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What Happens When Business Founders Want to Split Up?

What Happens When Business Founders Want to Split Up?

What Happens When Business Founders Want to Split Up?

Business Break-ups Can be Messy!

Unless the founders had something clear in writing beforehand, there is no end to the variety of things that can happen when founders want to go separate ways.

If there is nothing in writing and the split is not amicable, all sorts of time consuming, distracting and stressful things can happen. 

Here are some of the worst-case scenarios we have seen in practice, all where there was nothing in writing to start:

1. A Founder Dies Unexpectedly  

Whilst tragic at a personal level, it can also be very difficult for a business where one of the founders passes unexpectedly. Sometimes the family is aware of their business involvement, and sometimes they are not. In this case the family wanted the company to buy out the deceased founder’s interest in the business immediately and had some unrealistic expectations of what that interest was worth. 

Animosity was growing between the parties due poor communications. We were able to present a strategy which allowed for the progressive buy out of the deceased founder over a two year period, without interference by the family in the business, and at an amount set by a ‘desk top’ valuation completed by the company’s accountant. The family of the deceased founder were offered the opportunity to get an independent valuation, but at their cost, and the $11,000 price tag put them off.

2. One Founder is Stealing Money from the Business, and Another Finds Out

Unfortunately, this is not an uncommon scenario. 

We’ve seen this occur in a variety of businesses from software to building and construction, and it is rarely pretty, and usually a long and slow process of separation if nothing was agreed in writing when the business was founded. 

Too many people think “we don’t need a shareholder agreement, we will be fine” when they are all excited about getting started, and then when things go wrong, they have no protection.  

In one example with a tech company, there were four sets of lawyers involved and the end result was a comprehensive deed of release covering the transfer of shares, forgiveness of debts, payment of money, and indemnities from the exiting partner. There were no admissions of liability in the deed. The deed took more than 15 months to negotiate and some shareholders meetings to approve decisions. 

As long as the negotiations remain between the parties and their lawyers, law enforcement need not be involved. There is nothing that legally requires you to incriminate yourself or anyone else in the business. When fraud or theft is discovered and reported, it is usually through a third party.

3. A Founder Walks Away Without Notice, Making Demands

Things happen in people’s lives (like death, illness, an amazing job offer etc), and they can suddenly want out. This can be very hard on the people who want to continue with the business and a shock if not contemplated before one partner leaves. Business break ups are often referred to as like going through a divorce by the people affected. 

Sometimes people want out, and they want their money, whether or not there is any owed to them at the time. Many people exiting a business think in terms of the future value of the business, rather than where it is as they exit, and vastly overestimate both what it is worth and the capacity of the other parties, or the business to pay for the exit. 

If shares are to be transferred to existing business partners, then those individuals need to have the money to purchase the shares at the agreed value. In a start up phase, this is likely to be $1 a share and not onerous, but if the business has been running for a while and has some value, the remaining shareholders might not have thousands of dollars required to purchase those shares.

If the shareholder is exiting and the company is making a distribution or buying back the shares (not a simple process) then there needs to be sufficient funds in the company to pay out the exiting party. 

As long as you have clarity around ownership of assets, intellectual property and a realistic value of the business, then its just a process to be undertaken when someone leaves suddenly. If there is nothing in place, then it is a process of negotiation and often heartache before a resolution can be agreed. 

4. A Shareholder Stops Contributing

 In situations where you have people with different skills coming together to build a business, not everyone necessarily has the same energy to keep the business on track. We’ve come across several businesses where a lot of effort was required of one party in the initial set up (for example someone building an App or a Website) and then their contribution become maintenance only. Another person in the business might be responsible for promotion, and there work is constant, requires review and reinvention, and never lets up. 

An example we have is a digital business where the person responsible for service delivery got fed up with the lack of interest of the developer who originally built the website for the business. Their ongoing contribution was minimal and yet their deductions from the business stayed the same and the service deliver person felt like they were working to support two families, without any recognition.  

