There are multiple factors that impact the success or failure of a startup.
In Australia, entrepreneurs are being put out of business by more than just underdeveloped planning and poor sales. The grim reality is that over 95% of new startups are destined to fail. Many of these are sunk by preventable legal pitfalls that new business owners did not foresee or did nothing to protect themselves against. When you have solid foundations in place to protect yourself and your business against unnecessary risk, you can devote your energy full time towards making your startup dream a success.
Below are some strategies to deal with avoidable legal issues in business early and effectively.
Have A Clear Ownership Structure
The common legal structures for businesses include sole trader, company, partnership and trust.
Choosing the right legal structure for your business from the outset is important as some structures provide protection against personal liability for debts and legal disputes. It also impacts your tax obligations and expenses and makes it easier to sell your business in the future, if you wish.
A Shareholders’ Agreement
Even if your partners are your parents or your best mates, a shareholders’ agreement is an important and necessary document that clearly sets out the rights and responsibilities of each shareholder in your company.
Without such an agreement in place, in the case of a legal dispute, it will be up to a court to decide the outcome.
There is no ‘one size fits all’ shareholders’ agreement. Each agreement must be drafted according to your unique set of circumstances and the outcome the shareholders wish to achieve in relation to shareholder funding or contributions, director appointments, how the company should be managed, dividends and financing, transfers of shares or an exit strategy.
Depending on how much of the company certain shareholders own, for example, the agreement may also stipulate that minority shareholders cannot be forced out of decision-making by majority shareholders.
You can start by downloading a basic shareholders’ agreement template and supplement basic clauses according to your needs by speaking with a legal professional.
A Commercial Lease You Understand
Commercial leases can be complex documents which spell out the rights and responsibilities of both landlord and tenant.
If you don’t understand the lease document, you could end up being liable for costs you didn’t anticipate such as utilities, repairs, taxes and the cost of documentation regarding the lease.
You may also have difficulty renewing the lease. Fighting a lease dispute can be expensive and losing such a dispute could mean that your company loses its space.
Make sure you fully understand the legal implications of your commercial lease agreement before signing.
Have Proper Warehouse Safety Equipment
If your business has warehouse space for storage, it is critical to have proper equipment and procedures in place that comply with Work Health and Safety legislation to protect your staff from preventable injuries.
Loads falling onto forklift operators and other workers account for a high percentage of Australian workplace injuries and fatalities. Forklift safety cages and large goods cages, for example, protect operators and everyone else working in the immediate area from physical injuries and protect your startup from potential workers compensation claims.
Mandatory Sexual Harassment & Bullying Education
No doubt you agree that this behaviour has no place in your workplace, but do your employees understand exactly what is defined as sexual harassment or bullying?
As a business owner, if you don’t dedicate the time and resources to train your employees in appropriate workplace conduct, you could leave yourself open to large fines for breaching workplace health and safety legislation. The resulting financial drain on your startup could quickly put you out of business.
Understand relevant legislation surrounding workplace health and safety, bullying and sexual harassment and have each employee complete the necessary compliance training.
Maintain Detailed Record Keeping
A commitment to detailed record keeping is necessary for many reasons including invoicing and accounts receivable, tax compliance and payroll.
If your company is not large enough to hire a full-time accountant or business manager, record keeping is a task that you can adequately perform yourself by using accounting and online bookkeeping software like Xero. If you don’t have time to maintain your own records, it is worthwhile contacting an accounting firm in your area.
Yes, outsourcing this work is an ongoing overhead expense, however, failure to keep accurate records can lead to serious problems for your business, the consequences of which can doom your startup before it starts.
Compliance With The Privacy Act
Depending on the nature of your business, you may be collecting data about current customers and potential customers.
As a business owner, it is critical that you comply with your obligations under the Australian Privacy Principles to avoid breaching the Privacy Act in the way that you collect, store, use and disclose private information about your customers.
Mishandling or misusing private information can lead to serious fines and penalties.
These are some of the main legal risks faced by Australian startup owners.
Understanding your rights and obligations, and building your business on a rock-solid platform, places you in a strong position to avoid any unforeseen obstacles that may impede your startup success.
What unanticipated difficulties have you encountered on your startup journey? Let us know in the comments below!