It is important to make a thorough plan when starting a new business, particularly on the legal side of things. It is advisable to speak with the relevant professionals about the tax, financial and legal considerations of a startup. This ensures you’re giving your business the protection it needs. Understandably, it can be difficult for founders to give enough thought and planning to the structure and set-up of the start-up due to insufficient financial support or inadequate know-how. To protect your start-up from a legal perspective, we recommend that you follow the basic legal steps set out below and consult a small business solicitor about your needs. A small business solicitor will have experience in all stages of the business life cycle.

1. Incorporation

A quick consultation with an experienced small business solicitor will help to decide which business structure is most fitting. Perhaps a company is the best structure because it allows for quick growth and scalability. For this, however, you will need to fill in Form 201 to apply for registration as a company and incorporate the startup. This requires the consent of members, directors and the secretary prior to filing your application. It is unnecessary to lodge these consents with the Form 201.

Incorporation of a company means that the company is now a separate legal entity and the shareholders and directors have limited liability.

To ensure that your company share structure (amount and value) is correct and is set up in a way which works best for you, we recommend you speak with a financial adviser and a small business solicitor about how to go about structuring the company.

2. Constitution and Directors’ Duties

You need to determine how your company will operate. Will you simply use the replaceable rules under the Corporations Act or will you set up your own Company Constitution? The replaceable rules or Company Constitution are drafted for the internal management of your company and provide clear procedures on things like voting rights, meetings, election of directors/board committee members, accounts, and so on.

In addition, you need to be aware that regardless of how you wish to govern your company, as a director of the company, you have certain duties under the Corporations Act. If you are unsure of what duties you owe to the company, you should speak with a business solicitor.

3. Shareholders Agreement

A Shareholders Agreement governs the relationship between shareholders of the company. No matter how long you’ve known your business partners or how well you get along outside of work, every company is encouraged to have a Shareholders Agreement. A well-drafted Shareholders Agreement will cover a range of issues, including the right to transfer/sell shares, drag along and tag along rights, what happens when someone wants out, etc.

4. IP Assignment Agreement

An IP Assignment Agreement is important when particular IP developed by one of the founders is a valuable asset of the company. In this case, you will want to make sure that the company owns the IP, and not the shareholder.

If a co-founder created the IP prior to the incorporation of the company, once the company is incorporated, there needs to be an IP Assignment Agreement between the shareholder and the company whereby the shareholder transfers ownership of the IP to the company. In the IP Assignment Agreement, it needs to clearly recognize what IP is being transferred, and the shareholder should agree to execute all necessary documents and do all things required to assign the IP to the company.

5. Employment Agreement

Some startups downplay the importance of an Employment Agreement. Maybe it’s because most startups are founded between friends and they feel that writing down each other’s rights and responsibilities will create some sort of barrier from working together. It is quite the contrary. Having an Employment Agreement that clearly sets out the responsibilities, expectations, remuneration, and obligations upon termination, can help minimise disputes and avoid the relationship going sour.

Conclusion

Having good foresight, a strong vision in mind, and a team of financial and legal experts, will ensure that your startup business has a strong foundation to grow on. Setting up the right business structure and having the necessary legal documents is imperative to the success of your start-up. It will help you protect your business and assist in the overall growth prospects.

If you have any questions or would like some legal guidance for your startup business, speak with one of our small business solicitors today. Our small business solicitors here at LegalVision are experienced in working with start-ups (we are one after all) and would be more than happy to assist you in creating your own success story.

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