Differing levels of effort over time could have been written into a shareholder agreement and appropriately dealt with, with the service delivery person gaining a greater interest in the distributions over time. Unfortunately, they had nothing documented. Fortunately, the exiting party, being the person who initially built the site, was prepared to accept an independent valuation of the business and to be paid out over six months rather than an immediate exit. 

In another tech company, the exiting person was someone who thought that they were indispensable to the business, but kept upsetting customers to the extent they left. Again, and independent valuation was agreed and they accepted payment over time, but the process of getting to that point took 4 months and was disruptive to the business.  

5. A Founding Partner no Longer Gets on with Anyone Else in the Business

This was a strange scenario and there was no shareholder agreement. One of the founders had moved into the position of CEO of the business but was no longer on speaking terms with anyone in the business, whether other founders or staff. There were six founders, four of whom no longer had any involvement in the day-to-day operations of the business, but all were looking for a financial exit. 

The company did have prospects, but a sale was not going to be possible whilst the CEO still had voting power to stop it.  There was not enough cash in the business to buy out the CEO without adversely affecting cashflow. 

Through a succession of negotiations including an independent business advisor, we were able to get the CEO’s agreement to retire and stop being involved in the day-to-day operations, as well as converting his shares to a preference share which would be paid first in the event of any declaration of dividends or sale. The preference share had no voting rights. Tax consequences for the business and the individual were also examined before the transaction went through. 

Business operations were a lot smoother without the former CEO’s involvement and a sale was achieved within 12 months, with all founders getting paid. 

It is always easier to think through future scenarios and what is fair when everyone is excited about the business and getting started, and still friends. It is significantly harder, and more costly, to attempt to resolve an acrimonious split a couple of years down the track. 

We provide clients with questionnaires to help identify potential needs in the business, and how people might exit to get you thinking about what might become important when you get started, whether setting up a joint venture or a shareholder or unitholder situation. There a lots of options available.

How can Onyx Legal help you?

If you are or plan to go into business with someone else and you’d like to secure the future of your business, make an appointment with us to talk through your options. 

How to Complete a Quick Legal Audit of Your Business

How to Complete a Quick Legal Audit of Your Business

How to Complete a Quick Legal Audit of Your Business

Running your own business can be a juggle. So how do you know if you are putting yourself at risk? Consider doing a quick legal audit of your business to find out whether there are any potential cracks that you may need to fix.

We’re going to focus on structure, relationships and risk management.

Start with your Business Structure

When was the last time you thought about what business structure you have and if it still works for you?

Many people start small businesses as sole traders and continue that way until something bad happens, like a threat of court action or an unexpectedly large tax bill. Other people set up multiple companies or trusts and then lose track of them. Some people change the style of delivery of their business and then need to review how everything is done.

Some recent examples for our clients have been:

  • A client selling a business discovered that the business trade mark was registered to a company they had forgotten about. They had moved and hadn’t updated their contact details with the company register. The company had ‘strike- off action in progress’ recorded against it in the register. The quick fix there was to pay outstanding invoices to the register and update contact details.
  • Another client set up a second company in the US and separated its business delivery by area, some under its Australian company and some under the US company. Customers are now able to choose their area before checkout. Taxes had to be accounted for in each different country and in Australia that meant the invoicing had to identify the Australian company and the GST paid, which initially it didn’t. A few technical tweaks in the delivery software fixed the problem.
  • A couple started a business as a hobby as a sole trader under the name of one of them. Twelve months later they came to us asking about asset protection. Initially, it appeared that the structure didn’t need to change because they hadn’t really started generating any income. A little further in the conversation disclosed that one of the partners held shares, an investment property and crypto-currency in their own name and it became clear that a different structure was needed to isolate those assets from any potential risks in the business.

Audit questions for you

  1. What legal structure do I use for my business? Can I find the documentation?
  2. When was the last time I reviewed that structure?
  3. Are my business contact details up to date with all regulators?
  4. Do I know my business identification number (in Australia it is an ABN)?
  5. Are my invoices correctly set out for compliance purposes?

