Tips for a Startup Business before Leaving your Day Job
Updated: 26 July 2022
Are you thinking of quitting your day job to start a business? Have you been working on getting everything into place? Now it is time to take the plunge and leave the security of working 9 to 5 for someone else. It is a tough decision and will have downsides if your business does not succeed.
There is a lot to consider before making that leap of faith. You need to have many things in place for future proofing healthy founders and your startup.
Here are some handy tips for a startup business from a business lawyer. These will help you to focus on what is important and eliminate that daunting feeling of figuring it all out on your own.
While it is important to be prepared, thinking about the detail for each step and planning for a year or more at once before you leave your 9 to 5 can be daunting.
This article will help you focus on what's important for your move and eliminate that daunting feeling of figuring it all out on your own.
So let’s take things one step at a time and discuss the important stuff.
1. Post employment restraints in your employment contract
Does your employment contract include post-employment restraints to protect your employer’s business if you leave?. Employer’s use these clauses to prevent employees from working in different competitive activities while either working for them and when they leave.
The restrictions in your contract may make reference to:
- A geographical area.
- A time period.
- Different businesses, industries and activities you cannot take part in.
- Restrictions in dealing with or working for certain types of people such as customers, employees and competitors.
- Setting up a business in competition.
An example of a non-compete clause you may find in your contract is as follows.
The Employee agrees that, during the period they are an Employee and for a period of:
- 12 months, or if that period is held to be invalid
- 6 months, or if that period is held to be invalid
- 3 months,
(the “Restricted Period”), the Employee will not either directly or indirectly render services or give advice to, or affiliate with, directly or indirectly through one or more of any of their respective affiliates, own, manage, operate, control or participate in the ownership, management, operation or control of, any competitor or any division or business segment of any competitor in:
- Australia, or if that area is held to be invalid
- New South Wales, or if that area is held to be invalid
- Strawberry Hills.
What’s a reasonable post-employment work restraint?
What is a reasonable post-employment work restraint depends on a court's findings.
Generally, courts do not like restraint periods that are too long. Restraint periods should only exist to protect the employer’s legitimate business interests. That is, a restraint cannot go beyond protecting business interests and cannot stop a worker from earning a living.
Similarly, a restraint that bars a worker from working in the country the court may also consider being too wide ranging and onerous.
What about confidential information?
Employer’s want to keep their trade secrets, client lists and business strategy confidential and safe from competitors. Collectively, these are confidential information.
This means that during and after you finish working for an employer, you have an obligation to keep this information confidential.
What happens if you breach a post-employment restraint?
If you breach a post-employment restraint, the employer may send you a cease and desist letter. This will remind you of your contract obligations, such as keeping information confidential and may ask you to return or destroy any confidential information that you hold and stop working for a competitor.
A well drafted response letter can stop your previous employer from taking further action against you. So if you receive a cease and desist letter, make sure you get legal advice before answering it.
If the employer is not satisfied with your response to their cease and desist letter, they may take further legal action such as seeking an injunction.
An injunction is simply a court order to stop you from doing something; for example, working for a competitor or setting up your own business in competition.
If the employer claims you are profiting from using their confidential information, they may also seek an account of profits (that is, the profits you earned from breaching the post-employment restraints). You may have an option to negotiate a reduced post-employment restraint. So it is important to talk with a lawyer before you do anything.
Now, once you have checked your employment contract for any restraints and considered your options, it is time to look at your business structure options.
2. Your business structure options
In Australia, a business entity can be set up as a sole trader, company, partnership or a trust. While you can always change your business structure later, you may want to avoid this by setting up the most suitable business structure right from the start.
A sole trader structure is simple and cost effective. This business structure:
- Is the simplest form of business to set up and operate.
- Means you make all the business decisions and control all the business assets.
- Is normally low cost and you do not have as many reporting requirements as other business structures.
- Allows you to use your personal tax file number to lodge tax returns.
- Means there is no need for a separate bank account. But it can be easier to have a different bank account for the business so you can track your income and expenses.
- Means you must keep all records for a minimum of 5 years.
- Has unlimited liability which puts all your assets at risk if things do not work out.
Setting up as a company provides you with the benefit of limited liability. Generally, this means that as a director, you are not liable for company debts.
The company is a separate legal entity that can incur debts, sue and be sued. The exception to this is when you enter a company contract as a personal guarantor. As a guarantor, you are personally liable for company debts if the company defaults.
If you receive a document, such as a lease or franchise agreement, asking you to sign off as a personal guarantor, get legal advice about this before you sign so you fully understand the consequences if something goes wrong.
A trust is another option and is an attractive option for tax planning purposes.
