5 Essential Steps to Setting Up a New Business or Start Up

The excitement of setting up a business (such as a start-up) can often lead to confusion for many reasons. You may have a great idea and have started getting a team together, but have you thought about the best legal structure for you? What about protecting your idea and putting contracts in place? Taking the time to think about these things now can save you a lot of money, time and pain in the long run.

We know you don’t have much time, so to make it easy for you we have put together a list of things that are essential to consider from the outset, so that your business or start-up is on the right track from the start.

  1. Structure

Getting the right structure for your business from the outset will help you avoid headaches later down the track, and improves the odds of your business being a success.

Business structures can be broken down into 4 key categories: Company, Trust, Partnership and Sole Trader.

Company

There are many benefits to using a company to conduct your business. The company tax rate is lower than the highest individual tax rate, so your profits may be taxed at a lower rate than if you weren’t using a company.

Companies also provide a high level of protection for shareholders – you’ve probably seen the letters “Ltd” or “Limited” at the end of a company name before? This means that liability of shareholders in the company is limited to the amount unpaid on their shares (which is generally a nominal amount such as $1.00). So if the company becomes insolvent (i.e. runs out of money), although the company could lose all of its assets, your personal assets (such as your home) will usually be safe.

The disadvantages of using a company are that companies are more regulated than most other business structures and annual fees are payable to the Government keep a company registered. Also, the directors of companies may be required to provide personal guarantees to lessors, suppliers and lenders to the company, which ultimately defeats the “limited liability” aspect of having a company. Giving a personal guarantee means that if the company doesn’t perform its obligations, the person who you gave the guarantee to can come after you.

Directors also have duties under the Corporations Act, and a breach of those duties could result in personal liability.

Is a Company the right structure for you?

A company is the right structure for you if you want the highest and best level of asset protection. In deciding whether to use a company, consider the activities of your business, what could go wrong and the cost of a risk eventuating.

Trust

A trust is simply a relationship where a person (“trustee”) conducts the business for the benefit of other people (the “beneficiaries”). Set up the right way, a trust can be more tax effective than a company.

A trust is also an effective way to protect a business’ assets. However, trusts are more complex than the other business structures, and setting up a trust may have high costs.

The trustee of a trust can be an individual or a company. If the trustee is an individual, they can be personally liable for the losses incurred by the trust. The benefit of having a company act as trustee is that, provided the company has no assets, the company has nothing to lose in the event it is liable for the losses of the trust. By using a company you essentially add a layer of asset protection.

There are several different types of trusts to choose from, with the most common being a discretionary (or family trust). Another popular option is a unit trust. We can discuss these options further with you.

Is a Trust the right structure for you?

We recommend you seek your accountant’s advice as to whether running your business through a trust is more tax effective than running it through a company.

If you do proceed with a trust, we generally recommend a company be established to act as the trustee so as to give you an added layer of protection.

Partnership

A partnership is an inexpensive way to set up a business with multiple co-owners (“partners”) and is established simply by all the parties signing a document (although the partnership could also be incorporated, similar to a company).

Partnerships are relatively uncommon and that is in a partnership, all partners are personally responsible for the debts of the partnership, even where only one partner incurs a debt in the name of the business. For example, if there was a partnership of two people, one partner could go and get a loan on behalf of the partnership without the other partner knowing about this. If the partnership defaults in payment of the loan, the partner who did not know about the loan is still personally liable to pay the loan.

There are ways of limiting your liability in a partnership through the use of companies and trusts, however generally if you are going to the effort of establishing a company/trust you would not do a partnership.

In a partnership, each partner’s share of profits will be taxed at their personal tax rate.

Is a Partnership the right structure for you?

Partnerships generally provide minimal asset protection and should only be used in limited cases.

Sole Trader

If you want to start your business on your own, the sole trader business structure may suit your needs. As with a partnership, a sole trader structure is inexpensive and simple to set up. This structure provides you with total control over the management of your business and has less regulation and paperwork involved compared to other business structures. Essentially all you need to do is register for an ABN and away you go!

