Starting a business is risky, but the rewards can be great. The more you plan to grow, the more important it is to have the right legals… Why? To protect your business, avoid breaking the law, and to show customers and investors that you know what you are doing.
Here are 5 key legal considerations for all startups:
1. Choose Your Business Structure
Your business structure affects your level of liability, how much tax you pay, how much control you have over your business, and your growth potential.
TIP: If you want to bring in investors, the most common structure is a one company, or a two company structure with a holding company and an operating company.
There are advantages and disadvantages to every structure, here’s a quick summary:
Sole trader – you have personal liability for the debts of your business and you need to report all your business income on your own personal tax return.
Partnership – this is similar to a sole trader but you share profits as well as losses with two more people (your partners) and each partner is personally liable for the debts of the business.
Trust – a trust is a structure where a trustee (an individual or company/corporate trustee) carries out the business on behalf of the members (known as beneficiaries) of the trust.
Company – a company is a separate legal entity owned by shareholders, and managed by the directors that the shareholders appoint. The company is responsible for the liabilities of the business; each shareholder is generally not personally liable. The company pays a flat rate of company tax and shareholders pay tax on dividends paid by the company.
2. Nails the Business Ts and Cs Business
Your Business Terms and Conditions are the legal terms between you and each customer. Business Terms set out the contract, for example what you are selling, how you will deliver it and how your customers pay. This clarifies the deal and gives you a legal contract that you can enforce if the customer does not pay. Business Terms also address the Australian Consumer Law requirements like refunds, repairs and returns.
TIP: Well-drafted terms also protect your intellectual property and limit your liability.
If you have an online marketplace then you need Marketplace Terms and Conditions. These address the buyer rights and obligations, seller rights and obligations, and your rights and obligations as the marketplace owner. A well-drafted Marketplace Terms and Conditions also address intellectual property, payments, obligations and liability. These are complex and should be drafted by a lawyer who understands online marketplaces well.
3. Get Invested – Shareholders’ Agreement
If you are setting up your company with co-founders, you need a Shareholders’ Agreement. The Shareholders’ Agreement can be thought of as your ‘business pre-nup’! It requires you and your co-founders, and/or investors, to consider in detail how the company will be managed, how you will deal with exits, and how you will deal with a sale of the whole business. A well-drafted Shareholders’ Agreement covers:
– What decisions directors can make
– What decisions shareholders can make
– How often the directors and shareholders will meet
– New issues of shares
– Sales of shares
– How dividends will be paid (founders and investors may have quite different views on this)
– What to do if a founder, employee or shareholder leaves or stops contributing
– Dispute resolution
– Selling the company
A good Shareholders’ Agreement will have a Deed of Accession, so it is easy for new shareholders to join. Only the company and the new shareholder need to sign the Deed of Accession, rather than needing each shareholder to re-sign the Shareholders’ Agreement.
4. Hiring Staff? You need an Employment or Contractor Agreement
You will need a range of skills to help your business succeed, this will require hiring employees and contractors who will help you scale and grow.
Contractors: Contractors are independent people who run their own business. You are generally not required to pay insurance, superannuation or PAYG tax for contractors. The ATO has tests to check (i) is the new hire really a contractor? and (ii) are you required to pay superannuation for this contractor? You need to do these tests to make the right assessment.
Employees: Employees are covered by national and state-based legislation including the Fair Work Act. This includes a minimum wage and award wages for some roles, and conditions including leave rights and pay.
Both the Employment and Contractor Agreement should cover:
– The role
– Remuneration and when it will be paid
– Who owns intellectual property
– Non-compete/non-poaching staff/non-poaching clients
If you need an agreement drafted, speak with an employment lawyer to ensure that you correctly assess whether the worker is an employee or contractor.
With these 5 key legal issues covered – you will have a strong structure, will comply with the key laws, possess the documents you need to deal with clients and ensure that you get paid, and you are ready to bring in shareholders.