Top 5 Legal Considerations for Starting a Business

14 April 2023 in Business Law, Civil and Commercial Litigation and Law

Starting a business is an exciting and rewarding journey. However, it also comes with its own set of risks and challenges, including navigating the complex legal landscape and complying with legal requirements. Ignoring or misunderstanding legal requirements can result in costly losses and time-consuming legal disputes in the future.

This article will discuss the top five legal considerations for starting a business – including choosing a business type and registering with the Australian Government, protecting intellectual property, entering into legally enforceable contracts and agreements, complying with employment law and regulatory requirements, and obtaining business insurance to protect against potential liability.

1. Business Structure and Registration

Choosing the right structure for your business can have a significant impact on your business’s success and growth potential. There are four main types of business structures in Australia: sole trader, partnership, company and trust. Each structure has its own advantages and disadvantages, and the choice of structure will depend on your business goals, level of risk and personal assets and preferences.

Sole Trader

A sole trader is an individual who is the sole owner of the business. There is no business name or separate legal entity other than the individual. This structure is simple and easy to set up, there are minimal reporting requirements, as well as possible tax advantages. However, this structure provides no protections against legal risk, the business owner still has unlimited personal liability for the business’s debts and legal obligations.

Partnership

A partnership is a business arrangement in which two or more people share ownership of the business. Partnerships can be either general partnerships, where all partners share equal responsibility for the business, or limited partnerships, where one or more partners have limited liability. Costs are relatively inexpensive, skills and labour can be pooled and there are possible tax advantages. However, like sole traders, partners have unlimited liability for the debts and the conduct of the business and can be liable for the actions of any other partner.

Company

A company is a separate legal entity from its owners (shareholders), and it offers limited liability for its owners, limited only to the share capital contributed by the owners. This means that the company is liable for the risks of the business, not the owners, and the personal assets of the owners are not at risk if the company is under financial threat. A company can also be quickly and efficiently established through incorporation. However, companies are more complex to set up and require more ongoing compliance with more regulatory requirements than sole traders or partnerships.

Trust

A trust is a business arrangement where a trustee holds property or assets for the benefit of one or more beneficiaries. Trusts can offer tax advantages (such as potential tax-free capital gains) as well as asset protection. However, as unitholders must receive all income, they are responsible for paying taxes on it, and if the trust retains income, it is usually taxed at the highest marginal tax rate. Trusts can also be complex and require professional advice to set up and manage.

When choosing the structure of your business, there are several factors to consider. These include the size and complexity of the business, the level of risk involved, tax implications and the personal circumstances of the owners. It is important to consult with legal and financial professionals to ensure that the chosen structure is the most appropriate for your business goals and circumstances.

In NSW, the registration process for business structures varies depending on the type of structure. Sole proprietorships and partnerships generally do not require formal registration, although they may need to obtain certain licenses or permits, including registering for an Australian Business Number (ABN) and Goods and Services Tax (GST) if their annual turnover exceeds a certain threshold.

Companies and trusts must register with the Australian Securities and Investments Commission (ASIC) and they must comply with ongoing reporting and compliance requirements. The registration process involves submitting a range of documents, including a company or trust deed, details of directors or trustees and information about the company or trust’s activities and assets. Once the application is approved, the business will be issued an Australian Company Number (ACN) and an Australian Business Number (ABN) and the business can begin trading and operating.

2. Intellectual Property Protection

Intellectual property (IP) refers to creations of the mind, such as inventions, artistic works, symbols, names and images used in commerce. Protecting intellectual property is essential for businesses, as it ensures that the innovations, brands and creative works that form the basis of the business are not copied or used without permission. Failure to protect your intellectual property can lead to lost revenue, damage to brand reputation and legal disputes that can be costly and time-consuming to resolve.

There are three main types of intellectual property protection: patents, trademarks and copyrights.

• A patent is a legal right granted for a specific period to exclude others from making, using or selling the invention. Patents are crucial for protecting the innovative ideas that form the basis of many businesses, and they can be registered for inventions such as machines, processes and new technologies.
• Trademarks are symbols, names and images used to identify and distinguish the goods and services of one business from those of another. Trademarks are important for building brand recognition and loyalty, and they can be registered for a wide range of symbols and logos used in commerce.
• Copyrights are the legal rights granted to the creators of literary, artistic and musical works. Copyright protection is automatic, and it gives the creators exclusive rights to control how their works are used and distributed.

The registration process for each type of intellectual property varies depending on the type of protection.

• Patents must be registered with the Australian Government’s intellectual property agency, IP Australia. The registration process involves submitting a detailed application that describes the creation and demonstrates its uniqueness and usefulness. If you don’t have the budget to register a patent, you can ensure the protection of your interests when sharing your idea with others by having a lawyer draft a confidentiality agreement.
• Trademarks can be registered with IP Australia, and the registration process involves submitting an application that demonstrates the creation’s distinctiveness and intended use. Once registered, trademarks can be used to prevent others from using the same or similar marks in connection with similar goods and services.
• Copyright protection is automatic, and creators do not need to register their works to receive protection. However, creators may choose to register their works with the Australian Copyright Council or other agencies to provide evidence of their ownership and protect their works from infringement.