Because you aren’t shielded by a company or other structure, the main disadvantage of this structure is that you are fully liable for all of your business’ debts. The profits of your business are also taxed at the personal tax rates, which may be higher than the company tax rate depending on how much profit your business generates.

Is a Sole Trader structure right for you?

If your business is carrying on very low risk activities and you aren’t bringing anyone else in, operating as a sole trader may be the best option for you.

What next?

Given the complexities of the different types of structures available and that there is no “one size fits all” option, it’s important you get the right legal and tax advice before starting out. Merton Lawyers has extensive experience in working with new businesses and start ups in various. We also have great relationships with accountants who specialise in this area and would be more than happy to introduce you to our contacts if you don’t have an accountant.

*Please note this is a general guide only and should not be used in place of obtaining our advice.

  1. Intellectual Property

The intellectual property laws in Australia aim to provide creators and inventors with exclusive rights to deal with their creations or inventions for a period of time. It’s designed to encourage creativity and innovation in businesses and start-ups.

There are several forms of intellectual property which are likely present in your business, some of which you need to take steps to “protect” and some of which is automatically protected in Australia.

Example of Intellectual Property Do you need to take steps to protect it ?
Business Name Yes – note that simply registering your business name doesn’t necessarily stop others from using your name!

 

To get the highest level of protection, you need to trade mark it. We discuss this below.

Domain Name Once you buy a domain name its yours (as long as you keep paying the fees for it). No other steps are required.
Copyright (books, articles, films, music, art) Guess what? Copyright protection in Australia is automatic and no steps are initially required!
Inventions You need to take steps to protect your inventions by patenting them. We discuss this below.

 

Copyright

Copyright relates to a person’s creative skill and labour, and aims to protect the way an idea or information is expressed.

Copyright includes protection of literary works like books, poems and newspaper articles, computer programs, films, musical compositions, artworks and other works.

Copyright intends to either prevent another person from using your work or to allow you to receive money for another’s use of your work.

You don’t have to register to obtain copyright protection – the copyright protection is automatic from when your original work is created. However, it is best practice to put a copyright notice on your work (©).

Patent

If you invent something that is new to the world, or is a significant improvement on an existing invention, then you may be able to get patent it (which will give you the exclusive right to that particular invention for a period of time).

There are certain requirements that must be satisfied before a patent is granted, including the invention must be new, must not be obvious and should be useful.

There are two types of patents in Australia (standard and innovation). Standard patents are difficult to obtain and innovation patents are much easier (however provide limited protection).

Trade mark

All businesses have at least one trade mark, and that is their business name. Other trade marks could be logos, phrases, sounds, smells, shapes, and pictures, or a combination of these, which are used in a business to indicate the origin of goods and services or to distinguish goods and services from competitors.

To protect your trade mark, you need to register it with IP Australia. The process generally takes up to 9 months, however once your trade mark is granted it gives you the exclusive rights to use that trade mark.

There are certain requirements that must be satisfied before registering a trade mark. The most common issue with trade marks is that they are descriptive of the services being provided, in which case IP Australia is unlikely to register them. For example, a business name called “We Sell Clothes” is obviously descriptive of the services it provides. On the other hand Apple has successfully trade marked its business name because the name “Apple” does not describe what they do.

Trade marks go beyond just your brand name and logo. For example, demin company Levis has registered trade marks on distinctive pocked stitching on their demin pants, and fashion brand Burberry has registered a trade mark for its distinctive check pattern.

What Next?

Merton Lawyers can undertake an IP audit of your business and advise you on what you need to protect and your likelihood of success in applying for protection where this is required.

*Please note this is a general guide only and should not be used in place of obtaining our advice.

  1. Documenting Everything

There are a number of important documents that a business and start-up should have in place before beginning operation. The following is an overview of common documents generally used when starting a business.

Shareholders Agreement

A shareholders agreement is an agreement between the shareholders of a company setting out their rights and responsibilities.

