Top 6 legal considerations for a start-up business
Starting a business is exciting! It is, however, important to comply with all necessary legal requirements to ensure your business is adequately protected from the outset.
Due to a lack of experience, knowledge and resources, start-up business founders tend to overlook the following top 6 legal considerations.
Choosing the right structure for your start-up business
Choosing the right structure for your start-up business is one of the most important decisions you will make as a new business owner. The business structure you choose to operate under will affect your level of personal liability, the amount of tax you pay, your control over the operations of the business, and your growth potential. Bearing in mind there are advantages and disadvantages to each structure.
The most common legal structures for business are:
You have personal liability for the debts of the business and you need to report all business income on your personal tax return.
This is similar to a sole trader, but you share profits (as well as losses) with your partners and are personally liable for the debts of the business.
In this structure, a trustee (either an individual or company) carries out the business on behalf of the members (also known as beneficiaries) of the trust.
A company is a separate legal entity owned by shareholders and managed by directors that are appointed by shareholders. As a company is a separate legal entity, it declares income and is responsible for liabilities of the business.
If you set up your company with co-founders, you will need a shareholders’ agreement. A shareholders’ agreement will cover important considerations such as:
- What decisions directors and shareholders can make
- How often directors and shareholders will meet
- The sale of shares
- How dividends will be paid
- Selling the company
- Dispute resolution
A good shareholders’ agreement will have a Deed of Accession. This deed is signed by the company and the new shareholder rather than having each shareholder re-sign the shareholder agreement.
If you develop your start-up business with a partner, you will need a partnership agreement. A partnership agreement will clearly set out the role of each business partner, the management of company profits and terms for ending the partnership or winding up the business.Shareholder Agreements
Employee/independent contractor agreement
In order for your business to grow and succeed, you will need to hire employees and/or contractors.
Employees are covered by national and state based legislation including the Fair Work Act. Employees are entitled to (amongst others things) minimum wages, sick leave, annual leave and superannuation.
Contractors are independent and run their own business. In general, you are not required to pay their insurance, superannuation or PAYG tax.
You need to correctly assess whether the worker is an employee or contractor as each has different rights and entitlements. If you get this wrong, you may be legally and financially liable.
Once correctly assessed, you need to document the relationship using either an employment or independent contractor agreement. Regardless of the agreement, it will cover (amongst other things) the worker’s role, remuneration, entitlements and employee obligations.Employee Agreements
Terms and conditions
Most start-ups have an online presence, for which your business is liable. Hence, it is vital to nail your terms and conditions.
If you sell products or services, you need business terms and conditions. As well as addressing consumer law requirements, business terms establish the basis on which you will provide your products or services to a client.
If you have an online marketplace, you need marketplace terms and conditions. These terms are complex to draft, as they address the rights and obligations of all users interacting in the marketplace i.e. buyer, seller and marketplace owner.Terms & Conditions Services
- The type of information you will collect.
- How this information will be used.
- If this information will be disclosed to third parties and, if so, to whom.
- Whether this information will be stored and, if so, where.
Protect your IP
Your IP is your most valuable asset and you must protect it.
The most common types of IP include:
A trademark is a sign or symbol that is used to distinguish your product or service from those of your competitors. Trademark registration gives the owner the exclusive right to use and license the trademark, within Australia, for a period of ten (10) years from the date of filing and can be renewed indefinitely. You do not obtain these rights by registering your business name, company name or domain name.
To varying degrees, every company will require trademark protection. In the case of start-ups, this typically involves trademarking their business name and logo.
Before registering a new business or company, you should conduct a trademark search to ensure you are not infringing an existing trademark.
Copyright protects the owner’s original expression of an idea rather than the underlying idea itself. In the case of start-ups, copyright may extend to website content, layout and software source code. For an idea to receive copyright protection, it must be original, recorded in material form and connected to Australia. There is no need to register for copyright. Instead, an idea has automatic copyright protection once it is expressed.
A patent is a legally enforceable right for a device, substance, method or process. For your application to be successful, your invention must be new, useful and inventive or innovative. Not every business needs patent protection.
You can protect your IP by having employees and contractors sign a confidentiality agreement that states they will not use or disclose your IP to anyone during and after their employment with you.