So, you’ve decided to build a startup—some pretty exciting stuff!
You’ve got a bunch of new ideas and expectations for how your new business will take off, but you might be skimming over one of the most important things to consider: your legals.
We know how exciting it is to get right into it. But, as in any business, there are a number of risks and obligations you need to be aware of when you’re starting up. If you don’t have the right agreements or contracts in place, your startup could potentially suffer.
The first 6 months are crucial for ensuring your startup’s future success. Here are some legal tips to keep in mind when you’re starting out, so that you’ll be building your business on a strong legal foundation.
Choosing The Right Business Structure For Your Startup
The first thing to think about is your business structure. Your structure will need to accommodate your business’ goals and your long term plan.
When choosing your business structure, it’s important to consider your:
- Anticipated business size
- Tax obligations
- Parties involved (e.g. do you have suppliers/manufacturers?)
- Liability and other general risks
Setting Up As A Sole Trader Or Partnership
These types of structures may be your first preference because they’re cheaper and easier to run than a larger company. Tax obligations are not as complex and, technically, you’re your own boss!
This all sounds quick and simple, but there are a few risks.
A sole trader or partnership structure has unlimited liability, which means you will be personally responsible for any business debts. As a startup, you may have relied on loans to get started. If you can’t repay these loans, you may be personally liable.
These risks can be pretty daunting, but you can limit your liability by having the right insurance and contracts in place (we’ll talk more about this shortly).
If your startup is on the larger side, a proprietary limited (Pty Ltd) company structure might be better suited for you.
Setting Up As A Pty Ltd Company
Generally, the more risks there are, the more protection you’ll need against liability. This is where a company structure comes in handy.
Under a company structure, your startup will be separate from you. If your business owes money, you won’t be personally liable—it will only come from the business.
Put simply, your company can owe money and be liable for any debts, which means you’re (personally) safe from that liability!
However, this stronger security is more expensive and can be more complex to manage from a legal perspective. So, it’s important to think carefully about which structure is best suited for your startup before you dive into your other legals.
Registering Your Company
Once you’ve decided on your structure, you’ll need to register your company.
If you’ve decided to adopt a sole trader or partnership structure, you’ll need to apply for an Australian Business Number (ABN), which you can do for free here.
Even though it might still be early in your startup journey, you’ll need to start sorting out the following things when registering your company:
- Your income tax
- Sending invoices
- Contracts with customers
- Tax File Number (TFN)
You’ll also need to register your business name. Keep in mind that this does not automatically give you exclusive use of that name; you’ll still need a trade mark so other people don’t use it (we’ll talk more about this shortly).
If you’ve chosen to set up a company, there are a number of things you’ll need to do before you get started:
- Appoint directors and shareholders (directors control the company and shareholders have ownership rights to it)
- Apply for an Australian Business Number (ABN)
- Take note of your ACN (once you register your company with ASIC, you’ll receive an Australian Company Number [ACN])
After you have registered your company, and given ASIC your details, it is your responsibility to ensure all the information is up to date.
Whenever you change your company’s details, you’ll need to inform ASIC of these changes. For example, if you’ve changed your business address, you’ll need to notify ASIC so they can update their records accordingly.
If you’re a startup founder, there’s no doubt that you’ve thought about how to raise capital. At the end of the day, you need to be able to fund your startup’s activities.
If you want your startup to survive its first few months, you’ll need to choose the right method of raising capital. Luckily, there are a few to choose from:
- Debt raise: You can borrow money from people or institutions and pay it back later. It’s generally good practice to have a Loan Agreement so you know what happens if no payment is made.
- Equity raise: You can also sell shares, and these investors get dividends and stock valuation in return. You can manage shareholder actions and disputes with a Shareholders Agreement or a Share Subscription Agreement.
Protecting Your Brand
Your brand is one of the most important parts of your startup’s success. In such a competitive environment, it’s important that you stand out. But what happens if other people use your brand’s name or logo?
Startups need to be aware of how they can protect their Intellectual Property (IP). Here are a few ways you can protect your brand.
