Finding a product you’re passionate about, or something you excel at, and then becoming your own boss, is a dream of many Aussies. And a lot of us are lucky enough to realise it.
In fact, in the last financial year alone, almost 16 per cent of Australian businesses were new – a year-on-year increase of 3.8 per cent.
The various online platforms on offer make it easier to start, from selling via sites such as Amazon, to building a customer base through social media, new business can grow quicker than ever before.
But in the excitement of finally realising a dream or filling a high-demand niche, legal aspects in setting things up can be overlooked. That means avoidable mistakes can be very easily made.
Don’t worry, though – it’s never too late to put structure around your new business. Just ask Damin Murdock, the legal practice director of Lawpath, Australia’s leading online legal software platform for small businesses.
Murdock helps hundreds of online businesses with their queries every single week. Disrupting the expensive world of traditional legal services, Lawpath has assisted more than 200,000 businesses in Australia with their legal needs, providing a more cost-effective, technology-powered approach to quick – but crucial – legal advice.
From his experience, Murdock takes us through five of the most common mistakes online businesses can avoid, right now.
1. Not working out how the business will actually run
You’ve done the hard part – coming up with a hopefully winning idea – but now you’re setting things up to make money from it. That is, you’re running a business. The structure that business takes will depend on whether it’s just you, or if you have a partner, and your preference for how you will split the work – and profit.
Although it may be the last thing you’re thinking about when starting an online business, Murdock says that forward thinking and planning is vital for success – and this begins with getting advice on the right business structure for you.
This is important even if it’s just you at the start, because it can make a difference to your long-term success – which is something you obviously want.
“The first step to identifying what will suit your online business is to consider the growth opportunities and any exit strategy. You want a structure that gives you the flexibility required in the future in terms of tax, growth and asset protection.”
Murdock uses the example of a business which offers two quite separate things, such as a catering service combined with event planning.
“For instance, if one is operating a food business and also providing consulting services, it may be best to separate the products into two businesses,” he says.
Doing so would essentially protect the businesses from each other – so that if there was a problem with one, it wouldn’t affect the other – which is protection for you.
2. Confusion over intellectual property
In the world of online businesses, it’s common for competitors to claim another business is copying their work by outright breach in intellectual property (ownership of an idea) or similarity in product. A recent issue between two candle start-ups – and former friends – in Sydney who claim to be ripped off by each other comes to mind as an example.
It can also become problematic when you commission someone to produce something for you, such as a graphic designer, website creator, or even a social media administrator.
Things can become murky very quickly as to who owns the work, and which way they can use it, Murdock warns. This is especially the case if you’re still employed by another party while you’re starting up – and where intellectual property considerations are essential.
“Where a company engages a contractor, no matter how small that engagement may be, it is important to have an agreement which states that the company owns all of the intellectual property in the work which is provided, or at the very least, a perpetual, irrevocable, worldwide, unlimited licence to use, modify, adapt and sub-licence that work,” Murdock explains.
“We have seen companies at their exit stages either being unable to complete a sale due to not being able to prove ownership of their intellectual property, or alternatively, having to try to contact past contractors from many years ago and have them sign an IP Assignment Deed.
“This can be a costly and timely exercise, especially in circumstances where a buy/sale agreement generally has timelines that needs to be met.”
Essentially, don’t leave your work, or work you’ve paid for, open to an ownership claim by someone else.
And of course, make sure you’ve got your domain name registered and your trademark applications sorted (Lawpath has more info on that here).
3. Being too soft on your software service contracts
Some online businesses need infrastructure such as bespoke software to operate. But without agreed upon details, costly disagreements can arise.
“We regularly see situations where a company will enter into a software development agreement that is provided to them by the developer. These agreements have specifications that are prepared by the developer, have no due date and no acceptance testing phases,” Murdock says.
It’s a mistake that can be easily overlooked in the stages of enthusiastically starting the business – but with the right guidance, issues of software ownership and use can be avoided.
“We normally recommend engaging a third party to work with you to review the developer’s specifications, and then to assist you in testing the software at each testing phase,” Mr Murdock says.
“That is, software development should be performed in milestones or stages with specific due dates, and a company should not be paying the developer in advance, but rather upon the completion of each milestone, and after that milestone has been tested or proven completed.”
4. Copying someone else’s terms and conditions from the internet
Not having solid service contracts which stipulate your terms and conditions – or using standard ones you’ve found online – can see issues with customers and suppliers escalate – so it’s worth bedding them down for your products and services right at the start.
For example, the Ts and Cs for your nursery business wouldn’t be the same as the ones for someone selling beauty products.
“Preparing terms and conditions for your business is essential as it will provide protection moving forward,” Murdock advises. “For instance, it will provide a company with the opportunity to suspend services, terminate the services, or recover unpaid bills. It also ensures that both parties are on the same page and understand what they will be receiving.
“Certain clauses which require particular attention is the definition of the services or goods, for instance, providing sufficient detail to what is actually being received, and when it will be received.
“Other clauses to consider are having a detailed variation clause, ownership of intellectual property, confidentiality, limited liability and a well-defined termination clause.”
5. Keeping your business relationships a little too loose
Going into business to sell products online with a friend? Being friends with someone and running a business together can be very different things. This fine balance should be formalised in an agreement, stipulating details such as sick days and profit-sharing, so resolving disputes is straightforward.
It’s something Murdock and the Lawpath team see happening all too often. To avoid this, you’d need to ensure you have a clearly stated corporate structure with more than one shareholder, outlined in a shareholder’s agreement covering your bases should future issues arise. It’s like a prenup for a marriage, but for business partners.
“[A shareholder’s agreement] governs the relationship between the shareholders, such as who has the right to appoint a director, is the company allowed to sell new shares to third party investors or do the existing shareholders have the first right to buy those shares,” he explains. “And you can force the minority shareholders to sell their shares if a purchaser seeks to purchase the entire company.”
Relationships between contributors and owners often change during the course of business and an official agreement can help when disputes arise.
“If there is a dispute before proceeding to court, the shareholders must first attend to mediation,” Murdock says. “If one shareholder is not pulling their own weight, or moves overseas, or dies or simply stops working in the business, sorting the situation out can become a costly legal exercise if there is not a clear shareholder agreement.”
Got more questions and don’t want to spend $600 an hour on legal advice? Contact Lawpath for affordable online legal for your business.
In Lawpath’s Legal Advice Plan you’ll get access to an on-call business lawyer and be able to make 30-minute calls to help with any legal need. Commercial law, trademarks, employment, starting an online business – it’s all covered. Plus access to more than 300 legal documents. Get smart with your legal and save time and money with Lawpath today.
This article is brought to you by Flying Solo in partnership with Lawpath.
Disclaimer: Information in this article should not be considered legal advice. Consult a lawyer via Lawpath to get certainty about your legal obligations.