Then Think About All Your Business Relationships

Mind mapping might help you identify all the different types of business relationships you have. Think about your business from the inside out, starting with you and ending with the general public.

You might have relationships with some or all of the following groups:

  • Business partners
  • Investors
  • Employees
  • Contractors
  • Suppliers
  • Affiliates
  • Sponsors
  • Advertisers
  • Joint venture partners
  • Clients
  • Customers
  • Subscribers
  • General public

Each different relationship potentially has different risks, obligations and responsibilities, and those things are much easier to keep track of if they are documented.

Lots of people who come to us have operated their businesses on verbal agreements or exchanges of emails successfully for years. There is nothing wrong with that, but if something goes wrong, your options are likely to be more limited than if you had a written agreement to refer back to when resolving the problem.

Most people can’t remember what they did a week ago. Don’t expect to be able to remember exactly what was agreed with someone months or years ago.

Some recent examples for our clients have been:

  • A business break-up. The parties had not documented their relationship or what would happen if the business came to an end. They had a meeting with their accountant to agree on how to close the business, but then one party decided not to follow that plan, and it hadn’t been documented and agreed in writing on the day, so became a dispute. The simple fix would have been to have a shareholder agreement in place within a short time before or after starting their business, whilst relationships were still good, and the parties were able to speak sensibly and logically to each other.
  • Another client had been operating their business without any hassles for years. The nature of their business meant that there was always a sponsor between them and their end customer. For the first time, a sponsor acted as gatekeeper and stopped the supply of products from our client to the end customer based on their assessment of the quality of the product. Each product was developed by our client’s labour, unique to the client, and our client could not be paid if the products were never put in front of their clients. Difficult situation. We prepare terms and conditions of service between our client and their sponsors to ensure that sponsors who behaved in that way would have to pay our client and amount equivalent to their lost income.

Consider whether you have anything in writing to help you manage all of the relationships in your business. Some examples are as follows:

Business Partners

A business partnership works well when both parties are on the ‘same page’. A clear and transparent agreement will help you quickly resolve any potential issues in the future, regardless of the structure you are using to operate.

Business relationships will be covered to a limited extent in founding documents, like constitutions or trust deeds, but those documents are designed more for setting out the rules of governance of an entity, than managing the relationships of the people involved. For older businesses, governing documents might be completely outdated and no longer compliant with changes in law.

Types of documents you may already have in place or like to have in place could include a partnership agreement, or a shareholder’s agreement, or a unitholders agreement. If you’re working with someone on a side gig, you might need a contractor’s agreement or a joint venture agreement.

Employees

Whenever you employ someone, you will have certain information you need to collect and compliance obligations you need to meet, before even considering whether you want to create company policies to help guide your workers.

Consider the following:

  • notices required under regulation (in Australia we are required to give a Fair Work Information Statement to employees before they start work)
  • information that needs to be securely collected and protected, like tax information
  • an employment agreement
  • a position description
  • health and safety information
  • company policies – social media policies and work from home have been important recently

Also think about any insurances you are legally required to have in place for your employees, in Australia that will be Workcover insurance.

Contractors

Engaging a contractor without a written agreement is not an ideal position to be in if something goes wrong. Even if you have a written agreement, sometimes it isn’t sufficiently clear.

The biggest issue we’ve managed for clients when contractor agreements have gone wrong is clearly identifying the required deliverables and whether they were met or not.

If you engage a contractor on their terms and cannot measure what was to be delivered by the end of the month before you pay them, then don’t be surprised if you don’t get what you expected. Be clear before you engage a contractor what you want them to deliver, and if you can’t, at least have the ability to set measurable results you expect on a weekly or monthly basis. If you don’t, make sure you can end the agreement at any time without penalty.

In some industries there are minimum legal requirements for contractor agreements which can include terms of payment including frequency.

Clients

Your clients are an integral part of your business, and it is essential that you have agreements in place with them appropriate to the type of business you operate.

