Setting Up Your Business in Australia

Australia’s stable economic environment provides an excellent opportunity for those interested in setting up a business. There are many issues to consider, but the following highlights some of the major local issues which you should take into account before making any final decisions. Contact our Commercial Team for specific advice regarding your planned operations, and we can guide you through the process. We have helped with many start-ups over the years and will be able help you avoid some costly mistakes.

  • 1. Structuring your business

    There are different legal structures possible when setting up your business in Australia, with the best option involving balancing the cost, simplicity, legal risk and financial benefits.

    The Sole Trader model involves a single person running and owning the business in their own name. While it is the simplest from a compliance perspective as the business income is simply included in the sole trader’s personal tax return, it also involves the greatest risk. This is because a sole trader is personally responsible for the liabilities of the business. Their personal, non-business assets (for example, the family home) could be claimed by a creditor to satisfy the debts of the business. A sole trader also misses out on the potential financial and taxation benefits of structuring as a company or a trust.

    The Partnership model usually involves two or more individuals working in tandem to pursue a commercial enterprise. The benefits of running a partnership are that there is usually a lower level of compliance, and each partner’s share of the partnership income is included in their personal tax returns. Operating as a partnership attracts its own risks. One of these is the personal liability – as per a sole trader, partners may be personally liable for the debts of the partnership (though this can be mitigated by setting up a company to act on your behalf in the partnership). Each partner in a partnership is generally liable for the actions of the other partners, regardless of whether those actions were authorised. It is also vitally important that any partnership have a detailed partnership agreement, covering the rights and responsibilities of the partners.

    The Corporation model is more expensive to set up, and comes with more regulatory compliance obligations than either a sole trade or partnership, but is has significant benefits from a risk management perspective. It is usually the preferred model because a corporation is a separate legal entity, meaning that its liabilities are generally restricted to the corporation’s assets. As such, the shareholder’s and director’s personal assets (e.g. the family home or car) cannot be used to satisfy the corporation’s debts (though in certain circumstances directors can be personally liable, for example if they allow the corporation to trade while insolvent). Corporations can also be used in conjunction with trusts.

    The Trusts model – involves using legal entities, under which a trustee holds assets on behalf of the beneficiaries, usually under a trust agreement. They will generally be either a discretionary trust or a unit trust. Discretionary trusts are where the trustee may elect how to distribute the income of the trust to the beneficiaries. Unit Trusts are where the unit holders are generally entitled to a set percentage of the income of the trust. Trusts have many of the same risks and benefits as a corporation. A trust is treated as its own legal entity, so, once again, its liabilities are usually limited to the trust assets. Similarly, by setting up a corporate trustee, you are limiting the potential liability of the individuals involved in the trust (though, once again, individuals may be held responsible for their own wrongdoing). Other benefits of trusts are the flexibility they offer in relation to how income will be split between the beneficiaries.

    Trusts are often combined with a corporate business structure, whereby the trust holds the shares in the corporation running the relevant business.

    The decision as to which structure to use will involve balancing the various legal and financial issues, and we frequently liaise with our client’s financial advisers to find the best solution for our clients. Of course, even if you have already started trading under one of the above structures, it is possible to change to one of the others, if it turns out that you want to take advantage of any of the benefits described above. While doing so may result in capital gains or stamp duty issues, there are a number of rollover relief provisions in various taxation legislation, which may allow you to defer or avoid such expenses.

  • 2. Leasing a Commercial Premises – risks to be aware of

    While the location and configuration of a work premises will largely depend on your business’s needs, there are many issues which arise in all leases that need to be considered:

    Rent – the rent itself is a commercial consideration, however care is needed when negotiating the annual increases. Usually these will involve either a fixed percentage increase, or an increase by CPI (or, sometime, the greater of both options). While, in the current economic climate, our experience is that CPI increases result in lower rents than most fixed percentages, there is some benefit in knowing exactly how much your rent will increase over the term. It also means that you won’t have any surprises should CPI dramatically increase during the term. It is important to remember, your lease will generally last 3-5 years (not including an option period), and much can change in that time.

    Term – How long will you lease the premises for? You will need to consider potential future requirements, room for expansion and business revenue when making this determination. Remember, once you sign the lease you are generally bound for the full term, even if you want to leave early. While it is possible to surrender a lease, most landlords will require a significant surrender fee be paid. The risks of a set lease term can be mitigated by negotiating multiple option period. This means you may have a shorter initial term (e.g. 3 years) however you could have the right to renew the lease for one or more additional terms. This gives you the option of renewing the lease if everything is going well, or letting the option lapse, if business has taken a downturn, or if you need to upgrade to new premises.

    Outgoings – In addition to rent, many leases will require you to contribute to the landlord’s outgoings. The nature and extent of these will vary, however it is important (and a requirement of retail eases) to get an estimate of outgoings up front, so that you have some idea of your liability.

    Security – Almost all leases will require some form of security, generally in the nature of a cash bond or bank guarantee. They may also require a personal guarantee from the tenant’s directors. When acting for tenants, we always recommend refusing a personal guarantee, even if it means offering a larger cash bond/bank guarantee, as you will at least know that your personal assets are safe.

    Maintenance – Your lease will set out who is responsible for maintaining the premises. While many leases will place significant obligations on the tenant (in particular regarding the air-conditioning of the premises) it is important to ensure that your obligations do not require major repairs or replacement, unless you have caused damage to the premises. This is particularly important in multi-unit buildings, as you need to ensure you will not be responsible for the damage of other tenants.

    Alterations – Many tenants will need to make alterations to the premises, to appropriately meet their business needs. If this is required, the nature and extent of the alterations should be negotiated prior to entering the lease, so that the landlord can’t refuse your request, locking you into an inappropriate lease. It is also important to negotiate what will happen with the changes once the lease ends i.e. will you be required to reinstate the premises, or will the alterations remain in place.

