What You Need To Know When Starting a Business (2021 Update)
Experienced business lawyer Damin Murdock provides his tips and tricks on what you need to know when starting a business.
Lawyer Damin Murdock is here to provide some insight into what you need to know when starting a business.
- Contracts, employment and corporate structure are some of the most common legal issues faced by small business owners
- Using documents such as Services Agreement, Employment Contract and Letter of Demand can prove integral to your success
- There are times when hiring a lawyer might be unavoidable
Starting a business is very exciting and most people place a lot of emphasis on designing their brand, logo, website and product. However, the legal implication of operating your own business is often overlooked. Whatever the reason, my experience is that most people either:
- Believe they do not have sufficient funds to allocate to a lawyer; or
- They simply do not believe seeing a lawyer is necessary until something goes wrong.
I can assure you both are far from the truth. With respect to whether you have sufficient funds, the legal industry has been adapting to the market conditions and as such most people can find lawyers who offer free consultations, discounted rates for start-ups and free guidance or direction. With respect to seeing a lawyer when something goes wrong, lawyers are actually retained on most occasions to prevent disputes from ever occurring. These are the legal points that you need to know when starting a business.
What is a lawyer and how can they help you?
The usual tasks of a lawyer include the following:
Establishing Corporate Structures
This can help minimise personal income tax/ corporate tax and protect your assets from others now, or in the future. If you do not have the right Corporate Structure now, when you wish to change your structure or shareholding in the future, you may have to pay significant sums of money. For example, stamp duty may apply to the transfer of shares in a company to another person at a later stage.
A well drafted contract will ensure all of the parties involved are on the same page from the start (this includes business partners by way of a Shareholders Agreement). Accordingly, if you have a well drafted contract and there is a dispute, one party may be unable to issue a claim against you because it has already been well spelt out in the contract, or maybe the contract includes a dispute resolution clause preventing a dispute from proceeding any further.
Drafting Company Policies and Procedures
Often times a company will need internal policies in order to protect themselves in the event something adverse occurs such as an accident in the workplace; an argument between staff members; fraud committed by trusted staff. Having company policies and procedures can prevent or limit your exposure to Prosecutions from SafeWork NSW or liability to a third party where your staff has been grossly negligent or fraudulent.
Start-ups and SMEs often struggle with cashflow management. Lawyers can help with payment of outstanding invoices (often times by simply sending 1 letter).
Governance, Licencing & Standards
If you wish to sell a product to a consumer, you may need a credit licence. If you offer financial advice, you may need a financial services licence. Finally, if you are in a particular industry, you may need to comply with an industry code of conduct. If you are selling goods, you may need them to comply with Australian standards. A lawyer in your particular field should be able to identify if there are any governance, licencing or standards which you need to be aware of.
What should I consider obtaining for my start-up business?
My clients often times forget or overlook the basics. To this end, some of the basics you need to know when starting a business include the following:
This may include the establishment of a Trust, Partnership, Joint Venture or Company. This is the most basic element you need to know when starting a business.
This is to protect your brand which may include your design, logo, name or colour.
Some insurance coverage which should be considered (and sometimes mandatory) include: WorkCover; professional indemnity; public liability; product liability; key person; content; and mortgage protection.
Some policies which should be considered include: Bully and Harassment; Anti-Discrimination; Drugs and Alcohol; Grievance; IT and Confidential Information; Social Media; Work Health and Safety Induction; or Code of Ethics Policy.
What are the key things I should put in my employment agreement?
Employment Contracts can vary between industry, however, I would say the most important clauses need to know when starting a business include the following:
- termination clause with notice;
- termination clause without notice due to misconduct;
- non-solicitation of clients and employees;
- restraint to operating a competitive business within a particular area, for a particular period of time;
- confidentiality clause; and
- intellectual property right clause to ensure the employee will sign all documents necessary to assign the intellectual property rights created during employment to the employer.
What are the key things I should cover in a set of online terms and conditions of an ecommerce site?
