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Starting a Business?

Starting a business is simultaneously an exciting and daunting prospect. With so much potential for growth and success in the future, many people do not think about the practical legal concerns today. We have outlined below some matters that should be considered. 

Fidelity Legal can assist and advise clients starting new businesses on the appropriate structure and processes involved in running a business. This includes advice pertaining to:
  • The ideal lease for your situation
  • The legislative considerations of a franchise
  • Optimal business structure for your venture
  • Applicable government fees and costs
  • Pre-existing contracts and entitlements
  • Appropriate business insurance

Going into business?

The following is a summary of some matters you may wish to consider

What business structure should I use?
There are several forms of business structure, each having its own legal, accounting and tax requirements. The form of organisation of a business determines many things, including how tax is paid and how profits are disbursed, and it should be geared to help you achieve maximum benefits.

The types of structure you may wish to discuss with us include:
  • Sole trader: With this structure you intend to conduct your business on your own or with employees but no joint owner. As a sole trader you are responsible for all debts and may have to mortgage or sell your personal assets to pay the debts of your business.
  • Partnership: Up to 20 people may form a business partnership. A larger number is possible for some professions, such as accountants. If no formal partnership agreement exists, partners are deemed by law to be equal owners. Liability for all debts may fall on any of the partners jointly and severally – if one absconds or dies the others may be left with the liabilities.
  • Limited liability company: If you form a company, the shareholders have limited liability; you may also become an employee and a director with certain duties, liabilities and strict responsibilities set out in the Corporations Act. Companies are subject to their own tax, record-keeping and reporting obligations.
  • Trusts: Trusts are not legal entities themselves but a layer of legal and equitable obligations which overlay the legal entity which is chosen. The different forms of trust and the impacts of choosing a trust structure to hold investment assets, or to own or operate a business involve a detailed assessment of your financial position and your short-term and longer-term goals.   
  • Incorporated Association, Co-operative: We can advise you of the appropriateness of these less common structures to meet your goals.
How important is my lease?
The location of your business is often vital to its success and you must ensure that your lease is properly drawn up so that you do not have to move or change some important aspect of your operations. Before moving into leased premises obtain a copy of any proposed or existing lease and discuss with us the key clauses in it and their implications.

Remember that your occupancy may be subject to the NSW Retail Leases Act 1994 and the conditions under which you occupy the premises must be contained in the lease you sign. It ought to allow you to make any alterations necessary to your business and, if the business is in a shopping centre, there are additional considerations. An important matter to be considered and built into any business plan is the existence of restrictions or requirements relating to hours of access or methods of carrying on business.

Most leases make the lessee responsible for keeping the premises and fittings in good repair and many require you to pay all or a proportion of costs such as rates, maintenance and so on. Such provisions need to be clearly stated so that you can budget for the expense. You need to understand whether the rent may vary annually or otherwise according to a fixed percentage increase or some formula such as the consumer price index or the turnover.

The lease will normally describe the only business permitted on the property and is usually interpreted strictly; this could restrict you from diversifying and make it difficult for you to sell the business. It must be clearly worded with the future development of your business in mind.

How is a franchise set up?
Franchising is a type of business ownership which allows an individual, partnership or company to operate an independent business under the banner of an already established brand and using market-tested systems. Before entering into a franchise you should check the reputation, track record, and financial stability of the franchisor very carefully. Matters such as the franchisor’s advertising budget and availability of back-up services may have an impact on the success or otherwise of the franchise.

The fees payable to the franchisor must be checked, along with the terms of sale for goods supplied by the franchisor – you will need to know if you can purchase stock from outside the franchise network.

A franchise agreement is a written document outlining the rights and obligations of both the franchisor and the franchisee. It is a binding contract and careful attention should be given to its contents – ultimately it contains the rules and regulations upon which your future income and security will depend.  

The franchisor must give you a ‘Disclosure Document’ and a copy of the Franchising Code of Conduct and allow you at least 14 days to consider them before signing.

What do I get when I pay for goodwill?
Goodwill is a way of describing and valuing the tendency of customers to return to a business. Repeat business as an element of turnover is a valuable asset of a business for which a vendor will expect to receive payment. It arises for a variety of reasons, for example, the location of the premises, the quality of the products sold, the performance of the staff, the absence of competition, etc. It is generally reflected in earning capacity but can be destroyed quickly by changes over which the owner has no control, for example, zoning, widening of roads or cancellation of a supply agreement.

Are there any Government fees to pay?
Often there are certain permits, multi-purpose licences and certificates you are required to have in order to carry on business legally, for example, a council licence which takes account of Department of Health regulations, a factory registration certificate, tobacco retailer’s licence, trade waste agreement or liquor licence. In many cases these are not transferable by the seller and a new permit or licence must be obtained by you and a new fee paid. In most cases NSW Government transfer duty will be payable by the purchaser.

What sort of insurance will I need?
Usually, the only business insurance you are required by law to carry is workers compensation, though landlords and franchisors may also require you to have certain insurances. The rest is up to you, but you would be unwise to neglect to cover such obvious risks as fire, burglary, public liability, personal disability and loss of profits.

There are many other types of insurance which might be appropriate for your business and these should be discussed with us as part of our impartial assessment of the business.

How does my sale or purchase affect staff entitlements?
It is important that the purchaser of a business knows what accrued staff entitlements it will be responsible for after acquisition, for example, long service leave, sick pay or holidays. Provision for these obligations should be clearly agreed with the previous owner in negotiations before the sale.

The owner should be aware, too, of the effect of fringe benefits tax on any benefits given to valuable staff to induce them to stay on.

In many instances, staff are the most vital single asset when you buy a business, but it is difficult to prevent them from leaving. It can be important to many businesses to ensure that any staff who leave, or even the previous owner, do not set up in opposition using special knowledge or confidential information which has been gained from the business you bought.

Will the Government help me?
Some businesses are eligible for assistance from the Government of New South Wales. The Government also funds a comprehensive range of publications, audio-visual material and computer assistance available through Business Enterprise Centres in regional areas around the State.

[Adapted from material prepared for the Law Society of New South Wales]

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