There is an increasing level of awareness of what happens when you hand over personal information and an expectation that it should be protected. Platforms like Facebook and Google require advertisers to have a privacy policy before they can publish any adds. Most importantly, a privacy policy gives you the opportunity to show you clients how you care for their information. Do you have one? Is it on your website or otherwise easily available to your clients?

For online businesses, your agreements are usually contained in the terms and conditions you have published on your website or shopping cart.

If you’re delivering consulting, coaching, mentoring or similar services, you want something documented to ensure you get paid. We usually encourage an element of upfront payment for coaching or consulting services to ensure you don’t deliver services then have to chase to get paid.

Suppliers

If you have credit arrangements with any of your suppliers, you will be purchasing their goods or services under their contract terms. Often people don’t review those terms until they want to end the services and then check the terms to find out how to make that happen.

When was the last time you reviewed your supply agreements? Are you happy with your suppliers, and if not, have you told them? It is possible to change the terms of an agreement in writing between the parties, so that your business relationship can continue, but in a way you are satisfied with, rather than being an unhappy customer.

 

Audit questions for you

  1. Do we know where our founding/ governing documents the establish our business are kept? When did we last look at them?
  2. How many different business relationships do we have?
  3. Are those relationships documented in agreements?
  4. Do we know where our agreements and contracts are?
  5. Do we have written employment agreements or policies?
  6. Do we have a privacy policy on our website?
  7. Do we have a contract register so we know what agreements we have, with who, who on our team is responsible, when the agreements end and where they are?

Now Think About Your Risk Management

Have you thought about what the biggest risks might be for your business? COVID certainly surprised most people. Whilst some businesses were impacted by SARS and thought about adding in ‘pandemic’ as a risk factor in their risk management and business continuity, that was a very limited number of businesses. If you don’t stop occasionally and work out where the risks are to your business, you don’t give yourself the opportunity to lessen the potential impact on your business before they occur.

Even if you have a written business plan, and a written business continuity plan (a set of actions to be taken when events or circumstances have an adverse impact on the business), if you haven’t reviewed them for some time then they might not be relevant.

The key to risk management is thinking about what matters most in your business, how that might be threatened, and what you can put in place to reduce the impact of that potential threat happening.

A great example is considering cyber risk to your business and then having all staff complete training as a result. The training is a way of raising awareness of the potential problems and helping people understand what they can do to reduce the risk. 

If you have a business plan, that may help you identify the main areas of potential risk to your business. Consider –

  • Financials – processing payments; invoicing; paying employees, contractors, suppliers; tax changes; loss through theft or other means etc
  • People – what would happen if anyone in your team was gone for any reason?
  • Key Resources – physical, intellectual, human, network
  • Offering – competitors, changing environment, legal compliance
  • Key activities – what would impact your ability to deliver your product or service to your clients?

Once you’ve identified your risks, then consider the likely chance of it happening, and the likely impact, to calculate a risk score. Typically, businesses identify 4-5 levels of risk for likelihood and impact. So, the likelihood might be from ‘rare’ to ‘almost certain’ and the impact might be from ‘minor’ to ‘catastrophic’. For a large proportion of business, if they’d had the chance to do this exercise with knowledge that COVID was coming, would probably have assessed a pandemic as ‘rare’ and ‘catastrophic’. That may have given it a risk rating in the HIGH range and ensured that measures were in place (like the ability to work remotely) before COVID happened.

Hindsight is a wonderful thing.

 

Audit questions for you

  1. Have we ever considered risks to our business?
  2. Do we know whether we have compliance obligations in our industry?
  3. Do we understand risk management?
  4. Do we have a risk register?
  5. Do we have risk mitigation in place for identified risks?
  6. What insurances do we have in place?
  7. Have we scheduled staff training to help identify and manage risks?

Is it time for a refresh?

If you’ve read through the audit questions and think it sounds all to hard, consider the future of your business. If at any time you want to apply for finance, look for an investor or sell your business, all these things will need to be sorted out to get the best value.

If it seems overwhelming, consider working with us to help prioritise what is most important to support your future objectives, and then to work through the process with someone in your team to help you get organised and on top of everything.

