Starting a business is an exciting process that can lead to incredible experiences, high profits, and success. However, in order to bring your business idea to life, there are several key documents you'll need to have ready.
When it comes to the different types of business documents you need, which ones are vital to getting your business off the ground?
Read on to learn more about which documents you need to secure and keep on record as you execute your business plan and prep your product or service for successful sales.
Common Business Structures
When starting a business, one of the most important things you will need to do is to choose a type of legal structure. Your business structure affects not only the amount of paperwork you’ll have to deal with but also your personal liability, the taxes you’ll be paying, and your compliance with national and state laws.
Here’s a quick review of the most common business structures in Australia:
1. Sole trader
This is the simplest and cheapest structure, meaning only one person owns and runs the business. If you think you can handle your operations alone, then this might be the structure for you.
However, just note that since you will have full control of your assets and business decision, you’re personally responsible for everything, including taxes, lawsuits, asset claims, and debts.
A company business structure is a separate legal entity, unlike a sole trader or a partnership structure. Generally, starting and running a company involves more complex regulations and higher costs. A company is run by its directors and owned by its shareholders.
In this business structure, the company:
- must be registered for GST if its annual GST turnover is $75,000 or more
- must apply for a tax file number (TFN) and use it when lodging its annual tax return
- must lodge an annual company tax return
- usually pays its income tax by instalments through the pay as you go (PAYG) instalments system
As a member you’re not liable (in your capacity as a member) for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you are called on to do so. However, directors of the company may be held personally liable if found to be in breach of their legal obligations.
This is a business structured owned and operated by two or more individuals. Partnerships come in three varieties:
- General partnership - All partners agree to share the assets, profits, management responsibilities, and liabilities of the business.
- Limited partnership - Each partner’s liability is limited to the amount of money they have invested in the business.
- Incorporated limited partnership - partners can have limited liabilities but there should be at least one partner with unlimited liability.
In Australia, partnership laws differ in every state and territory. For example, in Victoria, partnerships operate in compliance with the Partnership Act 1958.
In this arrangement, a trustee (either an individual or a company) manages all assets and runs the business for the trust members or beneficiaries. The two main types of trust are:
- Discretionary - The trustee has flexibility on the distribution of the trust’s income and capital to the beneficiaries.
- Unit trusts - The trustee does not have flexibility on the distribution as each beneficiary’s capital or income portion is generally fixed.
Each entity has their benefits and pitfalls so think carefully and get some legal advice before you proceed!
Types of Business Documents You Will Need
As previously mentioned, the documents you need to set up your business may depend on its legal structure and state regulations. This is not an all-conclusive list but here are the documents you need to protect your company’s interests in its lifetime.
One of the most important documents you should prepare for a company structure is a shareholder agreement. Decide who the equity stakeholders are, what their voting rights are, how their decisions will affect your business as a whole, and how you exit the company.
Although a company constitution, which we will discuss in short below, can act as a safeguard in unforeseen and unfortunate scenarios, having a well-drafted shareholders agreement ensures better protection for shareholders. The agreement can set out:
- the shareholders’ rights, obligations, and liabilities
- how crucial decisions are made
- how the sale of shares and transfers are regulated
- how the company raises capital
- how you will carry out your company’s business
- what actions will be taken when an investor exits the business either voluntarily or involuntarily
Make sure your shareholder agreement has clear terms that are easy to understand. It is important that you don’t use a generic shareholder’s agreement; instead, draft an agreement based on your company’s needs. The rules and provisions that you will set should be beneficial both to minority and majority shareholders, establishing a fair working relationship and protecting each one’s investment.
While the term constitution is typically reserved for governments, it's a vital document for Australian businesses as well. Having a company consitution is an important part of good business management.
You may adopt a company constitution, adopt the Corporations Act 2001's replaceable rules, or create a combination of the two together.
Some key components should include rules for the office and employees, rules regarding members inspecting books, how directors' meetings should be run, and how voting should be carried out when members meet. It should also include how shares and share transfers will be made including how dividends are to be paid. A company lawyer can help you draft a constitution that works in conjunction with your shareholders agreement.
NDA (non-disclosure agreement) / Confidentiality Deed
A non-disclosure agreement or NDA is a legally binding document that creates a confidential relationship between two or more parties. Typically, a mutual NDA is used by businesses that enter into negotiations or potential partnerships with other businesses or in circumstances where you are negotiating on the terms of a sale or purchase of business. The agreement lets the parties exchange information without the fear or risk of it ending up in the hands of competitors or outsiders.
There are also unilateral confidentiality deeds. For example, an agreement or clause is usually required of a new employee especially one that has access to marketing plans, potential customer list or investors, business reports, financial documents, and other valuable information.
Hiring employees is a sign that your business is ready to start operating and making money. Finding great employees can be a challenge, and an employment contract should be drafted to protect your interests and manage your relationships with employees. Each contract would depend on the employee’s status, which can be any of the following:
- Fixed term
What you decide to include in your employment contract is up to you, but it's important to mention the protection of your company's intellectual property and some other confidentiality provisions. These terms are essential to protecting your business in case you end up with a rogue employee.
Add a non-compete clause and a non-solicitation provision to the contracts of employees who may have access to your business' proprietary information. You can also include agreements regarding benefits like time off, sick leave, and other employee-related details if you choose.
All businesses should include terms and conditions regarding their service since this regulates your business relationship with your customers. The document governs the use of your products, services, intellectual property, website, and/or mobile application. It sets out your business procedures, protects your rights, and also limits your liability.
Protect Your Business with the Right Documents
Before you launch that new product or begin providing services to customers or start a new venture, make sure you have the important types of business documents you need already in place. With the help of an experienced lawyer, you can be sure that everything is in line and ready to go.
If you need assistance in drafting your business documents, contact us today for more information or to schedule an appointment.