Photo by RAWPIXEL on Unsplash
Legal issues for startups to keep in mind
STEPHEN ANNICCHIARICO
TECHNOLOGY & IP ASSOCIATE
1
Who is making the investment?
First and foremost, you need to work out who will be setting up the business….will it be you individually? If so, you may consider a sole trader, company or trust. If it’s more than just you, you might consider a partnership, a company or a trust. A quick comparison (with pros and cons of each is seen below).
Sole trader
One of the most simple business structures, a sole trader is easy and inexpensive to set up but involves you being legally responsible for all facets of the business.
General characteristics
- Day-to-day operation of the business is facilitated by you
- Tax returns can be lodged using your own tax file number
- Losses are capable of being offset against the income earned by your business
- Profits of the business are usually used to pay yourself
Pros
- Simple and inexpensive to set up and run
- Absolute control over the decision making of the business and assets
- Limited reporting and compliance requirements
- Generally simple to expand, or shut down
Cons
- Limited access to support or external advice, otherwise often accessed through business partners, VCs or experienced advisors
- Liable for the debts of the business, and your personal assets are at risk if you are unable to pay off such debts (limited asset protection)
- Significant responsibility and all business decisions are made by you
- Limited borrowing ability
- Such heightened responsibility may adversely affect your personal life (e.g. business may render you unable to take time off)
- Limited access to resources and capital
Partnership
A partnership is a simple and easy structure to set up and run that may involve anywhere between 2 and 20 people, of which, such parties are responsible for the day-to-day running of the business. The shared nature of resources and decision making reduces each partner’s individual responsibilities, but may lead to issues of conflict where interests of the partners do not align.
General characteristics
- Control and management of the business is shared between the partners
- Partnership doesn’t pay income tax on the income earned. You and each of your partners pay tax on the share of net partnership income you each receive from the partnership
- Partnership tax return to be lodged with ATO each year
- Partners are not employees of the partnership
- Must be registered for GST if annual income turnover is greater than $75k
- Requires an ABN and separate TFN
Pros
- Relatively easy and inexpensive to set up, and run
- Easy to understand
- Ability to exercise flexibility through partnership agreement
- Increased access to resources and capital (through various partners)
- Greater ability to borrow
- Shared responsibility
- Limited reporting and compliance requirements
- Generally simple to expand, or shut down
Cons
- Partners are jointly and severally liable (e.g. liable for other partners’ partnership debts)
- Risk of conflict between partners where interests do not align
- Limited asset protection
Company
Unlike a partnership or sole trader, a company is considered separate from its owners, with its own legal rights and responsibilities.
General characteristics
- Separate legal entity from owners
- Owners of the company each hold a certain share of the company (i.e. shareholders). The influence each shareholder has on the decision making of the company is dependent on the size of ownership in the company, subject to the company’s constitution and shareholder agreement (e.g. the greater the share held, the greater the influence the shareholder generally has on the decision making of the company)
- Business operations are controlled by directors of the company (usually appointed by shareholders with greater ownership interest in the company)
- Money from the business activities of the company is the property of the company
Pros
- Ownership in the company is generally simple and easy to effect (i.e. transfer, issue or sale of shares)
- Liabilities of a company do not pass to the owners (i.e. shareholders)
- Promotes external investment (e.g. cash investment in return for shares in the company)
- Taxation rates may be more desirable than other structures (i.e. 30% tax rate)
- External parties are generally comfortable with, or often prefer, dealing with a company
- Broader access to resources and borrowing
Cons
- Involves higher set up and running costs than other structures
- More difficult to wind up than other structures
- Limited privacy (e.g. shareholders of the company are publicly listed on the ASIC registers)
- Stricter compliance requirements and regulatory oversight (various compliance requirements set out in the Corporations Act 2001 (Cth))
- Directors may be personally liable where they do not adhere to their legal obligations (e.g. Directors Duties set out in the Corporations Act 2001 (Cth))
Trust
A trust is an investment vehicle that is operated by a trustee for the benefit of the beneficiaries (or in the case of a unit trust, the unit holders) of the trust. The trustee, which can be an individual, multiple individuals or a company, is charged with the responsibility of making decisions on behalf of the trust.
