Structuring Your Start Up
One of the first things you need to think about when setting off on your journey to turn your business idea into a reality is to figure out how to structure your business. This will depend on a number of factors, and you will need to take legal and tax advice, but there are a few issues you can think about before seeing a professional for advice:
If you are the sole “owner” of a business, then in theory you don’t need to set up an elaborate corporate structure, or even a simple one, but in due course we would recommend that you at least look to establish a company through which to conduct the business. This has a number of benefits, including:
- limited liability (generally, a company gets sued when things go wrong, not its directors, shareholders or employees);
- the ability to keep your personal assets separate (and relatively safe) from claims against the company; and
- and you can use a company to offer shares to investors and employees.
If you are setting up a business with co-founders, or you want to offer equity to investors or employees, you will need a company (you can also set up a trust structure, but that may be too much detail for now). If you set up a company with one or more other shareholders, we highly recommend finding an experienced lawyer who really understands your business to prepare a “Shareholders’ Agreement”.
A Shareholders’ Agreement is a contract between the shareholders which governs how the company will be run, and sets out the commercial issues relevant to the management of the business. It will deal with issues such as:
- agreeing how decisions are to be made between the shareholders – does anyone have a right of veto in respect of certain decisions?
- what happens if the company needs more money – are the shareholders obliged to put in more funds?
- when is a shareholder allowed to sell some or all of their shares – for example, do you want an embargo on share sales for a long enough period to provide some stability for the business?
- have you agreed when you will seek to exit from the business – for example, to sell the company or seek a stock exchange listing?
What if I start working with my co-founder without setting up a company?
If two or more of you agree to work on a business together and you have a common purpose in operating that business, it is likely that you will have created a legal partnership, even if this is not put in writing. This might not be a good thing!
As partners, you will jointly own the assets of the business. Moreover, you will be jointly and severally liable for the liabilities of the partnership, meaning that you may be sued directly for a claim against the business and your personal private assets may be exposed, even if the other partners were the cause of the claim!
There are also complications if one of you wants to leave the business, or if you want to take on more partners, or if you are looking for investors. A partnership is not the way to structure a business if you are looking to raise money from investors as they will generally expect to invest in a company structure. This is because investing in a company structure gives them a tangible equity interest (i.e. shares), rather than a percentage in a partnership which could expose them to liability (which they wouldn’t have as a shareholder in a company).
So you’ve probably got the message…don’t operate as a partnership unless you know exactly what you are getting into.
Ultimately, in order to make sure that you select and properly establish the best corporate structure, you will need to take professional legal and tax advice. If you’re ready to take the next step with your venture, and you’re looking for high quality legal advice given with a commercial and pragmatic approach, give us a call on +61 2 9300 3100. We take the time (at our expense) to get to know your business, and operate on the basis of fixed fees for most work so you don’t have any surprises. Whether you are a maverick, disruptor or entrepreneur (or all 3!), we look forward to working with you.
Looking for more information on the legal ins and outs of starting a business in the meantime? We’ve got you covered! Check out our free Startup Pack for a whole bunch of tips and tricks for establishing good legal practices, pitching to investors, protecting your ideas, taking on people, signing up customers, and respecting privacy.