After working as an apprentice electrician or as an employee in someone else’s business, you may decide that it is time to start your own electrical business. Deciding to own and operate your own business can be daunting. This article will make it easy to understand your legal and commercial considerations to have, as well as the types of legal documents you may require, when starting your own electrical business.
Firstly, you need to ensure that you are suitably qualified and have the appropriate licences to operate as an electrician, as it is a highly regulated area. Each state in Australia has their own licensing authority. These are the:
- Electrical Licensing Board (Western Australia);
- New South Wales Fair Trading (New South Wales);
- Electrical Safety Office (Queensland);
- Energy Safe Victoria (Victoria);
- Access Canberra (Australian Capital Territory);
- Electrical Works and Contractors Licensing Board (Northern Territory);
- Consumer and Business Services (South Australia); and
- Department of Justice (Tasmania).
It is essential to contact the appropriate authority to submit your application and maintain this licence while you continue to work.
Choosing a Business Structure
Before you start operating, consider how you would like to structure your business. Will you work as a sole trader? Will you work with a trusted person and operate a partnership? Or, will you structure your business as a company? There are many considerations when deciding on a structure and it is important to understand the risks and benefits of each.
A sole trader structure and a company structure are the two most common structures for electrical businesses. It is important to consider both the initial and ongoing costs of each particular structure.
A sole trader means you operate the business on your own. Many people opt for this structure when establishing their businesses. As an electrician, you will need to weigh the potential monetary benefits against the increased personal liability.
A sole trader structure is the simpler structure, as you and the business are one. However, there are some downsides, including the fact that:
- there is full personal liability for the business; and
- all earnings are taxed as personal income.
You will be required to register an Australian Business Number (ABN) with the Australian Business Register (ABR).
|Pros of Sole Trader Structure||Cons of Sole Trader Structure|
|Inexpensive to set up||Personal risk of liability if something goes wrong|
|Individual has full control of the business||Personal property, including assets, on the line|
|Individual keeps the profits||Earnings are taxed as personal income|
A company is a separate legal entity to the individual who runs the business. This type of structure is more complex and initial set up costs are high. Typically, a company is owned by one or more shareholders, in conjunction with one or more directors. Additionally, depending on the size of the company, there may also be a management team.
A shareholder is not personally liable for the business or the debts of the business. This means that if the business closes with debts, the shareholders are not expected to pay the debts. However, the directors of the business have some duties and liabilities. If, for example, they trade while the company is insolvent, they can be personally liable for debts of the business.
|Pros of Company Structure||Cons of Company Structure|
|Legal entity separate to its shareholders, so if the company becomes insolvent, the shareholders are not personally liable for the company debts||High set up and ongoing costs, and complex business structure|
|Directors have legal duties and can be liable for breaches of these duties||30% company tax rate as compared to personal tax rates, with a tax-free threshold and a sliding scale of tax paid|
Tax and Financial Considerations
When deciding on your business structure, it is also important to understand how each structure will affect you from a tax perspective.
If you have chosen a sole trader structure, it is important to understand:
- how your business profits are considered personal income; and
- the tax implications on the income you earn.
As a sole trader, you can lodge your tax return with your personal tax file number (TFN), and you are not required to have a separate business bank account. As a sole trader, you are also not required to pay:
- workers compensation insurance; or
- payroll tax on your income.
Additionally, sole traders can also claim for costs incurred in running the business, including everyday expenses such as office stationery.
If you have chosen a company structure, it is also essential to understand the tax implications on your profits and income. A significant consideration is that you must be registered for Goods and Services Tax (GST) if your annual turnover is $75,000 or more.
You must also lodge a company tax return with the Australian Taxation Office (ATO). As a director, you will also need to submit an income tax return and report any fringe benefits you receive. A company must also have a business bank account.
No matter what stage you are at or what business structure you choose, you should have appropriate business insurance to protect you. If you experience a significant loss, for example the theft of a work vehicle or tools, this could put you out of work for some time.
Ensuring you have appropriate insurance is a necessity for any business, especially when working on people’s homes and in a potentially dangerous vocation. It may seem like a daunting task, but securing the most appropriate insurance cover for you and your business is a vital step in setting up your business. Not only is it crucial, but insurance for electricians is also mandatory in many states in Australia.
If you have developed a business name and logo, you want to ensure you protect it. Your local community may begin to recognise it if you are applying your branding to work vehicles or promotional material. If you also want to launch a marketing campaign, you will want to ensure you protect your branding.
If you trade using a business name, you must register this first with the Australian Securities and Investments Commission (ASIC). A business name is an entity under which someone conducts their business. Most of the time, you will need to register your business name on the Business Name Register. This is vital, as it shows if an entity carries on business in Australia and is publicly identifiable.
It is important to note that registering a business name with ASIC does not ensure the protection of any intellectual property regarding your brand.
Intellectual Property (IP) Protection
It is a good idea to protect your branding through a trade mark. Often, you can trade mark your business name and logo. If registered with IP Australia, this will protect your brand for up to 10 years. A trade mark is ultimately used to distinguish the goods and services of one trader from another. When branding your business and looking to protect your IP, it is useful to consider what can generally be trade marked. You cannot trade mark things that are:
- too descriptive, for example, “Electricians R Us” or Electricians At Your Service”;
- scandalous; or
- likely to mislead the public.
