Business Legal Aspects

What you will need to include

Business Structure

• What structure will the business take - a sole trader, a partnership or a company?
• Why have you chosen this business structure?

Permits and Licenses

• Provide a copy of all relevant documentation that allow you to run the business. Include such information as:
• Business Name Registration;
• Contracts for business partnerships;
• Details of approved permits and licenses to run the business in your area;
• Details of commercial lease for business premises if relevant; and
• Other legal and statutory requirements relating to your business.

Other Legal Requirements

• Provide samples of invoices, receipts and other contracts you will use in your business.

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The advantages and disadvantages of various business structures

1. Sole Trader

Advantages:

1. Simple to set up — minimum legal requirements and government interference
2. Low set up costs
3. Only need to send one tax return form
4. No need to register business name if you use your own name. Even if you do not use your own name and must register the business name, in the eyes of the law, the business and the owner are the same. A sole trader does not have a separate legal existence from the business.
5. After all taxes and employee wages are paid, all the rest of the profits go to you
6. You have full control and authority over your business. That means, you have the freedom to make your own decisions.

Disadvantages:

1. Because the business and sole trader are legally a single entity and the sole trader makes all the decisions, the sole trader is personally liable for all debts and in the event where people successfully sue your business. This is essentially unlimited liability.
2. When you die, the business dies with you
3. You may be required to pay additional tax
4. You will have to take the pressure and responsibility of running the business
5. There can be difficulties in getting finance from a third party such as a bank manager
6. You can't afford to be sick to a certain degree (unless you are income insured, or have trained someone to help manage the business).
7. If you do all the work of purchasing, selling, delivering, installing, and/or applying products or services as well as manage the business, you may be expected to work long hours, unless you can automate your tasks and/or get someone else to help out.

2. Partnership (usually between 2 and 20 people) (1)

Advantages:

1. Same as for Sole Trader
2. There is also the added advantage of additional skills and expertise offered in the business by another business owner, or else can share in the time spent to deliver a specific expert set of skills as a service for customers so long as the amount charged for the service and the number of customers are enough to meet the financial aims of all the business owners participating in this structure. In other words, the potential to earn the same reasonable amount of money from the profits earned, but work only half as much time as a sole trader can be the attractiveness of establishing a partnership.

Disadvantages:

1. Same as for Sole Trader, including unlimited liability shared across all business owners.
2. In addition, you may be liable for debts incurred by your partner(s) even if you were not responsible for the decision.
3. Must work well with your partner(s). In other words, there is an increase risk of disputes arising from this type of relationship where some decisions may not be accepted or agreed upon.
4. The profit is legally split according to a partnership contract. (2)
5. Unless stipulated clearly in a contract the responsibilities and work to be performed by each business owner, disputes within the partnership can extend to simple matters of who is contributing enough into the business to warrant the profits earned by each partner compared to another.

3. Company

Advantages:

1. A company has its own legal identity separate from its business owner(s).
2. A limited company has special status in the eyes of the law in the sense that their owners are not personally liable for the company's debts. Indeed the ownership of a limited company is generally divided up into equal parts called shares and purchased by anyone in the community. Generally the more shares you have in a company, the more you own the company. A person who has shares and thus owns a part of the company is called a shareholder. Profits made in the company are divided up as dividends to the shareholders as well as an increase in the value of the shares. At the same time, shareholders also share in the liability of the company, but this is limited to a loss in dividends and a drop in the value of the shares. This is partly because not all shareholders can make decisions affecting any aspect of the company, but also any debts incurred can be spread out across all shareholders, making it easier to recover, pay off the debt, and move on. Or if the company does collapse, the shareholders receives nothing from the company and the shares are worthless. In effect, the shareholder loses all the money invested in the company, but nothing more than that. However, if the company does well, everyone with shares benefits from an increase value of the shares, which can be sold at any time to someone else who wants to be a shareholder of the company, as well as receive a reasonable dividend depending on how many shares you have.
3. Company tax rate is lower than the personal income tax rate.
4. Personal liability is not shared with the owners. In fact, if the company is successfully sued by someone in a court of law, the business owners are not personally liable. Only the company is!
5. The company can have the privilege of having the "...Pty Ltd", "...Ltd" or "...Inc." at the end of the business name.
6. Because running a company can potentially be complex, shareholders are usually happy to appoint/elect during an annual meeting a group of directors and a chairman (known as the Board of Directors) to help make prudent business decisions within the company. For the benefit of these people's business expertise, a bonus is often paid yearly, and in return, shareholders hopefully will receive a bigger dividend and a higher share value.