The trustee holds the assets, in this case, business assets on behalf of others (the beneficiary/beneficiaries). They are responsible for everything to do with the trust, including the income and any losses.
A trust can be complicated and expensive to set up. Its purpose is to protect the assets of the business for the benefit of all the beneficiaries.
A lawyer can prepare a trust deed that sets out the trustee’s powers. It is also important to ask an accountant for advice about the tax implications.
A partnership is two or more people in business together who share in the profits and are responsible for the losses. Different partnership laws apply depending on which Australian state you are setting up the partnership.
There are also three different partnership types:
- A partnership "normal". A partnership normal is where all partners have equal responsibility for all parts of the business.
- Limited partnership. Each partner’s liability is limited by how much capital they contribute to the business. These partners are usually investors without a role in the day-to-day running of the business.
- Incorporated limited partnership. The partners in this partnership have a limited liability for any business debts but there must be a minimum of one general partner who takes personal responsibility for any shortfalls.
Both limited and incorporated limited partnerships need to be registered with Fair Trading in New South Wales.
How can a lawyer help you with a partnership ? A lawyer can draft up a partnership agreement to set clear expectations for your business and help minimise disputes.
3. Understanding and working with your stakeholders
Even if you have set up as a sole trader, sole director or secretary of a company, chances are you will not always work alone. You will need to interact with a range of stakeholders. Following are some important ones.
Australian Tax Office
Regardless of your business structure, you have taxation obligations including monthly, quarterly or yearly reporting on items such as GST and PAYG. So make sure you talk with an accountant to set up your structure correctly.
Most lawyers can give you some good recommendations. We do this for our clients.
Australian Securities and Investments Commission (ASIC)
If you have set up a company, you are accountable to the regulator, the Australian Securities and Investments Commission (ASIC).
You must notify ASIC of certain company changes such as appointing a new director, changing your business address, issuing shares and the resignation of a director or secretary.
Fair Work Commission
The Fair Work Commission (FWC) is Australia's national workplace relations tribunal.
It sets the minimum national employment standards and minimum wages in awards. If you have a dispute with an employee that involves a dismissal, that worker may be entitled to seek a remedy from the FWC.
Health and safety regulators
SafeWork is the New South Wales health and safety regulator.
SafeWork provides guidance on improving work health and safety, licences and registrations for dangerous work. It also investigates workplace incidents and enforces work health and safety laws.
You may need to contact insurers to comply with your lease or any other legal contract. Insurance may include public liability, professional indemnity, glass, contents, plant and equipment, and management liability aka directors insurance which most client's do not consider.
You may also need to list your financier or landlord as an interested party on your insurance premium. Both can give you guidance about this.
Suppliers include anyone that supplies any product or service to your startup; for example, IT, advisors, manufacturers, contractors and subcontractors.
Should I accept another party's contract or draft my own?
Larger organisations that you deal with may supply you with a contract or terms and conditions before you can deal with them. You can review these and have them revised or request additional terms. It is advisable to have a lawyer look over any contact before you sign it.
Business contracts are important. They set clear expectations and minimise the risk of legal proceedings against your business. The following are contracts you may need when starting your business:
- Shareholder agreement. If you have allocated shares in your company, a shareholder agreement is useful. It outlines shareholder rights and responsibilities, transfer and sale triggers, voting procedures and more.
- Founder's agreement. A founder’s agreement is used by two or more founders to outline roles and responsibilities, dispute resolution procedures, IP ownership, confidentiality and more.
- Contractor agreement. A contractor’s agreement sets out the work relationship, expectations, roles, responsibilities, dispute resolution, IP and more.
- Employment agreement. An employment agreement is similar to the contractor agreement. It sets out work expectations and can help you minimise disputes with workers.
- Advisor agreement. An advisor agreement is suitable if you have someone providing advice to your startup and you want to clarify duties, IP ownership and ensure confidentiality.
- Confidentiality agreement. Confidentiality agreements protect your business secrets and are useful when you are speaking to advisors, prospective business partners or collaboration partners.
Bringing it all together
The following are the key points to keep in mind before you move from a day job to your startup:
- ·Check your existing employment contract for post-employment restraints and have a lawyer look over your contract if you are unsure
- Look at what the best business structure is from a legal and tax perspective.
- Understanding and knowing your stakeholders is important so your business is compliant with legislation, regulations and local laws.
- Once you decide on a business structure and set it up, you can start entering into contracts. Contracts may include supply agreements, employment and contractor agreements, leases, equipment rental and business purchase contracts. You may want to have your lawyer either review or draft these contracts.
Do you have any questions or comments about making the move to a startup? Leave them below.
I wish you success in all your ventures!