It's exciting when you decide to start a new venture. Often, you have an idea and you gather the courage to run with it. This, the entrepreneurial spirit, is essential for success. However, in the excitement, there are often other fundamentals that are overlooked or put off. These are the legal and accounting issues faced by any new venture that can facilitate growth and ensure the interests of stakeholders a best protected, sometimes, from each other.
We can't advise you on the accounting issues, however, we have broken down the the legal issues facing new entrepreneurs into 3 broad headings:
Business 'Partners'; and
This blog article will likely raise more questions than provide answers, however, that is the point! Ask questions and don't get generic advice!
The business structure is the legal framework that comprises your business. How does it operate in the business world? How does it engage with other parties, and how to you and your business 'partners' engage with the business?
There is no 'one size fits all' answer to these questions. Ideally, the structure implemented would, seperate assets (value) from risk, provide income paths from the point of trade right through to the business owners that provides the maximum taxation efficiencies, allow business partners to enter or exit the business with minimal disruption, and is simple to maintain and comprehend.
Whilst this is often easy to achieve for any business lawyer worth his or her salt, the difficulty lies in creating a structure that suits to current position of the business and its partners that still achieves these goals. There are 'real world' issues that need to be taken into account. For example, it would be very easy to recommend that a new venture use a corporate structure. However, there are additional startup costs associated with this route that a sole trader or traditional partnership model would not require. Also, a corporate structure may, comparatively, have greater ongoing maintenance costs. These negatives need to be weighed against the benefits, which include the limited liability of shareholders and the lower tax rate.
Also, many new entrepreneurs come to us and ask for a trust for the business. There is no doubt that the use of a trust can provide phenomenal asset protection and taxation efficiency. However, where, in the structure of the business model do you best incorporate a trust? Do you create a trading trust or simply a discretionary trust shareholder arrangement? Do the instructions of the new entrepreneur suggest that a unit trust is more appropriate? Again, the answer to this question will vary from case to case, however, it is important that it is well considered and that your business is not shoehorned into a generic structure.
Now, we have the word 'partners' in inverted commas because, technically, they may not be partners in the legal sense of the word. However, we are discussing your co-founders. The entrepreneur sitting next to you!
Beginning a new adventure with your likeminded friend, family member or colleague is exciting. However, the beginning is certainly the honeymoon phase, where you believe that nothing could come between you and your ideas. Notwithstanding the warm glow that surrounds your relationship at this time, it is essential that you all document and formalise your professional relationship and how the business is to be run.
This entails not only how the ownership of the business is the be arranged (an overlap with Business Structure above), but also how decisions are going to be made, money invested and spent and when income is to be drawn. In the beginning, you may be able to achieve this via a few short text messages, however, when you each become battle-hardened entrepreneurs with different ideas and different life goals, then decision making can become more difficult. Worse still is when a stalemate occurs. As we know, sometimes it is better to make the wrong decision than no decision at all! An agreement should be formalised as to how the decision making process is to occur and, in cases of a stalemate or dispute, what happens next? Mediation? A mutually respected business mentor? Agree to a process at the start (take advantage of the honeymoon phase to agree to business processes!).
Also, agree to an exit strategy. What happens if one of you wants to leave? How is the interest to be valued? Also, what happens (knock on wood) if one of you dies or becomes incapacitated? Or even goes to gaol? Most importantly, what happens if Google makes you an offer and one of you wants to take it and the other does not? Formalise your relationship at the beginning to avoid more issues at the end.
In taking your business from an idea to the market, you will be entering the business world. The business world is governed by laws and regulations. You will likely be doing business with organisations that have been in business for a long time and know how to protect their own interests. It follows that you should understand what you may be getting yourselves in for and how to protect your own interests at the same time.
Now, this section is never ending, thanks in part to our colleagues in the legal profession, however, we have included a few considerations.
Tax. Are you prepared and registered for tax? Do you understand the variety of taxes out there? GST, income tax, PAYG With holding? Superannuation obligations? If you operate as a company, are you aware of the taxes that directors can become personally liable for and what conduct crystallises this liability. Whilst we don't provide financial advice, we certainly recommend speaking with an accountant at the beginning to avoid issues at the end of you first financial year.
Property Law. Will you be entering into a lease? Or leasing equipment? Are their any personal guarantees? Bank guarantees? What are your obligations under the lease and how do they change over time? Importantly, are you locked-in?
Insurance. It is likely that you will require insurance for your business. Professional indemnity? Public liability? If you have staff, you may be required to pay work cover as well. As an entrepreneur, you may also wish to consider income protection and key person insurance policies. A financial advisor is best placed to address these questions and find an insurance product for you.
Security Interests. Is a trade creditor taking a security interest in one of your assets (personal or business)? What does this mean if you default on a payment and what does this mean for your home loan or other major finance? You should know what is begin registered against you or your business and the implications of that registration.
As mentioned, it is also important to protect your own interests.
Terms of Trade. You ought to have a contract with any party that you supply goods or services to. The form of this contract will different from industry to industry, however, it is important when it comes to enforcing your interests. Also, you should seek advice as to where their are any registration requirements for your terms of trade, for example, on the Personal Property Securities Register (PPSR).
Intellectual Property. Do you require a registered trademark? Confidentiality agreements for contractors with access to your business 'know-how'. Licence agreements for other businesses using your intellectual property.
Registered Security Interests. It is absolutely essential for any business owner who uses equipment or leaves equipment at the premises of other businesses to ensure that their interest in that equipment is registered on the PPSR. Title does not necessarily prove ownership or entitlement since the introduction of the Personal Properties Securities Act (PPSA).
If you are thinking about turning that idea you have into a business, then please seek the appropriate advice on the boring stuff early on. Learn about the terminology and ask the right questions so you ensure that you get the best advice for your specific position.
For a confidential conversation, please do not hesitate to give Dane Grauf of Grauf O'Brien Lawyers a call on 07 3085 5696.