Disadvantages:

1. Expensive to set up
2. Separate tax returns must be lodged - one for yourself (as a personal income tax return) and one for the company
3. Need to be aware of your legal responsibilities as a director which is usually more complex than other business structures
4. Lots of paperwork to fill out (e.g. You have to register a file of an association with the Australian Securities Commission (ASC), and a Memorandum of Association)
5. You will need to spend a minimum of $2000 to start-up a company structure and have the books prepared by an accountant. (3)
6. You must show greater financial accountability to ASC and the Tax Office. In other words, they can look at your books at any time.

For most small businesses starting off, the business owner will choose sole trader or get into a business partnership with someone else. As the business expands, the owner(s) may decide to become a public or private limited company, or to offer franchises.

These are seen as traditional 20th century structures where a well-defined person(s) controlling the business and hence a hierarchical management structure exists. While many of these sorts of traditional businesses do exist in the 21st century, more progressive businesses are flattening out the hierarchical structure at the management level and looking at more and more employees (or shareholders) becoming part owners of the business where decisions are made as a whole group on the future of the business and the products/services to sell. Expect the traditional business structures to merge and simplify over time.

Franchising

Although not strictly a business structure, there is an alternative to starting off a new business or company from scratch. You can buy into or purchase the licensing rights to run an existing business idea, together with all the branding and supplies needed to run the business yourself. This is called franchising. A franchise is a joint venture between the franchisee (i.e., yourself), and the franchisor (i.e., the person who originally created the business idea).

You can still run the business as a sole trader or in a partnership. You can do anything that you would expect to do in either of these business structures. You decide how best to achieve the business aim within the franchise. The only difference is that once you are running the business and make a profit, you must pay a share of your profits to the franchisor for the privilege of using his/her business idea.

There are usually less risks in opening a franchise, mainly because the business itself is well-established and with products well=known to enough customers wherever the franchise is established. However, it does not mean that no business plan is required when running a franchise. All the same requirements of running your own business from scratch still applies, and that includes making sure there are enough customers who are close by and willing to purchase what the business has to offer. Furthermore, the cost of leasing a premises or shop within a shopping mall to run the franchise need to be accounted for and covered by the profits. At the end of the day, you still have to prepare a business plan to ensure the franchise will work in the location you choose.

Remember, the franchisor will not prepare a business plan for you. It is your responsibility to determine whether it is financial viable and can make a reasonable profit from running a franchise in the way you think it might work.

Advantages:

1. The same as for a sole trader or partnership.

Disadvantages:

1. The same as for a sole trader or partnership.
2. You have the added burden of paying the franchisor part of the profits for the privilege of running his/her business idea as stipulated in the licensing agreement.
3. You must pay for the costs of establishing the business (this is not given to you on a platter by the franchisor, but the materials, branding and other aspects will be supplied when you purchase the business).
4. You are unlikely to have flexibility to modify and or create new products and/or services because of the reputational factor that the business idea represents to all those running the business unless you can somehow negotiate or demonstrate to the franchisor how the new and/or improved products/services will dramatically improve the bottom-line and earn all franchisees the opportunity to earn a higher profit.

Business name registration

Every business operator should register the name of his/her small business before commencing any commercial activity. In the ACT, it normally costs around A$92 (in 1999, and perhaps closer to A$140 in 2020) and you will receive a certificate of registration confirming your ownership and exclusive rights of the business name.

Remember, your business name is part of your image. It is a kind of promotional tool to help show to your clients the level of professionalism you have reached within your business through the products and services you have created or can sell (and know it is of good quality). So think about your business name carefully. You may have to live with it for a long time. The registration simply gives the operator the authorisation to use the second name on any business document like a cheque, letterhead etc. (4)

Note that in Australia you will have to renew the registration after every three years.

When choosing a good business name, make sure it tells your customers exactly what you do. Keep the name simple, short and snappy. Use your own name if you can for professionalism. And finally, make sure the business name differentiates from all other business names.

Choosing a good business name can also be advantageous. Why? Selling the business name to someone else can make you lots of money.

Trademarks

A trade mark is a design. It can consist of a word with a different typeface and colour, or a picture/logo. The inspectors at the Patent Office are there to look at the whole design, not just the letters, when determining its uniqueness.

How much does it cost to protect a trade mark? Anywhere between $500 and $1000 for 20 years protection. After the protection period, you must relicense it. Patenting a trade mark design is expensive, but it can be a brilliant promotional tool if your design is simple, unique and interesting.

Copyrights

The special © symbol is known as the copyright symbol. This is used for partial protection of your original written material. For further protection, we recommend sending your copyright material to the National Archive and the people there will date it and record it for you.

