Six ‘danger zones’ where an accountant should involve a lawyer

Our business clients are facing increasing complexity and higher risks in almost every area of their business life. Navigating these waters requires a team of professionals who work well together, and serve the client’s bests interest as a cohesive group.

At the very least, every business owner needs a lawyer (of course!), an accountant, a financial adviser, an insurance broker, an IT specialist, a property adviser and a marketing professional. Some of these may be in-house, while others will work externally.  Depending on what the client does, they may also need other ‘domain’ experts, like surveyors, OH&S risk specialists, and patent attorneys.

Over the past 20 years we have developed a short list of six key ‘danger zones‘ where other professionals should definitely be involving the team’s legal practitioner:

1. Entity formation and operation

It’s very common for non-lawyers to set up ‘closely-held’ or ‘family owned’ business entities, such as proprietary limited companies and family trusts. This can seem like a simple ‘compliance’ activity. However, without proper governance documents (e.g. Constitutions, Trust Deeds, Partnership Agreements, Shareholder Agreements, Exit Deeds, etc), adopting these ‘off the shelf’ entities will set your client up for unforeseen grief down the road.

There are few things nastier or more expensive than an uncontrolled ‘business divorce’. The chaos that results from an unwanted ‘in-law’ inheriting an ownership interest in a family business can be equally destructive. A ‘legal entity’ does not automatically come with a well formulated regime for smooth operations and ownership changes. Your client needs good legal scaffolding put in place to meet these very common eventualities.

The same applies to how the day-to-day operation of the business activities is recorded, (or in many cases, not recorded). Your client needs a written record of key decisions in a legally-binding form, so they can be relied on when opinions differ down the track. This includes things like remuneration levels, asset contributions (and distributions), and loan terms.

2. Intellectual property

Registering a company does not mean your client then ‘owns’ the name or their associated logo. The same applies to registering an internet domain name. Prior to registering an entity, it is critical to do a ‘trade mark’ search as well as a general ‘Google’ search (keeping a copy of the results), to ensure the name and logo is not already registered or in general use. If you don’t do this, your client may end up having to change their name down the track when they become better known, and throw out all their expensive marketing material and associated client goodwill.

A client and their co-founders will usually undertake core conceptual work around the business concept prior to setting up the legal entity. It is critical that ownership of this work product is properly assigned to the legal entity, and not left in the individual names, (to be the subject of a nasty dispute down the track). It is equally important to ensure that any contractors engaged by your client have also agreed in writing to assign the intellectual property in their work-product to your client (and then your client’s entity).

3. Trading terms and other standard business contracts

All businesses need written trading terms on which they will deal with their customers. This should include a clear statement of the ‘scope’ of what they are supplying, what they are going to charge, when they will get paid, as well as a limit on the extent of warranties they are giving and the liability they are assuming. To ignore this aspect of business is completely irresponsible. Not only will this document limit your client’s liability, and ensure quicker payment on invoices, it will also ensure better relationships between your client and their customers. As your client’s business grows they will also need to adopt and apply an appropriate privacy policy.

4. Loan and other inter-entity documents

Quite often people just ignore inter-entity transactions, such as loans, leases, sales, services, and assets transfers. But there are many legal pitfalls in this area. To start with, not charging an arm’s length amount for the use of cash or assets between related entities can result in significant lost tax deductions in other entities. If one entity goes broke, an external administrator may come in and seek to enforce common law rights, which may cause other entities to fail, or otherwise protected assets to be lost. If there is a dispute with a business partner, or family member, then loans and entitlement may be called up, or leased assets withdrawn. If super funds are involved, then a failure to document the transactions may result in non-compliance.

Just having one party ‘minute’ the transaction does not create a ‘legal agreement’ between the entities that will be accepted by the Tax Man and other third parties. All the entities need to be formally involved. These transactions can be recorded quite easily, but you need to ensure the relevant terms are included to anticipate things that may eventuate down the track.

5. Employment matters

This area is turning into a true minefield. It’s getting harder and harder to create and maintain a functional workplace. It’s not a simple matter of adopting a ‘template’ employment contract. Such a document is useless without a consideration of things like:

  • The nature of the employment relationship, e.g. fixed term, maximum term, ongoing, part-time, casual, etc;
  • The National Employment Standards;
  • Any applicable Modern Award and associated levels and pay rates; and
  • Role descriptions and clear KPIs.

On top of this should be a suit of clear and relevant workplace policies and procedures.

Without all of these things in place, the chances of your client avoiding costly disputes, underpayment claims, and penalties, is zero.

6. Estate planning

There is no point in your client working hard to build up their wealth, only to unnecessarily lose a chunk of it when they die. The fundamental functions of a Will is to identify the people your client wants to be in charge of their affairs (including who will be the guardian of their minor children), and who will benefit from their wealth after they are gone.

An estate plan must also include an appointment of an Enduring Attorney, who will be able to keep your client’s business operating if they become mentally incapacitated, and a substitute decision maker for personal and health matters. Dealing with super, minimising taxes and ensuring your client’s family wealth does not end up in the hands of an ‘outsider’, are also key aspects of a core estate plan.

Absent a complete estate plan, a Court will end up making decision about important things, like who will look after your client’s children, who will administer your client’s wealth, and who will ultimately benefit from your client’s hard work.

Key takeaway

Clients often want quick results with minimum fees, and you can soon find yourself under pressure to do things that really should involve a legal professional.  However, the above danger zones really are a case of ‘penny wise, pound foolish’.  The most-sound professional advice you can give your client about these issues is to get a great lawyer involved! (Hint: us)

If you are looking for a great lawyer to involve in your client’s affairs, call us now on 1300 654 590 for a no-obligation chat. We’re easy to deal with.

If you are looking to assist your client with engaging a new legal advisor and would like to know a bit more about us, read more here.

The information contained in this post was reviewed on 11 July 2022

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