You can check to see if there are any conflicting marks on the register, as it is open to the public. It may seem like an added expense, but the protection of your brand is vital especially if you are positioning yourself for growth. You do not want a competitor to copy any of what you have developed, and it adds further value to your business with customer recognition.
As you start your new business, you will be interacting with a range of customers. It is good practice to have a standard document that you can use each time to quote a customer for a job.
Terms and Conditions
When you engage with your customers, it is vital to set out the terms and conditions of your business relationship. These terms and conditions should be provided to your customers before they engage you to perform the works. Primarily, they seek to limit any concerns and prevent any disputes.
Firstly, you will want to ensure that your terms and conditions are attached to each quote you provide. Ensure you set out what the customer is paying for. This is an excellent time to set out what circumstances may vary or affect the quote and the original price, for example:
- council permits;
- delayed receipt of goods from a supplier;
- customer change of mind; and
- any other unforeseen circumstances.
You can also define when and how you will provide refunds to a customer. Here it is essential to remember that you need to follow the Australian Consumer Law. Establishing a structured payment system with your customers is prudent. For example, whether you:
- expect payment upfront;
- payment for the purchase of the supplies; or
- if you will agree to payment arrangements.
The payment structure should also outline what methods you will use to seek out a late or overdue payment.
Limitation of Liability Clause
You may also wish to outline how your liability covers your customers and your workmanship. Customers may feel more at ease if you have been upfront about this. Your limitation of liability clause requires careful thought and consideration, and it is best to seek legal advice on how best to draft this.
It is important to consider that you cannot contract out of your liability completely. There are still primary considerations regarding faulty workmanship or defective repairs that you cannot remove in your terms.
Despite clear terms and conditions, disputes may still arise. It is a great idea to have a clear dispute resolution process within your terms and conditions. This is necessary to limit wasting time and money and also means that if a customer is unhappy, you can refer them to the particular clause as a way of resolving the situation. Your clause should clearly state your preferred method of dispute resolution. This may include mediation, a form of alternative dispute resolution, where an impartial third party helps you solve your dispute.
Variations to the original quoted work are also common. However, if you do not have a clause which discusses variations and how they are agreed and paid for, you may not be able to seek the recovery of the additional costs from your customers.
Electricians often encounter unforeseen problems once beginning work on a job. If the rectification of the problem will mean more money and time, you will need to make your customer aware of this. Without a variation clause, your customer may be entitled to rely on your original quote, leaving you out of pocket.
Supplier or Wholesaler Documents
A clear agreement setting out the terms and conditions with your customers is vital, but so are the contracts you have with your suppliers and wholesalers. It is crucial to understand the warranties and guarantees your suppliers have over their goods or services. You will also want to ensure there are clear payment terms.
Generally, many suppliers and wholesalers will have their own terms and conditions, including limitation of liability and product guarantees. Failure of parts, despite correct installation, is something you will want to clarify with your supplier before you engage with them. You will also want to be aware of some of the rights and responsibilities your supplier will have under Australian Consumer Law.
Once you have started your business, you may realise that you will need to take on an apprentice or qualified electrician as an employee. This is an exciting step, however can sometimes feel daunting with the expansive Australian employment law framework. You need to understand and comply with legal employer obligations.
The National Employment Standards (NES) set out the core entitlements owed to an employee. Although not a requirement, it is best practice to have a well-drafted employment agreement that sets out the terms of your relationship with your employees. The employment agreement should clarify:
- hours of work;
- employee and employer obligations;
- requirements; and
- termination clauses.
These documents are helpful to refer to if any employment dispute arises. You may also include:
- work health and safety;
- drug and alcohol; and
- behaviour policies that you expect your employees to follow.
Additionally, an employee handbook is a helpful way of outlining your expectations. You give this to each employee.
Master or template documents mean that as you engage more team members, you can simply re-use the original documents by updating the relevant details. This makes recruiting someone new easier.
Many of your employees will be covered by a modern award. A modern award is an industry or occupation-based document which outlines minimum rates of pay and employment conditions. The Fair Work Commission sets the minimum wage and it is good to check changes to relevant awards each year.
The modern award defines several things, including:
- rate of pay;
- penalty rates;
- hours of work;
- annual and sick leave; and
All of these factors contribute to how you pay your employees. It is very important to ensure you are paying your employees correctly, as not doing so may result in a fine by the Fair Work Ombudsman.
It is common for electricians to need additional help during busier periods. If you find yourself requiring short-term help, you may wish to consider engaging an independent contractor. It is best practice to engage other electricians who use an ABN or operate a company as you do not want to be caught out sham contracting. Sham contracting is when you engage an individual as an independent contractor when they should be an employee receiving employee entitlements.
Independent contractors have a much higher level of control over their work and will be able to decide:
- which jobs they will perform; and
- what hours they will work.
Additionally, electricians who are contractors will most often:
- use their own tools and equipment; and
- make all their own superannuation, tax and GST contributions.
A contractor is usually engaged for a short period and is not entitled to any paid leave. Independent contractors can be helpful during busy periods. Be mindful of how you use contractors, as you may be obligated to pay employee entitlements if they are not engaged correctly.
Setting up your new business for growth and success starts with structuring it the right way. Once you have decided the most appropriate structure for your business, you can set up the legal documents you require to ensure your business is compliant in the electrical industry.
Although it may seem like a big expense at a stage where you do not have disposable income, it is important to protect your new business by:
- creating important legal documents;
- protecting your branding; and
- ensuring you are meeting employment obligations.
If you have any questions about starting your own business, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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