General characteristics
- Requires a formal deed that details how the trust operates
- Business is operated through the trust
- Assets and property of a business trading through a trust are the property of the trust, and are not owned by any one person or entity
- Income that arises from the business activities passes to the beneficiaries of the trust in accordance with the terms of the trust deed
Pros
- Asset protection
- Trustee has flexibility regarding distribution of income and capital
- Less regulation than companies
- The trust deed can be tailored to the needs of the beneficiaries
- Easier to wind up than a company
- Increased privacy (i.e. beneficiaries of the trust are not listed on any publicly accessible register)
- In the case of a unit trust, ownership of units in the unit trust is generally simple and easy to effect (i.e. transfer, issue or sale of units)
Cons
- Complexity (e.g. complying with the terms of the trust deed)
- Can be expensive to set up and operate
- External parties may not understand how the business operates
2
What’s the name of the business?
Once you have worked out the type of entity that will be running the business, you’ll need to work out what name your business will trade under. The process regarding the registration of the name of your business will vary depending on the type of entity you trade through:
Company
Where you’ve decided on registering a company, you don’t necessarily need a business name if the business name is the same as your company name ( ignoring “Pty Ltd” or “Ltd”). However, it’s always best practice to register a business name (especially given that it is quite affordable). In the first instance, you should register your company with any name you see fit (whether you decide to use a name that is the name of your business or not), before applying for an Australian Business Number (ABN). An ABN is simply a unique 11 digit number that identifies your business to the government and community (which is necessary to do business in Australia). Once you have applied for, and have been supplied with, an ABN, you will then be able to apply for a business name to be registered to your ABN. You can check whether your proposed company/business name is available here.
Sole trader or partnership
In the event you decide to operate as a sole trader or partnership (after registration) you would have been provided with an ABN. Once you’ve decided on an appropriate name for your business and you’ve checked that your proposed name is available at this link, you will be able to apply for a business name to be registered to your ABN.
Trust
Where you’re looking to trade through a trust, and you’ve finalised a trust deed which sets out the manner to which the trust will operate, you will be able to apply for an ABN. Once an ABN is supplied, you will be able to apply for a business name to be registered to your ABN.
In all of the above scenarios, it’s important to remember that a business name is never owned by you, your business or the entity that operates your business, it is merely registered to that party. For this reason, it is important to register a trade mark, as to own that name (for further information see this link).
3
Ensure your business' intellectual property rights are protected
After you’ve developed a product and you’re ready to go to market, it is essential you protect your:
Protect the name and logo of your business by registering a trade mark to ensure you own the rights and interest in the name and logo. A trade mark provides you with ownership rights (i.e. a proprietary interest) in the word(s) or logo(s) that have been registered with IP Australia (those that you have been using whilst carrying on business in Australia). For further information click here.
Register a:
- patent, for the purposes of protecting (and enforce your rights) over your business’ product or concept (whether that’s a substance, device, method or process); or
- design, for the purposes of protecting a unique specific design associated with your business’ product.
Make sure all intellectually property, that is related to the products or services of your business, is owned by the entity that operates your business. For example, where your business is operated by a company, certain parties involved in the company (i.e. directors or co-founders) may have previously developed the products (before the company was set up) that are now being sold by the business. Given that intellectual property can often be a business’ biggest asset (you don’t need to look further than Coca-Cola to know that, being approximately valued at $AU110 billion), it is essential the intellectual property related to your business’ products or services are the property of the entity that operates your business to (just to name a couple):
- ensure the business is exploiting their own rights, not another party’s rights, avoiding potential lawsuits; and
- maximise the value of the company; your company’s value will be worth a great deal more if it has the exclusive ownership rights to highly sought after intellectual property.
The above can be achieved by preparing a simple document that basically transfers all intellectual property rights to the company. Alternatively, you may rather prepare a document that acknowledges the rights associated with the intellectual property.
4
Get a digital presence
These days, it virtually goes without saying that you’ll be setting up a website at some stage, so when you inevitably set up your website, remember that it’s critical you:
Terms and conditions
Provide terms and conditions, and a privacy policy on your website (if you’re providing products or services to individuals based in Europe you will likely need to make sure your privacy policy is compliant with European privacy principles known as the GDPR)
Consent
Ensure your terms and conditions, and privacy policy have been expressly consented to in accordance with our recommended acceptance method (example here)
Ownership
Ensure all images, words and other information contained on your website are owned by your business or your business has been given the right to use such content, as to avoid any breaches of Copyright (further information seen here). This also applies to any content you use on your business’ social media pages.
5
When it's time to employ
