Setting Up Your Business
Issues to Consider

Setting up your own business is an important project both personally, legally and emotionally.

There is much to do, learn and make decisions about. The structure of your business, and the cost of establishing it, are vital. It is preferable that you obtain advice from your professional advisers (lawyer accountant and financial adviser) banker and others before taking those first steps. They can give you invaluable assistance in your new venture and their advice may even save you money in the future. This article sets out some of the issues to consider in establishing your business.

STRUCTURE

A business can be acquired by purchasing an existing business or setting one up yourself. You need to balance the cost of acquiring a business (and what you get for your money) with the cost of starting 'from scratch'.

Your business can be operated using various structures. The one you choose will depend on your needs and the cost of each option.

Sole Trader
This is where you personally own and operate your business. Therefore, your income and expenses are dealt with as part of your personal tax position. You are personally responsible and liable for the business and it's debts. Any net profit belongs to you.

Partnership
You can operate a business in partnership with one or more others. You and your partners are all personally liable for all debts and responsibilities of the business. If one partner will not or cannot pay his share of a partnership cost then the other partners must do so and then look to him for his share. A partnership arrangement exposes your own personal assets to any partnership liabilities.

The partnership arrangement (as with any business arrangement) should be documented (see below).

Company
A company can be operated by you alone or with other parties (shareholder(s)).

Single Director/Shareholder Company
The law now allows a sole trader to operate his business using a company where he is the only director, secretary and shareholder of the company. An existing company can be converted to such a structure or a new company can be incorporated with this structure. There are a number of issues relevant to such companies which should be carefully considered before this option is taken.

DOCUMENTATION

Any business arrangement should be detailed in writing so the partners or shareholders know what is expected of them including what they must do, what money they must pay, what happens if the business requires money to operate, borrowing money, expanding the business, selling all or part of the business, bringing in new partners or shareholders etc.

Business relationships are like marriages. The successful ones are operated by good communication, having good systems and procedures in place and properly documented, ensuring that documents between the company and it's shareholders, directors and employees are in place, keeping company records up to date and filed as necessary including with the Australian Taxation Office and the Australian Securities and Investments Commission, regularly reviewing policies and procedures and business plans.

TRUSTS

There are different types of Trusts including those set up under Wills. Those most likely to affect a business are:

Discretionary (Family) Trust - this is usually established for the benefit of family and it's members. It allows the Trustee discretion as to the distribution of both income and capital, to beneficiaries who can be both specified and general. General beneficiaries are usually related to the specified beneficiaries.

Unit Trust - this is usually established where a business or joint venture is for the benefit of various parties of business partners rather than family members. It has flexibility in that the unit holders entitled to the benefit of the trust's assets can be altered. A unit holder holds units in the trust which can be sold in a manner similar to shares in a company. Income and capital are distributed to unit holders in accordance with the number of units they hold.

INDUSTRY REQUIREMENTS

In operating a business, it is important to ensure that you are aware of any industry and general requirements affecting your business. These include operating a safe work place, payments to employees, holding appropriate licences. Obviously different industries will have different requirements. Appropriate industry bodies can be helpful in keeping you informed of what is required.

GENERAL LEGAL REQUIREMENTS

Documentation is important to evidence the practices, procedures and conduct of your business. It also governs relationships of parties involved in the business (employees, directors, shareholders, suppliers, contractors, customers etc). If these are clear, negotiated and communicated, the risk of difficulties arising is substantially reduced.

Any material which must be filed with the Australian Securities and Investment Commission (ASIC) and (in the case of Public Companies) the Australian Stock Exchange should also be understood and attended to.

ACCOUNTING MATTERS

Relevant financial records must be kept for the company. A lender is likely to require that information on an ongoing basis where your business has borrowed funds.

Tax returns must be filed with the Australian Taxation Office on an annual basis. If you operate as a company, an Annual Return must be filed with ASIC. If you are registered for GST then Business Activity Statements (BAS) must be lodged monthly or quarterly.

OTHER MATTERS

Premises - you may operate from premises that you own or lease. If leased, then an appropriate lease with your landlord should be in place so that your rights and obligations are clearly understood.

Funding - where your business borrows funds from a lender, that lender will require loan documentation to be put in place and will also require a regular review of your financial position and information in the context of that funding.

Personnel - when personnel are engaged, you should consider whether they are employees or contractors. This affects your rights and obligations concerning payment of wages and salary, other employee entitlements, workcover, superannuation, taxation etc. Such arrangements should be properly documented and understood by you and your personnel.

Insurance – there are many types of insurance which you may need or should have in relation to your business. These include building, contents, stock, income protection, business expenses protection, trauma, life, public liability, product liability and professional indemnity insurance

CONCLUSION

It is important to obtain legal financial and accounting advice on the structure and implications of starting up a business whether you are buying an existing business or setting one up.

If you would like further information on the rights and obligations of directors and officers, basic requirements for operating your business, single director/shareholder companies, intellectual property or buying and selling a business, we can provide you with articles on these topics.

Personal planning is also important is properly setting up a business. This includes making a will, having powers of attorney (enduring (financial) and medical), having appropriate superannuation, income protection insurance, business expenses protection, workcover, and considering future issues like requirements for working capital, equity, expansion or sale of the business. If you would like an article on preparation of Wills and or Powers of Attorney , please let us know.

We are happy to work with you and your other professional advisers to have your business and personal matters proceed as smoothly as possible.

 

DISCLAIMER
This article is general in nature and for information only. It should not be acted upon without obtaining specific legal advice.

 

©Anne Hodgson & Co Lawyers,
Tel: 03 9578 7444 Fax: 03 8677 2962 Email: info@hodgsonco.com.au