Onyx Legal offers cost effective day rate services to help you get on top of big projects that support the future value of your business. Let us know if you’d like a hand with identifying and understanding your structure, contracts or risk management. Make an appointment now

How can Onyx Legal help you?

Book an appointment to talk with one of our team about your business structure and whether it is still the most appropriate structure for what you are doing and what you’d like to achieve.

The Right Business Structure to Protect Your Assets

The Right Business Structure to Protect Your Assets

The Right Business Structure to Protect Your Assets

Once you have made the decision to operate your own business, choosing the correct structure is the next step. Keep in mind that your business structure can change if your business grows in a direction that would suit a different structure. It makes sense to seek legal and financial advice before getting started, so you can tailor your business structure to your unique circumstances.

In Australia, your main options for establishing a business are:

  1. Sole trader
  2. Partnership
  3. Joint venture
  4. Company
  5. Trust

Getting a business name is not setting up a business, it is just registering a business name. We’ll discuss that a little more at the end, for clarity.

In deciding which option would best suit you and your business ideas, think about the following:

  • Your existing assets, income, tax and other ownership structures
  • The simplicity of the new structure and your initial set up costs
  • The type of business you would like to operate and the size of the business
  • The likelihood and speed of business growth and the requirements for investment
  • The tax impact upon the business and on you
  • The type of management and control levels required to operate successfully
  • The number of people involved in the management or ownership of the business
  • The degree of flexibility required to adapt as the business evolves and expands or moves in a new direction to first planned
  • The potential risk of the new structure failing and what impact that could have on you
  • The costs and ease of ending the business if it doesn’t turn out

Let’s have a look at potential business structures in light of the above factors.

1. Sole Trader

A sole trader is a very simple business structure and there are minimal set up costs involved for you as the business owner. You will need to register for an Australian Business Number (ABN) in your own name.

If trading under your own name eg. “Harper Lee Consulting” then you don’t need to register a business name. But if you want to trade under another name “Awesome Consulting” then you will need to register a business name. You are still the business, it just has a name that is not your name.

You will bear the responsibility over all of the business functions and will be completely personally liable for all of the debts that the business incurs.

If protection of your personal assets is important to you then this type of business structure might not be the most suitable for your needs. If you own a home or an investment property in your own name and someone sues the business, they are suing you and your property is on the line.

A sole trader business can have quite limited growth potential as it is heavily reliant on the owner and often can consume vast amounts of an owner’s time and resources. Even as a sole trader, you can employ other people, but the business is still intimately associated with you.

A sole trader business will pay tax at the personal tax rate applicable to the business owner.

It is relatively easy to end a sole trader business and cease trading, provided any debts of the business are paid in full.

A good example of a sole trader business could be a business consultant, a freelance writer, an at home hairdresser or a tradesman such as a painter.

2. Partnership

A partnership is similar to a sole trader, except it involves more than one owner. It trades under a registered business name and a partnership can comprise of owners with similar skills (eg. business brokers) or owners with complimentary skill-sets (eg. a graphic designer and a website developer).

Like sole trader businesses, partnerships are easy to establish. You simply register an ABN naming each of the partners in the application. It is also wise to have a partnership agreement prepared to protect the interests of everyone involved, while everyone is still friends and the business is working well. Partnership break ups without a written agreement are a bit like a divorce and can be messy and expensive.

Traditionally, law firms and accounting firms were structured as partnerships.

We’ve seen law firms dissolve without ever having had a partnership agreement and all the profits left in the business were spent on attempting to resolve disputes between the partners when it came to an end.

Partnerships are better for whole of business long term ventures between people. They are not really suited to short-term, part-time enterprises.  The number of partners can vary and can be comprised of individuals, or companies, or trusts.

Each owner pays tax at their own individual rates, depending on their share of the partnership profits. Partners don’t have to hold equal shares and can be split depending on the contributions of the partners. A partnership will require the agreement of all parties if the ownership structure or members are to change, and it is possible that a new ABN will be required if partners change.