3. Contracts and Agreements

Having written contracts and agreements in place is essential for businesses as they provide clarity and transparency for all parties involved. Written contracts can help prevent misunderstandings, disputes and potential legal issues. By setting out the terms and conditions of an agreement in writing, both parties can refer to the contract if any issues arise, ensuring that all parties are aware of their obligations and responsibilities and can enforce their legal rights.

There are a variety of contracts and agreements commonly used in business. One of the most common types is the supply agreement which sets out the terms and conditions on which the business may supply goods or services to its customers. A supply agreement may provide for the delivery obligations, payment terms, quality of goods or services, intellectual property, limitation of liability, indemnities, insurance, suspension and termination and the like.  The terms will vary depending on the needs of each party and the type of transaction.

When drafting contracts and agreements, the key terms must be comprehensively and concisely described to ensure that all parties understand their legal obligations and responsibilities. Often confidentiality and non-disclosure clauses may be included in any business agreement or separate confidentiality agreements may be drafted and may include provisions regarding the handling of confidential information, as well as damages and losses for any breaches.

Other contracts a business may be required to consider include, leases (property and equipment), employment contracts, licensing agreements, partnership agreement, franchise agreements, distributorship agreements, funding and finance agreements, shareholders agreements (for companies only), and transport agreements.  The range of agreements required by any business will be determined by the type of business and transactions and the legal risks involved.

4. Employment Law

Employment law governs the relationship between employers and employees, with a focus on protecting the rights of workers and ensuring fair treatment in the workplace. In Australia, the employment relationship is governed primarily by the Fair Work Act 2009 (Cth), which establishes the minimum standards and regulations for employment.

The Fair Work Act has several key functions, including:

1. Establishing terms and conditions of employment;
2. Defining the rights and obligations of employees, employers and organisations;
3. Creating administrative bodies such as the Fair Work Commission and the Fair Work Ombudsman to manage the Act; and
4. Providing employees with a secure baseline of fair, relevant and enforceable minimum conditions and standards through the National Employment Standards (NES), Modern Awards and National Minimum Wage orders.

Other key laws include anti-discrimination laws and Workplace Health and Safety (WHS) regulations. Anti-discrimination laws, such as the Australian Human Rights Commission Act 1986 (Cth), prohibit discrimination based on factors such as age, gender, race and disability. WHS laws, such as the Work Health and Safety Act 2011 (NSW), aim to ensure a safe and healthy working environment for all employees.

When starting a new business, it is important to be familiar with all relevant employment laws. Non-compliance with government regulations can result in legal action, fines and damage to your business’s reputation.

To ensure compliance with employment laws, businesses should create an employee handbook and other policies that outline the company’s expectations and procedures related to employment. The employee handbook should include information on topics such as the company’s mission statement, employee benefits, code of conduct and grievance procedures. It should also include information on legal requirements. Other policies that may be necessary include policies related to harassment, bullying and leave entitlements.

5. Regulatory Compliance

Regulatory compliance refers to the process of ensuring that businesses comply with relevant laws, regulations and standards. Understanding and complying with regulations is important for businesses as non-compliance can result in legal action, fines and reputational damage. Compliance also helps businesses to maintain a positive relationship with customers, clients, employees and regulatory authorities and can contribute to the overall success of the business.

Your business may need to comply with a variety of regulations depending on which laws apply to your industry and operations. Some key regulations that your business may need to comply with include corporations law,  competition and consumer laws, privacy laws and environmental regulations.

The Corporations Act 2001 (Cth) provides for the proper operation and conduct of companies, directors and shareholders and includes such sections as directors’ duties and insolvent trading requirements.

The Competition and Consumer Act 2010 (Cth) includes the Australian Consumer Law (at Schedule 2) which provides for any business’s obligations to its customers including the quality of goods and services and accurate communication with its customers.  The Competition and Consumer Act 2010 (Cth) also regulates business conduct and prohibits various forms of anti-competitive behaviour such as predatory pricing and collusive conduct.

Privacy laws, such as the Australian Privacy Principles outlined in the Privacy Act 1988, require businesses to protect the personal information of their customers and employees.

Environmental regulations aim to protect the environment by setting standards for emissions, waste disposal and resource use.

It is important for businesses to obtain expert legal advice in relation to the above matters prior to commencing to operate and establish any new business. The lawyers at Brander Smith McKnight have extensive experience in advising medium to large businesses including major multinational corporations.

Setting up a business is an exciting undertaking, but it also comes with legal challenges that you must be aware of ahead of time. Our key tips are to:

1. Choose the right business structure for you and register with the appropriate government agencies
2. Register your intellectual property
3. Have written contracts and agreements in place
4. Comply with employment laws
5. Comply with regulatory requirements

By understanding and addressing these legal considerations, you can mitigate legal risks and allow your business to flourish.