Privatising for maximum protection
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The biggest decision many young, aspiring entrepreneurs faced when setting up the lemonade stand was whether to charge 5 or 10 cents a cup.
Sure you needed enough lemons, water and sugar but the dilemmas were few and business was even fun.
Setting up and running a business as an adult with a lot more riding on the outcome isn’t quite so simple. Locating suppliers, hiring staff and securing property not to mention whether the business will be selling shoes or surf boards or servicing cars or computers is just the beginning. The list of other obligations is lengthy but perhaps none are more important than the myriad of legal trade issues facing today’s business owners.
Once an entrepreneur has selected the type of business, how should it be structured? Is it best to work as a sole trader or establish a partnership, a private company or a public company?
Sole traders own and operate the business in their own name. As such, a sole trader takes on the full responsibility of the business’ actions, possibly also for its staff as well as the quality of products and services.
Operating as a sole trader is enticing: The profits don’t have to be shared with partners, employees or shareholders. There are no costs to establish the business and there’s a lot to be said for being your own boss. On the flip side, the owner is solely responsible for all liabilities, agreements with customers, contracts and yes, anything that goes wrong.
Partnerships, which typically materialise when individual entrepreneurs pool their resources to establish a business, enjoy similar benefits but accordingly, share similar liability.
The most practical way for a business owner to limit risk is to establish a private company.
Yes, there’s a cost (about $400 if you do it yourself) to go this route as well as ongoing compliance expenses but it’s a small price to pay for insulating the business owner from potentially devastating liability.
In contrast to sole traders and partnerships, private companies are considered separate entities from their owners. As a general rule, the owner’s personal assets are not exposed in the event of litigation. Companies, both private and public, are also taxed at the lower concessional rate of 30 per cent.
The decision to register as a private company would thus seem logical yet it’s one many business owners don’t consider. Why? Most are so entwined in the daily operations of their business, little thought goes into managing the firm.
Before any decision is made on the best structure for the business, consult with a solicitor, accountant, or business coach, or all three. Each can recommend the most effective vehicle for which to launch and operate a business as well as providing an invaluable, objective opinion on the best way to do it.
Once a business name has been selected and registered, an ABN obtained and business structure selected, focus on quality of product, intellectual property and truth in advertising.
In some cases trade practices law requires that goods sold to consumers must be of “merchantable quality.” That is, they’re required to satisfy a basic level of quality and performance based on the price and description of the product. Similarly, the goods must be suitable for the purpose that the buyer expressed to the seller when purchasing the product.
Getting consumers to that point involves promotion of some sort. That too is regulated by trade practices laws.
Some legislation prohibits any advertising that is misleading or deceptive in all forms of media – print, electronic, billboards, signs and brochures. The definition of such advertising is expansive and includes everything from claims based on a statistical survey that have been distorted to prices that don’t show additional charges the consumer must pay such as delivery.
The Australian Competition & Consumer Commission administers the Trade Practices Act, one of the main pieces of legislation that regulates businesses. Failing to comply can result in substantial penalties from the ACCC and private actions brought by consumers against the respective business.
Arguably, a business’ most valuable asset is its intellectual property (IP) or proprietary knowledge. In essence, it’s the business owner’s ideas which should be protected at all costs. Note: ideas in themselves are not easily protected. So some steps should be taken to turn ideas into protectable property. This is a highly technical area of the law and if you are in any doubt you should try and get advice regarding incorporating patents, applying trademarks and protecting copyright, for example.
Akin to intellectual property, information can be powerless without documentation. Every business owner should make it a priority for ideas, contracts or promises of service, delivery or pricing. Without a record, business owners are leaving themselves exposed to a host of potential problems.
By Gavin Dixon
Gavin Dixon is the CEO of Reckon Limited’s Business Division. Reckon is the supplier of QuickBooks accounting software.
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