The Most Common Legal Threats to Startup Success

Posted by Luke Mitchell on 27 March 2019
The Most Common Legal Threats to Startup Success

Like any new business venture, startups are at risk of falling into multiple legal pitfalls that impact their success.

Many startups are sunk by preventable legal issues that new business owners did not foresee or did nothing to protect themselves against.
Putting in place measures to avoid common legal problems early and effectively will help your business succeed.


The Right Ownership Structure
The common legal structures for businesses include sole trader, company, partnership and trust.

Choosing the right legal structure from the outset is important as some structures provide protection against personal liability for debts and legal disputes.

There are also impacts to your tax obligations and expenses. In addition, some legal structures make it easier to sell your business in the future.

We strongly recommend seeking legal advice before you settle on the structure of your business. 

Here are some resources that may assist:
Relationships Between Business Owners - Start up to Success
Relationships Between Business Owners - Company vs Other Models

A Shareholder's (or Partnership) Agreement
Regardless of whether your business partners are family or friends, a shareholders’ agreement (in the case of a company structure) is an important and necessary document that clearly sets out the rights and responsibilities of each shareholder in your company.  A Partnership Agreement operates in the same way where the partnership model has been chosen.

Having an agreement in place, can help avoid an expensive and time-consuming court battle should a dispute between owners arise.

As every business is different, every Shareholder's agreement should also be different. Each agreement must be drafted according to the unique set of circumstances of the business and designed to meet the outcomes that  the shareholders wish to achieve in relation to shareholder funding or contributions, director appointments, how the company should be managed, dividends and financing, transfers of shares or an exit strategy.

We have more information here for your reference –
Relationships Between Business Owners - Shareholder and Partnership Agreements
Partnership Share & Unit Holder Agreements

Understanding Your Lease Agreement
Leases are complex documents which spell out the rights and responsibilities of both landlord and tenant.

If you don’t understand your lease, you could end up being liable for costs you didn’t anticipate such as utilities, repairs, taxes and the cost of documentation regarding the lease.

You may also have difficulty renewing the lease. Fighting a lease dispute can be expensive and can result in your business losing  its premises.

Do not sign a lease until you fully understand the rights and obligations the lease will impose.

Find out more here – Commercial Leasing 

Work, Health & Safety Compliance

It is critical to have proper equipment, procedures and work methods in place that comply with Work Health and Safety legislation to protect your staff from preventable injuries.

All businesses should at the very least have a written WH&S policy and ensure that all WH&S procedures are strictly followed. There can be significant penalties imposed on business owners personally – in addition to the business itself – as a result of WH&S breaches.

Sexual Harassment & Bullying Education

You have a responsibility to ensure that these behaviours are not part of your workplace. An important prevention tool is to have appropriate written policies and training programs in place – these will go a long way to ensuring that your employees understand the type of conduct that could amount to  sexual harassment or bullying.

While the development of policies and the implementation of training does require a time investment from you as the business owner, the time and financial costs that can flow from your employees engaging in  inappropriate workplace conduct far outweigh that time investment.

It is also important to keep updated on the relevant legislation surrounding workplace health and safety, bullying and sexual harassment.

More information can be found here.

Detailed Record Keeping
A commitment to detailed record keeping is necessary for many reasons including invoicing and accounts receivable, tax compliance and payroll.

Record keeping is a task that you can adequately perform by using accounting and online bookkeeping software like Xero/MYOB. It’s worthwhile engaging an external accountant or bookkeeper to maintain your records if you don’t have the time.

Failure to keep accurate records can lead to serious problems for your business, the consequences of which can doom your startup before it starts.

Compliance With The Privacy Act
If part of how your business operates includes collecting customer data, it is critical that you comply with your obligation as a business owner to avoid breaching the Privacy Act in the way that you collect, store, use and disclose private information about your customers.

Serious fines and penalties can arise from mishandling or misusing private information.

In Summary
Australian startups face many risks, most of which are avoidable with a relatively small investments of time and money at the outset.

So it's vital that you understand your rights and obligations, build your business on a solid foundation, and put yourself in the strongest position to avoid any avoidable legal issue that may impact your startup success.

Start the right way and engage a legal professional to help you avoid these and many other business startup pitfalls.

If you need assistance to help you avoid these legal pitfalls, we can provide you with the best legal advice tailored to your individual business situation.