When a partnership is working smoothly, it can be a great vehicle to operate a successful business. When a partnership is affected by personal differences between the owners, it can impact quite considerably on the successful business operation. Each partner is 100% liable for all the business debts and their own personal assets can be at risk if the partnership cannot repay its debts or taxes. This is the case even if the partner had nothing to do with incurring the debt in the first place.

We’ve seen partners in business lose their home because one of the other partners committed fraud through the partnership and went to jail, without being able to pay back the missing money. The people owed money were entitled to chase the other partners in the business to get paid, even though they knew nothing about the fraud.

3. Joint Venture

A joint venture is usually set up by a written joint venture agreement between the parties for a particular purpose or project. It is a good structure for operating a specific project instead of continuing indefinitely. It can vary how many entities are involved and can be comprised of individuals, or companies, or trusts.

It is best to seek legal advice before signing a joint venture agreement to ensure you understand your contribution to the venture, what happens when things change during the project and to ensure you are adequately protected if the joint venture is not successful.

A joint venture helps to grow your business through collaboration with other entities that have complementary skills or financial resources. The structure can vary depending on what you want to achieve, the governance type and obligations as well as the division of profits and losses to the parties. The agreement should also contain the process for disagreement or dispute resolution, if the parties’ relationships break down.

Each of the joint venture members are responsible for the profits, losses and costs involved in undertaking the joint venture project. The joint venture is a distinctly separate entity from the members other businesses and assets.

An example of a joint venture might be the combination of ride-share giant, Uber, with vehicle manufacturer, Volvo, for the purpose of producing driverless motor vehicles.

4. Company

A company is a separate legal entity to the business owners. It is a legal vehicle that can incur debts in its own name, can sue and be sued by other parties. It does not cease if an owner passes away but exists until it is wound up. The business owners are the shareholders and can often hold the position of director and secretary as well, particularly in a small business arrangement.

A director is responsible for the management and governance of the company and need not be a shareholder. A company secretary is responsible for ensuring that the reporting obligations of the company are met.

If you are considering setting up a company, you will need a company name, you will have to set up a governing structure with a constitution suitable to your business. The company must be registered with the Australian Securities and Investments Commission (ASIC) and will incur a yearly fee.

There are many complex parts to a company and essential for you to speak to your accountant or lawyer, or both, prior to setting up a company structure. It can have considerable set up costs compared to other entities and there are many legal obligations of the office-bearers. However, there are considerable benefits too.

It is an excellent vehicle to conduct business and ensure your personal assets, such as your home, are protected against legal action.

We had a client who, after audit, was required to repay some tax rebates received as R&D credits, together with penalties. The shareholders thought they had to sell their home to pay the company’s debt. They did not. The company remained responsible for its own debts and the shareholders got to keep their house.

Unless you give a personal guarantee for a business loan, then your private assets are protected. Since the company is a separate legal entity, it has a separate liability from the business owners. It can incur debts that are limited to the value of the company. If an aggrieved party sues the company for the outstanding debts, it is limited to the company itself and cannot sue the owners, unless they have given a personal guarantee, or fall within a category of liability where directors can be found personally liable – such as failing to pay superannuation.

There are other benefits with respect to taxation as well. The company pays tax at a company rate and can pay “fully franked” dividends to its shareholders, which can be very attractive to the business owners, depending on their individual circumstances.

Since November 2021 directors of companies (along with some other entities) now must be issued a Director Identification Number (DIN) which is issued by ASIC.

There are two types of companies – a privately owned company and a publicly owned company. So what is the difference between a private company and a public company in Australia?

4.1. Private Company

A private company is distinct from a public company because it is privately owned. It will often have “Pty Ltd” after its business name, and this means ‘proprietary limited’. This indicates it is privately owned, with limited liability.

A Pty Ltd or proprietary limited It is the most common structure for small businesses. It is incorporated, issues shares, will have a maximum of fifty shareholders, and each of the shareholders are not personally liable for the debts of the business. They will only be liable for any unpaid financial value of their shares. What this means if that if you purchase 10 x $1 shares but only pay the company $5 at that time of purchase, there will still be 50c owed against each of your 10 shares, and that must be paid if called by the company.

