Legal 101 guide for start-ups

No matter what the reason for starting your business, whether it’s a desire to earn more money, have more freedom or because you can’t stand your boss wearing tights around the office, you must research the industry, assess your competitors and gather as much information as possible.

Legal 101 for small businessChoosing the right business structure

Before starting your business, you need to consider the most suitable structure for you:

  • Sole trader

This is exactly what the name suggests. All the assets and the liabilities of the business belong to you. This means that there is no separate legal existence between you as the owner, and the business.

  • Partnership

This involves two or more people starting a business. It can be an association of individuals or entities for the purpose of carrying on business with the view to making a profit. Legally, all partners share profits, risks and losses according the partnership contract.

  • Company

A proprietary limited company is the most common type of company used by small business. A company is a separate legal entity from you and the company is capable of having its own assets and liabilities.

  • Trusts

A trust is a business structure whereby the trustee holds property and earns and distributes the income on behalf of the beneficiaries.

In choosing the structure that best suits you, you should obtain both legal and professional accountancy advice. There are a number of important factors that you need to consider. For instance generally, sole traders attract the greatest personal risk, as they are potentially personally liable. However, a company is a separate legal entity and the owner is not usually at risk, only the directors, who have very limited liability.

Also, tax rates vary depending on the type of structure you choose. Although company structures are more expensive to set up and run than as a sole trader, there are various tax benefits with company structures.

Regulatory requirements

Companies

All companies need to be registered through the Australian Securities and Investments Commission (ASIC). The company will be provided a unique Australian company number and is registered under the Corporations Act 2001. This means that it can then conduct business throughout Australia without needing to register in the individual States and Territories.

Business name

Unless you conduct your business under your own name, you are required to register your business name with the appropriate State and/or Territory Authority.

Trademarks

Although not essential, registering your business name as a trademark will enable you to use your business name as a means to distinguish your product or service from other businesses. It may also become a valuable asset of the business in the event that you wish to sell and/or franchise your business in the future.

GST, ABNs and TFNs

Depending on your expected annual sales, you will have to register for goods and services tax (GST). In the event that you do register for GST you will need to apply for an Australian Business Number (ABN). Sole Traders can use their tax file numbers, but partnerships and companies need to apply for their own.

Government and council licenses

Different businesses require different registrations and/or permits to carry out their business. You should check with your local government body and/or council to understand whether or not registration is required and/or a development application is required.

Insurances

Insurance is essential with all start-ups as you are usually risking your own finances. If you intend to employ staff you must take out worker’s compensation insurance. You should shop around and speak to brokers and you can often obtain a cheaper premium if you package several insurances together. You should also take out public liability insurance and product liability insurance, depending on the nature of your business. Obviously, if vehicles are required for the running of the business you must take out business vehicle insurance. Sole traders you should speak to a broker and take out life and income protection insurance.

Employment agreements

One of the most litigious and complex areas is workplace law. It is essential that the interview and hiring process is undertaken correctly to reduce your exposure to claims for discrimination. If there is one area that you should spend your money on, it is preparing properly drafted employment agreements at the beginning of the employment relationship.

Shareholder/partnership agreements

Sole traders do not require these agreements as the individual retains the control over the business, however with proprietary limited companies and partnerships, it is essential that all partners and all shareholders enter into an agreement in which they agree to regulate and exercise some of their rights as shareholders.

The agreement should set out what happens if an owner wishes to sell their shares upon retirement, disability, death or for any other reason. A company constitution will be silent on these details. An effective agreement sets out the specific conditions, rights and duties of each owner and should include the method of resolution. The agreements also enable you to provide an outline as to the distribution of profits, asset protection for owners and shareholders of the business, any buy back provisions and any restraint of trade provisions.

Shareholder agreements include:

  • exit strategies;
  • confidentiality agreements;
  • restraint of trade provisions for directors and/or shareholders;
  • director’s meeting procedures;
  • business plan and budgeting requirements;
  • distribution policy;
  • individual directors and/or shareholders’ duties;
  • management procedures; and
  • how and if loans are provided to directors.

Often businesses are started with friends and/or family member and many people don’t feel the need to enter into such agreements. I believe that this is one of the most essential parts of a start-up and the agreement should be discussed at the beginning.

Terms and conditions

An essential tool in protecting your exposure to costly litigation is creating a standard Terms and Conditions (T&C) in any business that supplies goods or services. I also suggest that the T&C should contain a retention of title clause (also known as a Romalpa clause), which provides that ownership of the goods supplied does not pass to a customer until payment has been made for those goods. That is, the supplier retains title in the goods, which give them a right to reclaim the goods supplied in the event of a customer failing to pay.

Business premises

You need to consider where your business will be located. Sole traders often work from home and under these circumstances you should not assume that your household insurance will cover you for any loss or damage. You should consider capital gains repercussions on the sale of your home.

With partnerships and companies, you need to consider whether or not you enter into a lease or purchase premises. Again, leasing can be complex and personal guarantees are often required. You must consult a solicitor and an accountant before entering into such agreements and you should insure the property is zoned for the purpose you require.

Business plan

A business plan will enable you to review the feasibility of your business concept and map out the future direction of your business. The areas to consider are the purpose and objective of your business, market research, marketing strategy, operational aspects including the structure of your business, and a financial plan.

Get help

The secret to a successful business is to ensure you surround yourself with professionals that can assist you during the start-up phase. A good solicitor and accountant, and I suggest a business coach, are all factors that you should consider when starting a business to ensure that it gets every possible chance of succeeding.

–Matthew Hourn is Lawyer Director at Neville & Hourn Legal, Sydney

Online: www.nhlegal.com.au

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