The top five legal issues to consider when starting a new business

By Luke Mountford and Tim Scanlan / 30 April 2012
5 min.

There are a number of important commercial and legal issues that you need to consider when starting a new business.

Commercial issues, such as getting appropriate insurance and establishing a business plan, often are dealt with as a matter of course by business owners and their advisors when establishing a new business.

However, there are a number of important legal issues that are often not addressed as early as they could be. Here are our top five.

1. Choosing the right corporate structure

The corporate structure chosen will have significant consequences as the business grows and upon exit. Ensuring the correct structure is chosen at the start is the best way to avoid costs that may arise if the structure is changed down the line.

There is no one 'best' corporate structure. There are many different options, and business owners need to have a clear vision of what they are trying to achieve in their business in the short and long term. Key questions that a business owner should ask when choosing a corporate structure include:

  • Do I intend to raise capital from external investors in the future?
  • What level of asset protection am I seeking?
  • What structure will deliver the best tax outcome?

Companies, trusts and partnerships are all commonly used in private businesses. Each different structure has benefits that the others don't. It is therefore important to understand what your needs are, and which structure best satisfies those needs.

2. Making concrete arrangements with your business partners

Take the time to work out how you and your business partners will interact with one another as owners of the business. Having a clear understanding of your legal rights and responsibilities can reduce the possibility of disputes in the future. Importantly, once you all have a clear understanding of your rights and responsibilities, that understanding should be recorded in a legally binding agreement.

Important questions to ask include:

  • How will decisions relating to the business be made?
  • What happens when a business partner wants to leave the business?
  • In what circumstances can a business partner be required to leave the business?
  • What happens if a business partner dies, or becomes incapacitated?

3. Your brand

In some cases, the most valuable part of a business is its brand. It's important to think about how you will establish your brand - the words, colours and images you will use to represent your business. Are you going to licence someone else's or create your own?

Licensing someone else's brand can have implications that you need to specifically consider. For example, what happens to your business if the licence to use the brand comes to an end?

If you intend to create your own brand, you should determine whether your proposed brand is available by arranging business name and trademark searches. There's no point spending time and money establishing a brand if you cannot use it because something similar already exists.

If the brand you want to use is available, you will need to find out if it can be registered as a business name and a trademark. Not all brands can be registered because they are too similar to other brands or are too generic. Registering your brand provides protection, preventing others from using it, and may help create value in your business.

If you don't take the time to properly consider the legal issues associated with your brand, you could potentially lose time and money having to develop a new one or dealing with the issues associated with infringing someone else's brand.

4. Commercial contracts

All businesses use contracts. They may be simple (for example, basic sale contracts with customers and suppliers) or more complicated (for example, joint venture arrangements or franchise agreements). You need to understand the following issues:

  • When do you need to have a written contract for a particular transaction? A simple sale of goods over the counter might not need to be documented by a written contract, but having a written contract is likely to be critical if you are extending credit terms to your trade customers.
  • When are you binding yourself to a contract? Do you ever read the fine print on the other side of purchase orders and invoices? You should!

Take the time to think about how you intend to deal with your customers and suppliers, and document that in writing. You will need to deal with key issues in your contracts to ensure, for example, that you get paid by your customers and are protected as much as possible against claims arising out of the goods or services that you provide.

Other contracts that should be considered when starting a business include:

  • appropriate employment contracts for your employees; and
  • the lease for any premises from which you intend to run the business.

5. Registering for tax purposes

You should also consider the impact of Australia's taxation regime on your business.

New businesses need to register for tax purposes. You will need to obtain an ABN, a TFN, and in most cases, register for GST. Depending on the circumstances of the business, you may also need to register for fringe benefits tax, pay as you go (PAYG) withholding tax, and payroll tax.

For more information on the legal issues associated with establishing a new business, please contact HopgoodGanim Lawyers' Private Enterprise team.

30 April 2012
Luke Mountford
Luke is a Partner in our Private Enterprise practice and he works predominantly with HG Private clients advising on their corporate and commercial legal matters.
Tim Scanlan
Tim is a Partner in our Private Enterprise practice and specialises in private client mergers and acquisitions.

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