Often times I find myself reviewing client terms and conditions and they fail to account for some of the key clauses which may be required. Key clauses need to know when starting a business include:
- offer and acceptance;
- limited liability clauses;
- general disclaimers;
- intellectual property rights;
- dispute resolution mechanism;
- choice of law and venue; and
- assignment of rights and obligations.
How do I get a customer to pay me when they dispute my bill? Should I go to court?
Court should always be a last option because it can be time consuming, costly and stressful. Before going to Court you should always try to resolve your dispute amicably by way of negotiation. However, negotiating with your customer may become a fruitless exercise. Accordingly, depending on the monetary amount owing to you, you should consider engaging a lawyer to send a Letter of Demand. Again, if a Letter of Demand is unsuccessful, consider obtaining legal advice before filing a claim with the Court. You can also consider attending to your local court to speak with a Duty Solicitor who can provide free guidance and advice.
We need help drafting and negotiating a contract with our suppliers. What are the main items to be covered in a Service Agreement?
The essential terms in your Service Agreement will depend on the kind of supplier providing the goods or services. For example, if it is a software provider, the essential terms will be the confidential information and intellectual property right clauses. If it’s a supplier of goods, then you may wish to consider whether time is of the essence (meaning the goods must be supplied by a certain time or date). However, as a general rule:
- make sure you know who the supplier is and the proper parties are clearly specified on the agreement;
- do not agree to make payment prior to the delivery of the goods and services, unless you are provided with a personal guarantee from the director of the provider;
- consider inserting a choice of law and jurisdiction clause into your agreement so if there is a dispute, that dispute must be resolved within your local courts;
- if it is the sale of software or intellectual property rights, consider whether you wish to own the product or simply use the product.
- If you wish to own the product then you want the intellectual property rights to be assigned to you. However, if you only want to use the product then you may only need a licence to use it;
- consider inserting a good faith clause and dispute resolution clause;
- consider having the provider warrant its ownership of the goods; and
- have a careful consideration to the warranty periods and service levels provided by the supplier.
Legal tips to consider when selling a small business
There are many other factors other than price that you should consider prior to selling a small business. Here are four legal tips to consider before you place your business on the market.
Be clear on what you are actually selling
The term “business” is very broad so when you decide to sell your business, be specific about what you wish to sell as the goodwill or value of your business may be spread through various assets of your business. You should also ensure that you own or have rights to sell that asset. Business assets can be tangible or intangible. Tangible assets include land, plant, and equipment. Intangible assets are intangible, such as your business name, telephone numbers and your customer lists.
Make a list on what components of your business you wish to sell or more importantly, wish to retain.
Consider the future of your employees and other restraints
Many employers do not tell their employees that they are putting the business on the market. However, you should consider whether you want to ensure that the employees remain employed with the new owner or give them adequate notice. Conversely, if you are looking to open a new business elsewhere and wish to take key employees with you, this should be incorporated into your sale and you should be aware of any geographical restraints on competing with the business.
Training the newcomers and passing on trade secrets
Are you looking for a quick sale or are you happy to stay temporarily to train the new owners of your business? Staying on and training the new owners can add value to your sale and also ensure that the brand name you created is passed onto able hands. If there are any special recipes, formulas or methods you are passing on with the business, you do not want to disclose these until after the sale which makes the training period a suitable time to pass on your skills and knowledge.
Get professional assistance
Accountants can help ensure that your financial figures clearly reflect the financial performance and position of your business. Your financial reports are going to be an important indicator of how well your business operates. There will also be various GST, tax and stamp duty considerations which your accountant can advise you on.
Lawyers can help protect you and include, exclude or negotiate important terms in your sale of business contract. They will also be able to tell you what you can or can’t sell and how those assets are to be transferred to the purchaser. Throughout the course of your business, you will have entered into various long-term agreements that will need to be assigned or terminated. This ensures that your legal rights and obligations tied to the business are completely discharged after the sale.
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.