Some key terms in a shareholders agreement include the roles and duties of directors, the rights of the shareholders, who has the right to appoint a director, the procedure if there is a deadlock in voting, the procedure if shares are to be transferred and the termination of the agreement.

Confidentiality Deed

A confidentiality deed should be entered into where one party/business provides confidential information (for example, designs, client information) to another party. The deed affirms the confidential nature of the information that is passed from one party to another party, and specifies that they cannot disclose the confidential information and the consequences of a breach of the deed.

Often a confidentiality deed will include clauses dealing with who owns any intellectual property developed by a party to the deed as a result of the use of the other person’s confidential information. They can also include non-compete provisions.

Confidentiality deeds can be mutual (meaning both parties have obligations of confidentiality) or in favour of a single party.

Contract for Services

A contract for services outlines the terms on which one party is providing services to another party. For example, if a builder is building a house for someone, they will get the purchaser to enter into a contract which sets out the terms of thee builder’s engagement.

The contract contains clauses relating to the duration of the contract, the nature of the services to be provided, any reporting requirements that one party must adhere to, the requirement of insurance and how the contract may be terminated. Most importantly, it also specifies the payment terms.

Distribution Agreement

A distribution agreement is used where a supplier of goods appoints a person to distribute those goods. The agreement generally gives the distributor a sole and exclusive right to distribute the goods in a particular region. The agreement also outlines the duration of the agreement, whether it is exclusive or whether other people can distribute the same products in the same area, the costs of the right to distribute and the method for accounting for the revenue generated from the sale of the goods by the distributor.

Employment Contract

Whether you hire a part-time, full-time or casual employee, an employment contract is essential in outlining the terms of the employment relationship. Generally an employment contract will specify the location of the workplace, the duration of the employment, the duration of any probationary period, the expectations upon the employee to perform his or her duties, the hours of work, the employee’s salary, leave entitlements, confidentiality, and how the employment contract can be terminated. It will also specify whether the employee’s salary includes remuneration for all hours worked, or whether TOIL or overtime payments will be made.

Contractor Agreements

It is more common than ever for businesses to engage contractors to perform jobs which may have previously been performed only by employees. Similar to employees, businesses need to document your agreement with a contractor. Clauses dealing with the services to be provided, due dates, payment, intellectual property and confidentiality will all need to be included.

In certain cases contractors can be deemed to be employees, which means that you need to pay their superannuation contribution, collect PAYG tax, and ensure the terms of their employment are compliant with any applicable awards.

Licence Agreement

If you are using someone else’s intellectual property (such as their business name, logo or processes), you should enter into an agreement with them which gives you the right to use that intellectual property. The agreement should specify whether you have the exclusive rights to use that intellectual property and for how long.

Leases

If you are operating your business on someone else’s land, you should secure your right to use that land by putting a lease in place. A lease gives you the exclusive right to use land for a certain period of time in exchange for payment of rent.

Website Terms of Use and Privacy Policy

If you have a website, you should have a website terms of use and privacy policy in place. These will specify the terms of which someone accesses your website, include terms dealing with cookies and remarketing and what you can do with any information you collect about visitors to your website.

Loans

If your business obtains funds, whether from a bank or private source, a loan agreement confirming the terms of repayment will generally be put in place.

Most businesses will receive a loan from shareholders or directors when starting out, and these loans should be documented (even though they are between related parties).

What next?

These are just some of the documents that your business may need. Merton Lawyers have extensive experience in creating tailored documents for every type of business or start-up that reflect how you intend to operate your business. We can also confirm which documents you need and which you can skip.

*Please note this is a general guide only and should not be used in place of obtaining our advice.

  1. Insurance

One reason why people don’t set up businesses or start-ups is the risks associated with them. Regardless of how much research you have done, there will always be risks with running your own business or start-up. Insurance is a way to counter this risk, and some types of insurance policies available on the market include:

Public Liability Insurance

One of the most important policies you can take out is public liability insurance. It covers you if you are responsible for an injury to a person or their property in connection with your business. It is extremely important to have a public liability insurance policy if you have a business. You might think your business is low risk but as with everything, you don’t need it until you need it! We don’t recommend you start a business without this.