A private company is for protection of your personal assets. There are a large variety of share structuring options available, so it is definitely an option to discuss in greater depth with your accountant or lawyer.

4.2. Public Company

A public company is a company that can be listed on the stock exchange and is funded by investors, or a company to be limited by guarantee and operated as a charity or not-for-profit.

Not for profit means the members or shareholders are not entitled to a distribution of the profits of the business and the profits must be reinvested back into the business. In a for profit company, members or shareholders are entitled to receive a distribution of the profits if dividends are paid. Business is not sustainable if it does not generate a profit.

A public company often has “Ltd” or “limited” after its name to indicate that it has limited liability.

For profit public companies have a complex structure and are required to issue public documents when paying dividends or raising capital. Qantas is a public company. Any company you can purchase shares for on the Australian Stock Exchange is a public company.

A public company remains an option if you grow your business to the point where you would like to take it public and raise considerable share capital through a public offering.

A not-for-profit public company is an appropriate structure for a large charity.

5. Trusts

A trust can be an excellent asset protection structure, but you will need tailored legal and financial advice to correctly suit your personal circumstances. A trust is a vehicle that enables a trustee to act in the best interests and hold property or income for a particular purpose, for the benefit of the beneficiaries or trust members. The trustee can be an individual or a company.

Whilst there are many types of trusts available, there are two main types of trust used in small business. They are:

  1. Unit Trust
  2. Discretionary or Family Trust

The trust is set up with a formal trust deed that provides guidance on the way that the trust operates and the powers of the trustee.

There are other parties named in the trust deed – such as the settlor who won’t have any future involvement in the trust, but who is essential in its establishment.

Superannuation trusts are often established with limited investment categories, for example, an inability to invest in cryptocurrency.

The trustee is responsible for administering the trust. Provided that the trustee behaves appropriately, the trustee is usually entitled to be indemnified out of the trust fund for any liabilities incurred in association with the administration of the trust. If the trust is an individual trustee, their own personal assets can be at risk if the trustee is sued and a good reason to appoint a company as a trustee.

A trust may also be entitled to a 50% capital gains tax exemption, but a company is not. You should seek accounting advice when reviewing your tax obligations.

A discretionary trust is the most common structure in small business.

A unit trust is one of the most common structures for small property development. 

Unit trusts have certainty in proportionate interests, whereas a discretionary trust is variable depending upon the decisions of the trustee. Where a greater degree of certainty in financial dealings of trust property is required, the unit trust is more effective. Each unitholder of the trust holds a specified number of units and the trustee has no discretion to give unitholders distributions that are inconsistent with the rights of other unitholders. You can transfer a unit to another unitholder, just like shares in a company.

We normally recommend that people involved in a unit trust structure enter into a unitholder agreement, similar to a shareholder agreement, to better protect their interests.

How can Onyx Legal help you?

Book an appointment to talk with one of our team about your business structure and whether it is still the most appropriate structure for what you are doing and what you’d like to achieve.

Legal Issues for Startups

Legal Issues for Startups

Legal Issues for Startups

The key is to identify the legal issues that put your startup business at risk of irreparable destruction or overwhelming cost, and deal with those issues first.

 

What impacts your startup business most will depend on where you are, and where you want to get to in the immediate future. Prioritise, don’t try and do everything at once.

Someone with an idea they want to develop with have different concerns to someone with a prototype looking for investors, which will be different issues to someone who has an MVP, investors and is looking to build their team.

At Onyx Legal we’ve designed a curriculum for start-ups covering –

MODULE 1 for Startups – Developing an idea

This is all about protecting and valuing your intellectual property (IP).

Too many startups have great ideas and start developing them without understanding how to secure their IP. If you can’t show serious investors that you own the IP, you won’t get investment. Simple as that.

