So you are about to start a new business and you are looking to take steps against risk and liability. It’s essential business owners to put the right structures and protections in place to ensure their risk and liability are minimised – especially because these things are sometimes difficult to change later on. This article will give you a quick crash course in the essential legal elements of opening a business.
First off, you need to decide what structure you are going to use. This obviously varies from business to business, however in the vast majority of cases you should run your business through a proprietary company limited by shares (‘private company’). Incorporating a private company is relatively cheap and it means that none of your personal assets (eg, a house or car etc) are at risk of being snatched by creditors of the business. It’s also simple to manage and allows you to make use of a standard flat tax rate.
If you are running on extremely limited resources, if you have no personal assets at risk and if you are not expecting a whole lot of revenue or liability to start off, you can probably just get by with operating as a sole trader on an ABN. In some other rare situations, it may be appropriate to use a trust or a partnership for running the business. But in almost all ordinary cases, private company is the way to go.
Terms of Service
Whether you have a saas product, a Shopify store, an architecture firm or an online marketplace, you need to make sure that you minimise this risk against customers. Your terms of service basically set out the conditions on which you are willing to provide goods and services to your customers.
The key concept here is limiting liability and setting clear expectations. Key concepts of these agreements include:
- Clarifying payment terms and what happens with things like cancellations, return or refunds.
- The duration of the agreement and how each party may terminate the agreement. Always have an easy exit strategy!
- Disclaimers and limitations of liability. One of the most common causes of consumer claims is poor results or satisfaction with a product, so it is important to say you do not guarantee particular results or effectiveness of goods or services.
- Intellectual property clause which ensures any of your pre-existing IP is not transferred to the customer.
Many terms of service have the added benefit of clearly outlining the relationship between you and your customers. For example, a marketplace like Airtasker or Freelancer would state that it is merely a venue connecting buyers and sellers, meaning they can’t be sued in relation to any dispute between the parties.
This one is only important for businesses with multiple founders. The co-owners agreement is the pre-nup of a business relationship. Just like a romantic relationship, everything seems great and rosy when two business partners start out, but statistics shows that most of these relationships fall apart down the track. For this reason, it’s essential for pretty much all business partners to have this agreement.
The most common co-owner agreement is the shareholders agreement, which is used for private companies. Some of the benefits of a well-written shareholders agreement include:
- Reducing the total negative potential and expense of business-threatening disputes by clearly defining each party’s rights and obligations, and by setting a dispute resolution process;
- placing obligations on the shareholders towards each other to behave in good faith and to avoid conflicts of interest (for example, prohibiting them to set up a rival business or selling the IP to a third-party); and
- providing a framework for what happens when there is a sudden (and often unforeseen) change to the personal situation of a shareholder such as death, disability, insolvency or even just a lack of desire to continue working in the business.
Services or employment agreement
This one is important when your business has to rely on non-founders to provide key services, the most common example today being outsourcing tech development. If you plan on outsourcing development, or even just engaging a marketing or PR consultant, it is absolutely essential that you enter into a clear services agreement with them. This applies, albeit to a more limited extent, to inhouse employees if they are generating valuable IP.
This agreement will address issues such as:
- the specifications and expectations of what you will receive, when and for what price.
- A mechanism for you to inspect and then accept or reject a completed service or product
- A mechanism to handle variations to the scope – one of the most notorious areas of development and services agreements
- An exit strategy
- An intellectual property clause which ensure you will be the sole owner of all IP, with an indemnity in case of a breach
We cannot stress enough how important it is to have a proper services agreement with service providers. Experience shows that disputes occur very often due to misaligned expectations, and poor performance (or perceived poor performance). Investors also expect to see sufficient proof that all service providers have signed away all IP rights to your business prior to investing in it. Why would an investor invest in your cool new technology if you can’t even prove that you are the owner of it?
A trademark is essentially protection of a brand name. A person can obtain trademark protection for a phrase, logo, sound or even scent, so that others would not be able to use it. Apple have registered trademarks over the phrases “apple”, “iphone”, “ipod” and also the logo design of the apple. McDonalds has a registered trademark for its name, it’s logo design of the golden arches, and also some meal names such as “happy meal”.
In today’s world, brand is king. You should always take steps to ensure no one is trading with a similar name or logo to you. Trademark registrations are relatively cheap and easy to obtain, so every business starting up should consider obtaining one as soon as possible. A competitor with a similar name could seriously devalue your business, and a trademark dispute could end up costing in the hundreds of thousands.
This article summarised the basic protections that all new businesses should put in place before they commence trading. They protect you against 3 core areas of risk: internal risk from cofounders and staff, external risk from customers, and intellectual property. Business owners who skip out on the documents described above are essentially taking a risk in the same way that not insuring your business or car is a risk – you will be saving a relatively small amount of money in exchange for incurring a potentially ruinous cost if issues arise down the track.
Please remember this blog post is merely a general summary of law and should not be relied upon as legal advice. Any brand names used in this article were used as hypothetical examples only and are not factual.
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