Starting up a business can be an exciting, yet tricky process and it is essential to get your legal affairs in order early on. We set out five key legal requirements for your start-up to help make sure you get off to the right start.
1. Choose the right business structure: there are a variety of options with respect to how you go about setting up your business structure. Your choice of structure can affect your level of personal liability, your tax rate, your ability to attract investors and your general level of control over the business. It is important to choose the right fit for your business. Your options for business structures include:
- Sole trader: as a sole trader, your business is really just an extension of yourself. You have personal liability for the debts of your business and any business income is added on to your personal income for the purposes of your tax returns.
- Partnership: this choice of structure is similar to that of a sole trader; however, any profits or losses are shared between your partners and each partner is personally liable for the debts of the business.
- Trust: a trust is a structure whereby a trustee carries out the business on behalf of the members (i.e., the beneficiaries) of the trust.
- Company: a company is a separate legal entity owned by its shareholders and managed by the directors that the shareholders appoint. Shareholders of the company are typically not personally liable for any debts which the company owes. Rather the company (as a separate legal entity) is responsible for the liabilities of the business. The company pays a flat rate of company tax, while any dividends paid to shareholders are added to their personal income for the purposes of their tax returns. Companies are the most common structure for those businesses seeking to attract outside investors.
2. Shareholders’ Agreement: If you are starting up your business with co-founders or investors, you will need a Shareholders’ Agreement. A Shareholders’ Agreement is a written contract between the shareholders of a business, clarifying their relationship. It is designed to govern the various shareholders’ relationships, business arrangements, rights, responsibilities, and obligations. It is designed to protect each shareholders’ interests and can be moulded to your particular set of circumstances. It will also typically set out the way in which the business will be managed and how any future sale or issue of shares will be conducted. Lastly, it may set out the interaction and split of decision making between directors and shareholders, as well as dispute resolution processes. Along with any good Shareholders’ Agreement comes a Deed of Accession making it easy for new shareholders to join the company. It is of vital importance to have a properly considered and well drafted Shareholders’ Agreement.
3. Employment/Contractor Agreements: At some stage you will need to hire employees and contractors, particularly as you continue to grow. Before hiring staff, you will need to make sure you have appropriate Employee and/or Contractor Agreements in place. The Agreements should cover the staff member’s role, remuneration and obligations. They should also include a confidentiality clause, allocation of intellectual property and non-compete clauses. Note that it will not always be clear if a worker is an employee or contractor, and you should seek appropriate legal advice on this matter.
4. Terms and Conditions: Your terms and conditions are the legal terms between you and each of your customers. Your terms and conditions should cover a range of topics for your products or services, such as the mode of delivery, methods of payment, enforcement options if customers do not pay and dispute resolution processes. The terms and conditions should also address any relevant Australian Consumer Law requirements, such as failures, refunds, repairs and returns. Terms and conditions can also protect your start-up’s intellectual property and further limit your liability.