The copyright symbol costs nothing to put onto your written material. Just use your computer and type in the © symbol on the written material either at the end or the beginning of the work. Then type the year it was published and the name of the author or business who produced the work next to it.

You should bear in mind that it would take only one person to deviate from the original material by 20 per cent or more to be considered no longer subject to copyright laws. So if you have a unique and original concept that could earn you some money, only a patent can help you give significant protection to your written material (i.e. only the concept behind the copyright material if the concept is original).

But getting a patent for any concept is very expensive and only lasts on average for about 5 or 10 years, and so you will have to know for sure whether your concept will work and will help you to earn a living before coughing up your hard earned money.

Permits and licenses

The law in Australia, and essentially everywhere else, basically says that you can do just about anything that does not interfere or harm anyone else. So if there is the slightest possibility that your small business may interfere with other people or there is a risk of harming someone else or yourself because of the dangerous profession you are in, you will almost certainly need a business license, permit or approval.

For information on permits and licenses, the ACT Business Services Centre provides a free and confidential Business Licence Information Service (BLIS). Ring BLIS on the toll-free number 1800 463 976 and the operators will give you information about any licenses or permits that you may need for your business.

Commercial lease

You must decide on a place where you intend to conduct your business or at least where you intend to store most of your business assets and records.

Once you have chosen on a good location for your business according to your market research and the amount of finance available to you, look around. See what the area is like. Are there lots of businesses trying to sell up? If so, why? If not, are there any vacant commercial premises near your preferred location? If so, would it be cheaper and better for you to rent these premises rather than buy the premises outright?

If you choose to rent a business premises, you must be prepared to negotiate with the landlord on the rent and what you can get for your money.

You can negotiate on a number of things like free set-up time before commencing your business in the leased premises. It's your money. You must earn money before you can pay and you must use whatever is realistically available to you on the premises to make a living. So always negotiate.

Check out the premises and everything else you may be owning during the lease period. Negotiate on the rental costs for any disrepair you see, or ask for the repairs to be done before you enter the premises.

Consider asking whether you can sub-lease the premises if you intend to leave the premises before the end of the lease contract period. Again this is just plain common sense as it is your money and you don't want to be wasting it on something you have no use or are unable to use in your business when making a profit.

Finally, verify the contract as to whether there are any repairs, rates or insurance premiums you may be required to pay.

Contracts

A contract is a promise or set of promises which the law will enforce. It is a legally binding document for confirming a communication or an agreement has taken place, what has to be done (or refrain from doing as the case may be), when and for how much.

Examples of common contracts include orders, receipts, tax invoices, leases, quotes, your diary, insurance policies, bus tickets, warranty cards, and a letter.

When preparing contracts for your business, learn to develop clear, concise and simple contracts for any part of your business you may need and you will be better protected, look more professional, and cost you less in the long-term. But remember to keep all contracts simple, easy to understand and relevant.

Verbal contracts

Contracts do not have to be made in writing. A verbal agreement is a contract too. But it is better for all important contracts to be formalised in writing, and preferably with the help of a solicitor.

Generally, you use a verbal agreement if the contract is very simple and is not very important to you. However, the more complex the agreement and the contract in general and the more important the contract is to you, the more vital it is to have a written contract.

If, you any reason, you cannot get a written contract for something important or complex and you must have the contract, make sure there are witnesses to the verbal agreement, or you simply don't have the verbal contract at all.

When should I use a contract

Contracts should be made for every job you do in a business. It avoids misunderstandings and mistakes.

What is contained in a contract?

The fundamental parts of a contract:

1. Intention to create legal relations between two or more parties who have a legal capacity to do so.

   IMPORTANT ADVICE: Never sign a contract over a business lunch — the act of drinking anything alcoholic can be made as an excuse for breaking a contract.

2. One party makes an offer to the other party or parties to do something, or to refrain from doing something.
3. Acceptance of that offer, by agreeing to the terms and conditions. Terms can include time, whom, when, how much etc.
4. The consent of all parties to the agreement by signing the contract without misrepresentations, undue pressure or whatever on any party concerned.

What should be included in the contract?

A contract should include:

• a completion date and extra rewards (rather than penalties) in any important contract to ensure the agreed work is completed on time.
• the amount of money agreed upon by all parties concerned, making sure as well that the currency is correct. For instance, are we talking about Australian, American or Hong Kong dollars? You could lose money during the exchange rate if you do not take account of this very fact.
• information that is clear and fair to all parties concerned.
• giving everyone concerned time to read the contract and understand it before signing anything.
• people who are in a contractual capacity - that is, be over 18 years old, sober and sane - to understand the contract.
• setting limits at different stages of contract work. For example, "...no further work is to be carried out after x amount of time until the work has been inspected."; and
• information that should not result in criminal activity.

