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An Australian lawyer’s guide for your Christmas and New Year’s startup plans
Updated: 21 November 2022
Do you have a brilliant idea and dream of your own startup business but have never had the time to investigate it further? Yes? Well, the Christmas and New Year holidays are an ideal time to investigate the viability of your idea further.
What ideas for a startup business do you have? Do you have a co-founder? If so, future proofing healthy founders relationships is also important.
Here are some tips when starting a business you should consider. Grab a freshly brewed coffee to enjoy as you read through.
1. Pre-launch
Before launching your startup, you need to take look at your employment contract or agreement to ensure you do not breach any restraint clauses it contains.
Restraint clauses in your employment contract
Are you currently working for someone else? Will you still be working for them after you launch your startup? If you answered yes, check the restraint clauses in your current employment contract before launching your startup idea. Understanding these will help you avoid any legal trouble with an existing employer.
A restraint clause is to protect your employer’s legitimate business interests while you are working for them and when you leave. The most common restraint clauses include:
- Non-compete which prevents you from either directly or indirectly competing with your employer’s business for a certain amount of time.
- Non-solicitation to prevent you from accepting or soliciting work from your employer’s clients for prescribed amount of time.
- Non-disclosure is a confidentiality clause that prevents you from disclosing or using your employer’s trade secrets or confidential information.
- Non-poaching prevents you from offering colleagues a job or work for a prescribed amount of time.
Restraint period
If an employer takes you to court to enforce a restraint clause, first, they will request a 12 month restraint period. For example, you cannot disclose confidential information publicly for 12 months. If that fails, they will request 6 months and failing that, they will seek a 3 month restraint.
Restraint period means from the date of termination of your termination with the company for:
- 12 months.
- 6 months.
- 3 months.
Restraint area
The restraint area is the geographical area the restraint clause applies to. This could be:
- Australia and New Zealand.
- Australia.
- New Zealand.
- The state or territory in which your employment was based in the last 12 months of working with the employer, except if you were in the Australian Capital Territory. The restraint area includes New South Wales.
- Within 20 km of the GPO in the closest city to which you lived in the state or territory referred to in (4).
Similar to the restraint period, if an employer seeks to enforce this clause in court, they will first seek a restraint in Australia and New Zealand. Failing that, they will request Australia, then failing that New Zealand and so on.
It is important to note that a restraint can only protect the true business interests of an employer and nothing more.
Finally, if you are ever in doubt about what a restraint clause means for you, get legal advice.
Launch
Business structure
Before you do anything you need to decide on a business structure. In Australia you can choose from the following types of business structures:
- Sole trader. As a sole trader you have total control of the business and it is the simplest form of business structure.
- Partnership. A partnership has two or more people who receive income from the business and share in the losses.
- Trust. Where the business is set up as a trust then a trustee becomes responsible for its operations.
- Company. Setting up a company is more complex. It is a separate legal identity so it limits your liability. Limited liability means you are only liable for up to the value of the company’s assets. Legally your personal assets are treated as being separate to those of the company.
The complexity between the different business structures is shown in the following table reproduced from ASIC.
Sole trader | Partnership | COMPANY | TRUST | |
|---|---|---|---|---|
Business structure complexity | Simple | Moderate | Complex | Highly complex |
Cost | Low | Medium | Medium to high | High |
Legal obligations | Low | Low to medium | High | Medium |
Separate legal entity | No | No | Yes | Yes |
Liability | Unlimited | Unlimited | Limited | Limited (with a corporate trustee) |
If you decide to set up a company, you may also need to:
- Register an Australian Company Number
- Register an Australian Business Number
- Register for goods and services tax collection
- Apply for a Company Tax File Number
- Consider Pay-as-you-go registration
Talk to your accountant or lawyer for advice on the best business structure for your startup.
Also keep in mind, setting up your Australian Business Number may take longer if some of the directors are not Australian residents. This can be frustrating as they need to send in the proof of identity documents required. See the Australian Business Register website for more information.
Agreements
My next tip when starting a business is to put legal agreements in place. Why? Certain legal documents can help you protect and grow your business.
It is important to set up agreements when there are no emotions involved. They set out how you will manage expectations and disagreements with the people and organisations you work with. For example, a founders agreement sets out how you will work with your co-founder. It will help you set expectations and future proof your relationship.
I wrote an article, Which legal services do I need first for my startup, that can help you. In a nutshell these legal documents may include:
- Shareholder agreement. This agreement outlines shareholder’s rights and responsibilities such as voting rights, share sales and transfers, dispute resolution and termination.
- Founders agreement. A founders agreement outlines how founders will work together and can be cheaper than paying for individual employment agreements.
- Confidentiality deed. You may need a confidentiality deed when sharing your business ideas with others. It can help protect your business ideas.
- Worker’s agreements. These agreements include employee and subcontractor agreements.
- Privacy policy, and terms and conditions. Your privacy policy, and terms and conditions outline how you will collect and use the information you collect, and the terms of your offering.
- Stakeholder agreements. Stakeholder agreements can include agreements with clients, suppliers and any other agreements you have with your business partners.
Key Takeaways
The Christmas and New Year holidays are a good time to research your startup idea.
Before you launch you need to consider if you will continue working for your current employer or not so you need to check out any restraint clauses in your employment contract.
You also need to decide what the best structure will be for your business and what agreements you need to put in place when you launch.
And do not forget, if you have any questions, leave them below.
I wish you every success in your ventures.