- A Non-Disclosure Agreement (NDA) is a contract that protects your business’ sensitive information when you’re discussing it with other parties, usually during commercial discussions and negotiation. It’s a good way to protect your brand while you’re still in the planning stage.
- Trade Marks: Once you’ve finalised your brand ideas, you’ll need stronger ways to protect it. The best way to do this is to register a trade mark with IP Australia so you have exclusive use of your brand name, logo, slogan or even a scent!
- Copyright laws also have your back: They ensure that your original work isn’t stolen or used without permission. You don’t have to register copyright like you would with a trade mark. It’s also good practice to have Copyright Disclaimers where necessary (they let people know that it’s your IP and they can’t use it!).
- Pitch Deck Disclaimers let people know that the logos, slogans or any other form of IP in your pitch belongs to you. Put simply, it’s like a copyright disclaimer for your pitch.
Protecting your IP during your early business stages is critical to your survival. Sprintlaw has a team of experienced IP lawyers who can help you protect your brand.
Managing Your Relationships Well From The Start
Startups can’t thrive without the people that build them.
If you want to survive the first few months as a startup, you’ll need to make sure you’re managing your team well. Here are some starting points.
Managing Your Relationships With Co-Founders & Investors
If you want to attract potential investors, you need to show them that you and your co-founders are organised. This is where a Founders Term Sheet comes in handy.
The term sheet sets out how decisions will be made and essentially plans out the business’ future, so investors can be confident that you’re prepared for whatever happens. Generally, it’s not legally binding, so you’ll have more flexibility for when you later draft your Shareholders Agreement.
Managing Your Team
Employers have obligations to their employees (such as ensuring they receive minimum wage), but it’s always a good idea to have this in writing. Employment Contracts should address salary, leave, IP ownership, the nature of work to be done, Workplace Health and Safety and National Employment Standards. Some companies reward their employees and incentivise their performance by issuing them shares. This can be done through an Employee Share Option Plan or Employee Share Scheme. It might be an option worth exploring in your startup, as it can help to create a culture of loyalty.
If you’re hiring contractors (rather than employees), you’ll need a Contractor Agreement. Your obligations to contractors are different from those you owe to your employees, so this agreement will make this clear from the outset.
It’s important that you understand your obligations to your interns, too. If they are doing similar work to employees, they need to be paid accordingly. There are some exceptions (e.g. if you’re on vocational placement), so having an Internship Agreement will help both parties understand the details around payment, entitlements and the nature of the internship in general.
Managing Your Shareholders
If your company has more than one shareholder, a Shareholders Agreement should be in place. This legally binding document sets out dispute resolution and decision-making processes, and addresses what will happen if a shareholder leaves the company. You can read more about what’s included in a Shareholders Agreement here.
Managing Your Supplier Relationships
If you work closely with suppliers, you’ll also need a Supply Agreement. Like an employment contract, it will set out the roles and responsibilities of each party. However, it can also limit liability if something goes wrong with stock, payment and dispute resolution.
Protecting Yourself With The Right Insurance
We’ve spoken about the big risks, but what about some of the more basic, general risks—like breaking equipment or stolen property? This is when you should start thinking about insurance.
Workers Compensation is compulsory for Australian businesses, so your employees are covered for injuries or losses incurred at work. However, you should also think about public liability insurance. Most insurers offer business insurance as a package, so while you focus on your startup success, you’re also covered for any unexpected incidents.
Establishing Strong Terms & Conditions
No matter what kind of startup you are, it’s always a good idea to have Website Terms and Conditions in place. This will limit your liability for anything that goes wrong when someone is using your website. Similarly, you can have T&Cs for any service you provide to customers. This will essentially disclaim who is responsible for what, and sets out a potential resolution for any issues.
These sorts of contracts will ensure that your startup manages its risks well, so there’s plenty of room for success.
Navigating your first 6 months as a startup can be daunting, especially with all the risks and responsibilities involved. To ensure your startup remains resilient during unstable times, you can contact our team of lawyers for help.
If you need help with more than one area of your startup’s legal set up, consider becoming a member for unlimited phone consultations with our lawyers and discounts on our fixed-fee packages.
To talk through the best options for you, get in touch for a free consultation on 1800 730 617 or at email@example.com.
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