPPORT

It is always wise to seek professional legal advice to tailor governance frameworks to your start-up’s unique needs. Retain The IP House Lawyers to assist you with your start-up corporate governance. With the guidance of our legal team, you can focus on innovation and growth while staying compliant with the law.

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For any further information or queries on the above content, please contact us.

The Author

Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: [email protected]

Key Contact

Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: [email protected]

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Disclaimer

The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.

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COPYRIGHT ??JEAN KALLMYR 2024