Starting a business can bring feelings of both adrenalin and fear. There are some important legal aspects that anyone starting up a new business should consider to ensure a successful start up.
After seven years of working for somebody else, I recently established my own law firm with a partner. As a business lawyer, I assist business owners every day in developing or starting up their businesses. I have also started a number of businesses of my own. The following are guidelines that I believe anyone starting, or thinking about buying a business, should consider.
Do the research
People start a business for a variety of reasons. These may include trying to find an alternative to paid employment, a desire to earn more money or be more independent. The first step is to research the market. Background research essentially includes knowing all about your potential and existing customers and the actual industry that you operate in. It is imperative that you assess who your competitors are, their strengths and weaknesses, and what is it that you are going to offer to make your customers choose you.
Gather as much information as possible from a variety of sources to help you understand your industry. Identify any economic and industry trends, seasonable fluctuations and any innovative products that will put you ahead of the others. My experience has told me that marketing is essential to any business and should be part of your ongoing business plan.
Developing a business plan
On a practical note, it is essential that pen is put to paper. Drawing up a business plan will enable you to review the feasibility of your business idea and acts as a blueprint, mapping out the future direction for your business. Key areas that should be included in your business plan are:
• Purpose and objectives of your business
• Market research
• Marketing strategy
• Operational aspects, including the structure of your business, location, employees etc.
• Financial plan.
The financial plan will need to be a realistic proposal of the revenue required to start the business and what are the strategies for raising revenue. This plan should also include the projected profit and loss over at least a 12-month timeframe and identify what your business’ break-even point is, at which point the level of production covers all expenditure.
Choosing the right business structure
Each having their own advantages and disadvantages, the most common business structures include:
• Sole trader: Exactly what the name suggests. All the assets and liabilities of the business belong to you, the owner.
• Partnership: An association of individuals or entities for the purpose of carrying on a business venture or activity with a view to profit. A partnership is not a separate legal entity so all assets of the partnership are owned by the partners jointly.
• Company: A company is a separate legal entity and capable of holding assets in its own name.
In choosing the right structure for your business, there are a number of important factors that you will need to consider.
Taxation and other costs
The tax rate varies, depending on the type of structure that you choose. Tax liability is incurred on profits of the business, land tax, payroll tax and other forms of taxes and levies. Generally, corporate structures are more expensive to set up and run than a sole trader or a partnership.
For sole traders, the income tax rate for the business is the same as your personal tax rate, which allows for the tax advantage of tax losses being offset against any other income you might have (for example, negative gearing).
Capital
At certain times, the running of a business will require the injection of capital which is generally more difficult for sole traders and partnerships. If your business required a great amount of capital, it may be necessary to use a public company structure by listing it on the stock exchange.
Liability
The operation of any business involves a degree of risk. Generally, sole traders attract the greatest personal risk, with partners being jointly and severally liable. There are many variations of the corporate structure. Essentially, the shareholders’ liability for the debts of the business is limited by their share in the equity of the business.
A company is a separate legal entity and the directors of a company have only a very limited liability for the debts or other obligations of a company, namely, a shareholder is limited by their share in equity of the business. Financers may often require a personal guarantee which is a way of making the directors personally liable for the obligations of the company or other legal business. It is advisable to get legal advice before entering into a personal guarantee.
Management and control
A sole trader will retain the greatest amount of control over a business and at the other end of the scale is the public company, where the ‘owners’ may not have a majority shareholding.
Many of my clients are business owners who seek to maintain a level of security as they enter into company structures. In my experience, I believe it is essential to have in place Shareholder Agreements and Owners Agreements. An effective Owners Agreement sets out the specific conditions, rights and duties of each owner and should include the method of dispute resolution. Further, these agreements should include provisions for efficient distribution of profits, asset protection for the owners and shareholders of the business, buy-back provisions and restraint of trade clauses. As owners of a business, it is understandable that you will want to retain managerial and administrative control of the business.
Choosing the most appropriate structure for your business is the most important step in starting your business, and it is essential that you have the support and expertise of experienced lawyers and accountants to guide you through the most effective and profitable ways to establish your business.
In summary…
• Do the research, not only about your product/services but also know who your competitors are
• Be realistic about the effort, time and money it will take- develop a business plan
• Keep accurate financial and customer records from the start.
• Get advice. Having access to a good accountant, lawyer, banker and insurance agent can often be the difference between a break-even business and a successful and profitable business. Such information is usually only a phone call away.
-Matthew Hourn is lawyer director with Neville & Hourn Legal (www.nhlegal.com.au) in Sydney.
BACK TO BASICS
Legal considerations
After you have decided on the structure of your business, there are a number of essential steps that must be undertaken.
• For sole traders, use your own name or register a business name with The Office of Fair Trading.
• Companies are required to register a company name with Australian Securities and Investment Commission (ASIC).
• Register for an Australian Business Number (ABN) with the Australian Taxation Office.
• Register for the relevant taxes, including GST and PAYG.
• If you intend to employ, obtain information on awards, superannuation policies, workers compensation, PAYG taxes, as well as other relevant employment information.
• Verify what licences/registrations may be required for your business through the Office of Fair Trading.
• Organise insurance, including public liability insurance and professional indemnity insurance, where appropriate.
• Contact your local council regarding zoning, health regulations and whether you need to lodge a Development Application or Building Application.
• To gain protection for your intellectual property (IP) register logos, trade marks, patents, copyright and designs with IP Australia.
• Many businesses have a strong internet presence for marketing purposes, and you will need to register your website domain.
• In the case of sole traders or directors, it is advisable that you draw up your will.