In the event there is a likelihood of misinterpretation in a given contract, get the help of a solicitor. But remember, this costs money. Therefore, it should be the responsibility of the person issuing/preparing the contract to keep it simple, or you will have every reason to be weary of the contract.

What if someone breaches the contract in some way? If the contract is signed by all parties concerned and are not fulfilled in some way, you cannot sue the person for breach of contract unless you can prove economic hardship (i.e. a financial loss is made on your part). Also you may not be able to sue anyone in a contract who has not given their consent to sign the contract. Remember, if something is logical to you, it may not be logical to the law. So be prepared for unexpected results in a court of law should you decide to take this radical and potentially expense course of action against someone.

Finally, do not rush into things. Do not sign whatever you don't understand. Do not put signatures on blank cheques. If it sounds too good to be true, be suspicious; it is likely to be untrue. But if it isn't and you have just misinterpreted the contract, then ask questions. And make sure you have all the details of a contract marked in your bookkeeping records for audit purposes.

How is a tax invoice for instance be called a contract?

The best way to understand a tax invoice is by realising a contract must have certain details of who, when, how much and of what item in the document. A tax invoice is a contract because it contains such details of who the customer is, the product being offered, the quantity of a given product, the unit price, the total price (which is the consideration part of the contract), the tax component, and the time the quote is valid for (part of the terms and conditions). You then provide the tax invoice to the customer for him/her to fully authorise it. Then it becomes a fully-fledged contract when the customer agrees with the tax invoice and you provide a copy of the document to the customer. The contract is then legally binding.

Partnerships

Because of the amount of skills and energy needed to apply in making a small business successful, some people choose to work with others to form a business partnership. If you intend to take this approach to small business, make sure there is adequate communication between the partners because this is usually the number one reason why business partnerships fail. If necessary, write the communication down on paper to be absolutely precise and to avoid ambiguity or misunderstandings about the roles, responsibility and expectations of each partner.

Once the communication has been written down can a kind of "wedding" certificate known as an "Agreement of Partnership" be produced and enforced by law. Once the Agreement is made and enacted upon, all partners must share in the responsibilities, victories and failures of the entire business. Remember, partnership debts (even personal ones like mortgages) could well be shared among all the partners in the business.

If this sounds a little bit daunting for the unweary, a certificate is available to end a partnership - that is, the "divorce" certificate. Writing a letter with a date stating the end of a partnership is acceptable. But it is best to get an official document of partnership termination with all parties signing on the dotted line.

Remember, an "Agreement of Partnership" should mention nothing about money - only duties, responsibilities and expectations.

As you can see, a business partnership is like a marriage - you will get the good times and, naturally enough, the bad times in a shared sense of the word. That is why lawyers find partnerships a generally unsafe area to handle in the legal profession. But if the partnership agreement is carefully planned and made official and in writing, then there is about an 80 per cent success rate for the business in achieving its goals. And if you do understand your partners well and the partnership works well in a business situation, the business can be very successful and rewarding. Hence choose partners well, and make sure they have complementary (i.e. opposite) skills for optimum success.

Or alternatively you can have a partnership in a shareholder company. In this way, the debts of one partner is not shared amongst all others - personal or otherwise! Consider this if you feel you are not ready to deal with the potential of a partner's personal debts as well as his/her side of the business.

Insurance

To protect the assets of a business against unexpected loss or damage due to fire, burglary, personal liability or whatever, insurance is a must for all business operators. This is especially true for sole trader and partnership structures, because the manager(s) are not properly protected from potential litigation. Less so with company structures.

What do I do?

Begin by drawing up an inventory list of all the things you need to insure (including yourself and perhaps others). Take account of all realistic possibilities. Now determine what type of insurance you think you will need in order to cover all the items on your list. Ask insurance companies what they think you will need and get the best premiums. Now choose the best insurance for your business.

When choosing the best insurance for your needs, go for an insurance company with a good reputation, the biggest assets, who are not stingy about paying up the money when you make a valid and justifiable claim, and the longest stability in the marketplace. That way you will have a better chance of getting claims processed quickly and easily, get the money you are entitled to, and generally obtain better value for money for your premiums.

Remember to insure for exactly what all your items are worth (perhaps with a new for old replacement option), no more and no less. Always ask the insurers for what you are getting for your money. And check your insurance policy carefully. If necessary, get a solicitor to look over your policy before signing on the dotted line.

