Business Mistakes

How not to get off on the wrong foot in business

The proliferation of “free” legal information on the web, coupled with the rising costs of hiring a lawyer, mean that investors and businesses can sometimes be fooled into thinking they can do without paying for quality legal advice.  Set out below are five good reasons why consulting a lawyer upfront can save you money down the road.

1. Not getting adequate advice on how to structure your business

Depending on what you want to achieve in your business, how you intend to grow it, finance it, and ultimately exit, you will need to thoroughly consider an appropriate business structure – that will endure over the fully lifecycle of the business.

For example:

If you start your business as a sole trader, and later want to transfer the business into a company or a company acting as a trustee for a trust, there are likely to be significant stamp duty and CGT issues involved in that transfer.  It may be possible to mitigate these costs by selecting a more appropriate business structure from the outset.

Depending on your particular business, you will need to consider what is the best entity to own your equity in the business, taking into account asset protection issues, succession planning, administration costs, and taxation planning. Common business structures include, sole trader, partnership, joint venture, discretionary trust, unit trust, hybrid unit trust, company limited by shares, company limited by guarantee, or a combination of the above structures.

2. “Do-it-yourself documents, or buying documents from a “document manufacturer”

A common error that business’ make is to rely on management to negotiate and draft legal documents, or to acquire documents from a “document manufacturer”. This presents a number of dangers, including:

Management often do not have the time or expertise to know what the common and more subtle risks are when entering into an agreement;

While document manufacturers can provide a good service if reviewed by a suitable lawyer, the base documents may not be adequately customised to suit your business’ particular situation;

If you are relying on a document manufacturer, ensure that you know which lawyer drafted the base document that you are buying, and ensure that the document is adequate for the purpose that your business is using it for.

3. Relying on service providers who are not qualified to provide legal advice

When buying or selling a business, the purchaser or vendor may rely on a review of the documents by their accountant or financial planner. While the input of these professionals is essential, it does not extend to a review of the legal aspects of the documents. Furthermore, such persons are not insured to provide this service, and hence you will have only limited recourse in the event they miss something.

4. “And/or nominee” contracts

“And/or nominee contracts” are commonly used when the purchaser executes a Sale Contract.  If you are purchasing an asset under such a contract, then you should ensure that the entity that is eventually substituted as the nominee is established prior to the date of signing the contract, (although, the actual valid appointment of a nominee may differ from state to state). If this is not done properly, there can be “double stamp duty” issues on the purchase price or deposit. Firstly at the named purchaser level, and secondly at the nominee level.

5. Issuing equity in lieu of a salary to management or employees

It is common for businesses that are not “income rich” to issue equity (e.g. shares) in lieu of remuneration. The most common trap that occurs in this context is when the equity is issued at a “discount” to the market value of the shares.  Simply put, this may mean that the Tax Office will assess the allottee of the shares on the difference between the market value of the shares and the lower value they were issued at.

A business should get advice prior to when they intend to issue equity to employees, so as to mitigate the potential for an up-front tax liability to be triggered.

The information outlined above is not intended to be legal advice and has been provided for informative purposes only. If you think that after reading the above information that you need legal advice, please feel free to call us on 1300 654 590.

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Published by

Andrew

Lawyer to entrepreneurs and investors

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