Can you image Microsoft paying $26b for LinkedIn if LinkedIn didn’t own the IP behind their systems? Probably not.

Understanding this legal topic can also help you identify the best tools and strategies for developing your business using other people’s IP.

MODULE 2 for Startups – Business structures

Your business structure is either going to give potential lender’s and investors confidence, or have them running for the hills. What your accountant might recommend for tax minimisation might not be the best structure for attracting an investor. So consider where you want to take your startup and what makes sense for you.

Understanding this legal topic will help you identify structures for investment, growth and diversification. We aim to give you the confidence to really ask questions of your advisers about what is best for your startup and challenge their recommendations to ensure you don’t waste heaps of time or money.

Trust structures might work really well for property investment, but might not be ideal for a tech startup.

MODULE 3 for Startups – Building a team

When you are bootstrapping an enterprise you might not have the ability to pay yourself, let alone anyone else. This legal topic will help you identify options for bringing new skills in to the team without losing your shirt.

Learn about the legal opportunities and pitfalls for employment, employee incentive schemes, sharing equity, contracting, outsourcing and joint ventures.

MODULE 4 for Startups – Protecting your business

Australia is a great part of the world, but probably not always the easiest place in the world to do business. There are loads of rules and you need to have an understanding of what is relevant to your startup or risk having it shut down as soon as you go out and start interacting with customers. There are easy steps you can take to protect your business if you know what questions to ask and where to find the answers.

Risk management is not a scary topic and it isn’t nearly as hard as many risk management systems try to make it. We can help you to work out the key areas of your business that need attention and how to measure and manage that effectively.

Insurance is only one part of risk management and not always the saving grace that some people expect.

MODULE 5 for Startups – Sales and Marketing

What you promise to your customers is no joke, and Apple recently found that out when the ACCC went after them for misleading representations about consumer guarantees. The ACCC can impose fines over $1m on company’s that don’t comply with consumer laws. It’s important to know how your startup will deal with customer enquiries and complaints to avoid having to deal with regulators like the ACCC.

Each module can be delivered as a fast and full on 60 min information only session, webinar (heads up) or a 120 min interactive workshop. Feedback has been that people get more practical understanding from the workshops, but we understand there may be time constraints.

If there was one other thing you’d like to know more about, what would it be? 

Advanced workshops include:

  • A practical guide to copyright, protecting yours and managing cease and desist letters – 90 min
  • What, when, why and how to apply for a trade mark – 60 min
  • Understanding property leases – 60 min

How can Onyx Legal help you?

If you’re starting out on your own, have a team or are even part of an accelerator program and interested in getting some plain English legal training, please use our contact form to make a booking. We like to start by arranging a chat to work out what fits best for your organisation.
How Governance Can Help an Organization Add Value

How Governance Can Help an Organization Add Value

How Governance Can Help an Organization Add Value

What is the purpose of corporate governance? 

What exactly is governance and why is it important?

Well, it’s not that complicated. It’s just the rules around doing business.

If you’re a registered company, there are certain reporting obligations that you have in order to protect the shareholders, the investors in your business. Good governance also helps to add value to your business so that when you’re looking at getting more investors on board or actually selling your business in the future, you can demonstrate why it’s worth what you say it’s worth.

An example here might be if you’ve got a startup and someone’s developed a piece of software. Now, that piece of software might have some value, and the person who created it might be entitled to receive some money from the business at some point in time once it’s making revenue.

Actually documenting the rights of the company and the developer shareholder are very important because if you’ve got an investor who wants to come into the company, or you’ve got someone who wants to buy the business, they need to know that the business owns that software and on what terms it owns it, because it can make a big difference to the valuation of the business. That is one of the first points of information around governance – ensuring that all the key players in the business understand the rules for the business.

There’s a lot of questions around what level of detail you need to have, but that’s a separate conversation. Typically, a company will have at least a constitution or replaceable rules, and a shareholder agreement governing the relationship between the shareholders. 

How can Onyx Legal help you?

If you would like to understand your business structure and how to bring in new people so that everyone is on the same page, contact us.