When formulating your policy, make sure the information you give to the insurer is complete. Include relevant information such as your mortgage, who you are living with, and so on. Otherwise, the insurer will find any suitable argument to reject your policy and/or claim for insurance because of a lack of information. Insurers are there to take your money, not necessarily give it to you unless they have to.

Finally, if you are subcontracting work to someone else, make sure the person who you are giving the work to is insured for public liability.

Must I get insurance for my business?

You can't run a business without insurance nowadays. In Australia, NSW and the ACT are now the most litigated states in the world after California, USA.

If you're not insured, the best position to be is not to own anything, or at least not own anything in your name. It will eventually come down in the law courts to how much you can pay per week for the next 35 years of you life! For example, if you want to work from home, you would be better off renting the house or working at someone else's place. In that way, you can't lose your personal assets if you don't own anything or is not under your name.

Alternatively, if you do own something, you must make it part of your business to always let the customers make their own decisions about what they want to do (e.g. purchase a product or service from you or your competitors) based on various options you present to them including the opportunity for customers to obtain professional advice from other people and to allow them to look at alternative products. Let the customer decide, not you!

In other words, never say to your customers, "You must buy this product because...." It is better to say, "These are the available options. You choose...." In that way, the customers must take responsibility for deciding whatever it is they want to do.

Finally, when your customers do decide to purchase your products or services, make sure they read the legal print on your contract (e.g. the tax invoice) before signing. When providing advice online, always provide a legal disclaimer on every page saying that the onus is on your customers to always seek other sources of advice before making a final decision.

There are other legal protection mechanisms you can employ. Talk to your lawyer for more information. Or visit your local insurance company.

Will I find a lower insurance premium with other insurance companies?

Probably. Talk to insurance brokers every 12 months for the latest insurance costs for your business. It is possible to get a quote which is 15 per cent lower than what you are paying right now for insurance.

Where do I get help?

If, for any reason, you have any problems about the law or any legal aspect regarding your business or your activities, which no doubt you will to some extent, speak to a solicitor or lawyer. The cost of hiring the services of a solicitor can range anywhere from $120 to $400 per hour. But with a little luck your first appointment should be free if that is any consolation to you!

Yes, we can see why there are so many lawyer jokes around!

How do I find a good lawyer?

"Good lawyers," you say? They're pretty hard to come by these days (if they're not six feet under the ground by now!).

To find a good lawyer for your small business, try to talk to three or four lawyers and find the one that knows something about your small business. Ring the Law Society to confirm the competency of the lawyer by checking on his/her accreditation in his specialised area of law. But remember, there are good lawyers out there who are not accredited specialists. Talk to other business people and find out whether they are happy with their lawyer and if so, find out who they are.

When meeting with a lawyer about any legal matter, be upfront about what you want and how much you are prepared to pay. This will sort out the lawyers who can or cannot do what you want within your budget.

Give adequate information to your lawyer about a matter of concern to you. Explain a little about your business first if necessary, then discuss the matter clearly and in detail. Let the lawyer sort out what is relevant or not from your information. Ask the lawyer whether there are matters not mentioned in your discussion that should be attended to. Have prepared and take with you any evidence you can use to help clarify in the lawyer's mind what can be done. Ask about the risks and the chances of being successful in the outcome. Finally ask when the work can/should be completed.

If your lawyer is completing work for you, do not regularly call them up unless you have something important to say about the matter at hand. Ask in the early stages of discussion whether you can receive a progress report and how often?

Finally if you have any problems with your lawyer - for example, if you have a communication breakdown that cannot be resolved satisfactorily between you and your lawyer, or the conduct of your lawyer has not been appropriate - contact the Legal Services Commissioner. This is an independent body not affiliated with the Law Society or the legal profession. Its priority is to resolve complaints by mediation. It is not designed to give legal advice.

Final tips

In general, there should not be too much to worry about when it comes to the legal side of your business. However, to minimise legal problems:

1. Try to understand some of the basic laws affecting your business and the activities you will perform.
2. Keep your business and your activities simple, and the laws will show itself to be simple.
3. Simplicity should also be reflected in your contracts and paperwork as well, as this will avoid unnecessary ambiguity and minimise time and money in the business and in the law courts should a legal dispute arise (which should be extremely rare if your documents are simple and well-developed).
4. Look at things again and again, because you may see something different than what you have originally interpreted them as. This is especially true of important and/or complex contracts; and
5. When charging someone for something, be clear exactly what you are charging for. What exactly did you do to charge that amount to a customer? It is all a question of being honest in your dealings with other people.