Starting a Business - Right Business Vehicle

Thursday July 9, 2015

This article was submitted by Greg D Ross, Partner, Eakin McCaffery Cox

To view the article on Greg D Ross' blog, please click here

I am often asked by people wanting to into business what they need.

So, I created a list of issues to think about, which I update every now and then. Not necessarily apt for all situations, but a good base which a few people have now used to ground their thinking.

If you are interested in starting up a business and, after reading this, have any questions, please feel free to contact me.

The Right Business Vehicle

One or more of sole trader / company / trust (unit or discretionary) / partnership:

• Keep it to simple tax effective structures adaptable for the future
• Problems raising money for a trust
• Research and development tax offsets
• Employee share schemes
• Structuring – Risk – tax and asset protection issues
• Company constitutions –start-up tailored – directors & control – advisory boards for risk management reasons – ownership of shares individual/family/trust
• Who owns the IP – the vehicle or is it licensed to the vehicle
• If you have an accountant, see what he or she says as they should know your asset position

Partnership/Shareholders Agreement

Profoundly important to get this right and flexible enough at the outset – need to have provisions for exit of one or more when things and/or personality clashes in the way:

• Board representation ratios/voting
• Board representation – ratios / voting rights / special resolutions/unanimous resolutions/ordinary majority decisions
• Vetting of new investors/participants
• Share classes
• valuation method
• Pre-emptive rights and valuation for share transfers and share allocations
• Put and call options / drag along / tag along rights
• Death / disability – buy-sell and insurance issues
• ADR and dealing with disputes

Funding Start-Up in Early Stages

Funding options: –

• Paying for it & giving equity – financial, ethical and legal issues
• Seed funding
• Grants– government – benefactors
• Australian Small Scale Offerings Bought
• Crowd equity funding, types of equity, hybrids

• Disclosure requirements
• +s & -s of convertible notes
• Practicalities of valuation, deletion and control
• Relevance to shareholders agreement/partnership
• What does your bank have to say?
Legal Issues
• What laws apply to the envisaged operation in addition to general business laws
• Opening it up – prospectus problems
• Sophisticated investor exemption
• Crowd funding problems and possibilities
• Relevance of financial services or other licences relevant to the operation;
• Privacy issues and security
• Any problems with existing employment bearing on issues (like IP)
• Anti-money laundering

Protecting the Startup Entity and Related IP

• Consider what IP types are relevant, who owns it, how is provided to the Startup entity, how is controlled and/or shared and commercialised
• IP laws to protect ideas as such
• Boundaries of different types of IP protection trademark, copyright, domain names, patents, confidentiality, registered designs types of protection
• Issues with trademarks (such as classes) what it can and can’t protect and where
• Search to see what is already registered
• Cost of IP protection particularly in overseas contexts – where to protect by registration
• Importance of NDAs
• Who owns the IP? The operating entity or the creators? Licensing and transfer issues including valuation
• How to protect software
• Cyber squatting trademark patent trolls
• Patents versus copyright
• Trade marks versus copyright
• Apps in context of legal protection of IP
• Options for contractual protection and their efficacy

What Contracts Does the Startup Business Need?

• Priority contracts
• Contract contents
• Dealing with privacy issues, particularly in online contexts and business records
• Agreements with customers T&cs inclusions and exclusions and IP protection
• Supplier agreements and procurement
• Which contracts and what things are needed when
• Containing costs
• Problems with exclusivity / restraint of trade

Research and Development Tax Offsets

• Tax issues
• Qualifying to refundable tax offset
• Other options
• What does required innovation mean?
• Employee/contractors and subcontractors

Employees and Contractors

• What’s the difference?
• Cost of staff
• Law sometimes sees contractors as staff
• Exposures to staff
• Contractor versus employee point of distinction and markers
• Status and role of original innovator founders
• Fair Work Act
• Workplace Health and Safety costs
• State Payroll Tax
• PAYG and Superannuation Guarantee liabilities
• Impact on IP ownership of employment arrangements
• Impact on IP ownership of “contractor” relationships and how to deal with it

Leaving the Start Up

• Provisions for departure of founders
• Newcomers and dilution
• Buyouts
• Trade sales and IPOs
• License IP when leaving whether to and whether practical
• Sale /licensing of business v sale of entity
• Continuation of some staff
• Restraint of trade issues on leaving
• Franchising

Employees Share and Option Plans

• Impact of new rules and laps of old rules
• Defining start-up
• Employees not contractors
• Timing and tax
• Effective share option structures
• Impact of an employee leaving

Legal, Tax and Accounting Advice, Stage by Stage

• Priorities
• Price
• Timing
• What and when – staging
• What are the stages and when do you have to start considering them
• Prioritising issues


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