Part of the challenge of being your own boss, is that you’re also where the buck stops when something goes wrong.
Legal issues can break a small business, so it’s best to protect yourself in all the ways you can before they arise.
We spoke to Gervase Liddy, Managing Partner at Taylor and Scott Lawyers in Sydney about the common legal problems that can affect a small business and how to prevent them from happening.
This is his advice.
Get the company structure right
The first defense against legal problems for a small business is to determine its structure at the outset.
Making the decision to be a sole trader, a partnership, a registered company or operating under a trust structure is very important because each one of those types comes with legal obligations and costs but they also come with certain protections.
Avoid being sued
As a sole trader you the person assume all the legal obligations, so you can sue and be sued in your name.
The same operates in a partnership. You don’t sue the partnership you sue the partners of the partnership, so they are personally responsible for the debts and liabilities of the partnership.
To avoid these issues you can choose a company structure, which gives you certain protections.
A company is like a legal person; it can sue and be sued.
So the shareholder or the owners of the company have limited liability and generally are not liable for the company’s debts.
But there is a higher cost to set it up and administer and there’s also reporting requirements of the company to consider.
I personally feel if you can afford a PTY Ltd it does give you better protection.
You have to weight up what’s best.
Get some legal advice.
It may cost you money at the start but it will help you get your business off on the right footing.
If you’ve already set up your business and your not sure the structure give you the best protection you can still change it.
Another common area of legal problems for small business is being prosecuted or fined because they’re not compliant.
If you’re employing people, you need to ensure that you are complying with the Fair Work Act in respect to workers wages and conditions, and you need to ensure that Occupational Health and Safety (OHS) is complied with and the workplace is safe.
Plus if you’re operating from premises, you need to know that you’re allowed to carry on that business from these premises – or if you need council approval.
Other common issues that we see are underpayment or incorrect payment of wages, superannuation and tax.
For many small business owners, the challenge is just keeping up with the paperwork and that’s where errors can happen.
If you have a company structure, you have to have a registered office, keep your corporate records up to date, put in an annual return, keep a share registry, your books have to be up to date, financial reporting have to be lodged with ASIC annually and there’s quarterly GST returns to lodge.
So engage with an accountant or a lawyer who knows what they are doing.
You can be fined otherwise.
Doing due diligence
In our practice, we see small business doing business with other businesses or individuals where they’re not being paid for the work they’ve done.
Chasing bad debts is always a problem for small business.
Often they haven’t done the due diligence to see if these companies are registered with ASIC, or if there are any notifications that they’ve being doing anything untoward.
You can register for company alerts with ASIC.
It’s important to make sure agreements are in writing.
Don’t do business on the shake of a hand.
If the wheel comes off, who said what to whom is good grist for the legal community.
You need to keep an eye on intellectual property (IP).
If employees are doing work for you, you need to know if you own the IP.
You also need to know if there are trademarks or copyright involved in any business you are doing.
If you use the names of other businesses by mistake it can be expensive to put it right.
Workplace injuries and public liability can destroy a small business..
You want to make sure you have the right level and type of insurance cover for your business and have all your insurances paid up because if you produce a product that’s defective or causes injury or harm, you can be sued, and you need to have protection.
If you’re a sole trader, make sure you have income protection.
If something happens to you, it can be devastating for your business if you can’t work.
By Gervase Liddy, Taylor and Scott Lawyers.
NRMA Insurance offers free legal and tax information for its Business Insurance customers. Find out more at nrma.com.au.