Workers’ Compensation Insurance

Workers’ compensation insurance covers your employees if they injure themselves at work. Most Australian states have a mandatory workers’ compensation scheme requiring businesses that employ workers to obtain and maintain a workers’ compensation policy. It’s important to know whether you need a workers’ compensation insurance policy, especially if you hire contractors as they can also be deemed to be workers. There isn’t a national workers’ compensation system, so you may require a policy in each state that you operate in if you employ workers multiple states.

Professional Indemnity Insurance

Professional indemnity insurance covers your business if another party suffers financial loss, personal injury or property damage due to your provision of professional services. It includes cover for any error or omission on your part. Generally, you would have professional indemnity insurance cover if your business provides advice or a service, for example if you’re in the advertising or management consulting industries.

Business Interruption Insurance

Business interruption insurance covers the loss of profits that your business may incur as a result of an event, for example a fire to your premises, which causes an interruption to trading.

Key Man Insurance

Key man insurance can protect you in the event something happens to your key personnel (such as your CEO, Managing Director etc.).

Income Protection insurance

If you are taking a salary from the business, you may be able to get income protection insurance to guarantee that you will continue to be paid an amount in the event something happens to you and you can’t work anymore.

What next?

A good business broker can advise you on the best insurance to suit your business’ needs. Merton Lawyers has long standing relationships with several brokers experienced in advising new businesses and can point you in the right direction.

*Please note this is a general guide only and should not be used in place of obtaining our advice.

  1. Finance and Security

If your business will be supplying goods or services on deferred payment or “credit” terms (i.e. you provide the goods or services now and get paid later), have you considered what happens if your client becomes insolvent or doesn’t pay you?

There are steps you can take to protect your interests and increase the chance of you getting paid (or at least getting your goods back).

Supply/Hire of Goods

You may have heard of the Personal Property Security Act (“PPSA”)? In certain circumstances, if you supply goods on deferred payment terms or hire goods for period of more than one year and do not register your ownership/interest in those goods on the Personal Property Securities Register (“PPSR”), you can lose your ownership over those goods in the event the customer becomes insolvent.

For example, lets say you are a tile manufacturer and you sell your tiles to a tile retailer on deferred payment/retention of title terms. The tile retailer then becomes insolvent and cannot pay you for the tiles you provided to them. If you haven’t registered your security interest on the PPSR in the tiles, then you most likely will not get your tiles back, and you may only receive a fraction of what the retailer owed you for them.

If you are engaging in the supply of goods or hire of goods, we recommend you obtain advice as to how to protect your interests to avoid losing your goods on the insolvency of the customer. Whether you do this will be a risk decision for you based on the value of the goods and the likelihood of the customer experiencing financial difficulty.

Supply of Services

If you supply services on deferred payment terms, we recommend you enter into a services contract which gives you a security interest over all or some of the assets of the customer. This is essentially like a mortgage, but over non-land assets. If the customer defaults in paying you, you can seize the assets you have security in.

To ensure you have priority over other creditors who have a security interest in the customer’s assets, this security interest should be registered on the PPSR.

Asset Entities and Trading Entities

A common business structure we see is where a person has one entity which owns all the assets used in a business, and another entity which actually trades the business. This can be an effective asset protection strategy, however what most businesses don’t know is that the lease of assets between the asset owning entity and the trading entity is covered by the PPSA.

This means that if the asset owning entity does not register its security interest in the assets on the PPSR and the business entity becomes insolvent, the asset owning entity will lose its ownership of the goods. By not registering on the PPSR, the whole asset protection strategy can be defeated.

What next?

Navigating the PPSA and protecting your interests in supplies you make on deferred payment terms is a complex area, and if not done currently can result in devastating losses for businesses.

We recommend you obtain advise as to what steps, if any, you should take today to better secure your interest. Merton Lawyers are experts in the PPSA and securities advisory and would be happy to assist you with this.

*Please note this is a general guide only and should not be used in place of obtaining our advice.



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