    The general terms – It is important to have all terms of the lease reviewed, as there can often be serious ramifications for a tenant (particularly relating to liability, indemnities and the landlord’s right of access). These should be balanced to ensure both parties are appropriately protected.

    Another consideration will be whether the lease is a retail lease or not. Tenants under retail leases gain certain protections under the Retail Leases Act 1994, which can minimize some of the above risks.

  • 3. Hiring Employees

    There are strict laws in Australia regarding what arrangements you can make with employees, and how you can terminate employees if things do not work out.

    We can assist you with template employment contracts which comply with the Fair Work Act, but some specific issues to be aware of include:

    Hours of Work – employees can only be asked to work a maximum of 38 hours per week plus reasonable hours. It is important to be clear on what the reasonable circumstances will be that mean that employees can be asked to work beyond 38 hours

    Rates of Pay – there are minimum rates of pay in Australia, and you will need to be aware of the Award which applies to your workers, as this will set out how much you need to pay them, including any overtime or weekend rates.

    National Employment Standards (NES) – guarantee that employees will have access to annual leave, personal (sick) leave, and various other entitlements. A copy of the NES must be provided to new employees so that they are aware of all of these rights

    Termination and Redundancy – there are processes which must be followed when terminating an employee, including observing procedural fairness and paying the correct amounts to end the contract. As situations vary greatly, specialist advice is recommended in this area.

  • 4. Getting Ready to Trade

    All businesses will need to ensure they have appropriate agreements in place with their suppliers and business partners to ensure continuity of their business. Some of these will be relatively simple (phone, internet, electricity, etc), while some will be more involved.

    Insurance – appropriate insurance will often depend on the nature of the business, however all businesses should have public liability and workplace health and safety insurance in place. If you are providing goods or services, then is would be prudent to have product liability and/or professional indemnity insurance in place. It is vitally important to ensure that your business risks are appropriately covered. Many businesses make the mistake of assuming that standard, “off the shelf” insurance is sufficient, and do not realise that certain risks won’t be covered. They further make the mistake of not notifying their insurer if they take on additional risk, or are notified of a potential claim, in which circumstances they may be voiding their insurance without realizing it. Obtaining appropriate advice, either form your lawyers, or an insurance broker, is vital to ensure that your business is appropriately protected.

    Service Providers – Will you be outsourcing any aspects of your business (for example to an IT provider, or sub-contractor)?  If so, you must ensure that you have appropriate agreements in place and that they protect your interests. For example, if your services are provided by a sub-contractor, you must ensure that the sub-contractor’s liability reflects your liability to your client, to ensure you are not left covering any gap. Likewise, your sub-contractor has appropriate insurance in place, to avoid you bearing the cost if your sub-contractor has insufficient assets to meet any liability.

    Suppliers – Many Australian business rely on a supplier relationship, under which they obtain products from their supplier for wholesale or distribution. This relationship should be documented in a detailed distribution agreement, which should cover, at a minimum:

    1. Minimum term of the agreement;
    2. Supplier liability for product failures;
    3. Supply commitments;
    4. Limits on price increases;
    5. Guarantees as to product quality.

    The above represents just a portion of the matters which should be covered when getting ready to trade, and you should obtain both legal, financial and business advice as to what would be appropriate for your business.

  • 5. Be Aware of your ongoing responsibilities

    Finally, after establishing your business, it is important to be aware of your ongoing obligations. As always, these vary from business to business, as there are many laws in Australia that can be industry specific (for example the Franchising Code of Conduct, Home Building legislation in each state, the Therapeutic Goods Act, etc).

    Restrictions on anti-competitive behaviour – The Competition and Consumer Act imposes obligations on all businesses in Australia, restricting their ability to engage in anti-competitive behavior. Some of these include:

    1. Misuse of market power;
    2. Restrictions on setting minimum prices;
    3. Restrictions on exclusive dealing (e.g. requiring your customers to only purchase products from you) where such would result in a substantial lessening of competition; and
    4. Restrictions on collective bargaining (i.e. competitors agreeing to fix pricing).

    Obligations to the Public – All businesses in Australia are subject to restrictions on how they can interact with the public. This includes restrictions on engaging in misleading and deceptive conduct, and making certain false representations. There are also restrictions on including unfair terms in certain standard form consumer, or small business contracts. This can severely limit a business’s ability to absolve itself of liability and must be taken into account when drafting standard customer agreements.

    Consumer Guarantees – If you supply goods or services for less than $40,000 (or for more than $40,000 where they are for personal, domestic or household use) then you will likely be required to comply with the Consumer Guarantees under the Australian Consumer Law in relation to those goods or services. The Consumer Guarantees include requirements that:

    1. Goods are of acceptable quality (including that they are safe and durable);
    2. Goods will match their description; and
    3. Services will be provided with due care and skill.

    These guarantees cannot be contracted out of, and apply in addition to any product warranties you may give.

    Privacy Law – All businesses with an annual turnover of more than $3,000,000, as well as businesses which handle sensitive information, or trade in personal information, must comply with the Australian Privacy Principles, under the Privacy Act. These include obligations to:

    1. Have a publicly available privacy policy;
    2. Provide certain notifications to individuals when collecting their information;
    3. Only use personal information for the purpose for which it was collected; and
    4. Only use personal information for marketing purposes if certain conditions are met.

    The relevant laws for a business will depend on its particular business activities, making it vital that all businesses obtain detailed legal advice, as ignorance of the law is never an excuse.

Contact our Commercial Law team to help guide you through the above issues. We can take the stress out of handling all of these issues.