Making the Right Decisions for Your Start-up

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Before commencing trade with your start-up, you need to consider a number of issues to make sure your start-up starts “right”. An essential consideration at this early stage is the legal business structuring of your start-up.

Making the decision between incorporating as a company, or simply trading as a sole trader under an ABN requires you to consider factors such as the relevant tax implications, liability risks and asset protection. These are all elements that many entering the start-up sphere feel uninformed to answer.

Making decisions on structuring without a working knowledge of these issues can lead to major headaches and potential liability down the track.

Some important considerations on structuring:

  • A common misconception is that creating a company protects directors from all liability, unlike a sole trader. However, there are certain exceptions to the limited liability rule, such as tax, superannuation obligations and work health and safety risks;
  • There are potential tax benefits whilst trading as a Company (or with a Trust) as opposed to a sole trader. These tax benefits may be able to apply to your start-up, and proper advice should be taken in this regard; and
  • While overseas investment is encouraged by the Federal Government, for companies there is still a requirement that at least one company director (for a local Australian Company) must reside in Australia. Additionally the need for Foreign Investment Review Board (FIRB) approval needs to be considered.

A helpful resource, entitled “Helping your clients understand business structures” has been published by the Australian Tax Office, which also links to a “Checklist: Key differences between sole traders and companies”, that may be of further assistance to you.

We also have prepared our own checklist for starting a small business in Australia which you may access here.

Registering the Company

After consideration and advice, if registering a company is your desired route, more is required than a company name. There are decisions to be made on:

  • Who the officeholders will be – director(s) and secretary (and ensuring the officeholders understand their obligations). Remember at least one director must reside in Australia.
  • Who the shareholders will be and what restrictions there may be on the admission of new shareholders. Is each shareholder to have a right to appoint a director? Standard documents do not achieve this. A Shareholders Agreement (in addition to the company Constitution) should also be considered. See our free checklist on Shareholders Agreements to see the types of issues they address.

These decisions and documents may also be able to protect you with an “exit strategy” should one director / shareholder want to exit. It is best to develop and agree to exit strategy when relationships are positive rather than strained.

Other legal documents

The following additional legal documents are usually required by start-ups:

  • Employment / Contractor Contracts
  • Terms & Conditions of Trade
  • Loan Agreements (for the provision of seed money often by shareholders or relatives of shareholders).

For many their venture is the culmination of a life’s dream or ambition; so beginning without assuring a solid foundation is unwise to the extreme.