Going into business?
How important is my lease?
The location of your business is often vital to its success and you must ensure that your lease is properly drawn up so that you do not have to move or change some important aspect of your operations. Before moving into leased premises obtain a copy of any proposed or existing lease and discuss with your Solicitor each clause in it and its implications.
Remember that your occupancy may be subject to the NSW Retail Leases Act 1994 and the conditions under which you occupy the premises must be contained in the lease you sign. It ought to allow you to make any alterations necessary to your business and, if the business is in a shopping centre, you would be wise to have a restriction on other businesses which may compete with yours.
Be careful of any restrictions or requirements relating to hours of access or carrying on business.
Most leases make the lessee responsible for keeping the premises and fittings in good repair and many require you to pay all or a proportion of costs such as rates, maintenance and so on. Make sure all these are clearly stated. In some cases the rent may vary according to a fixed percentage or some formula such as the consumer price index or the turnover.
The lease will normally describe the only business permitted on the property and is usually interpreted strictly; this could restrict you from diversifying and make it difficult for you to sell the business. It must be clearly worded with the future development of your business in mind.
What business structure is best?
There are several forms of business structure, each having its own legal, accounting and tax requirements. The form of organisation of a business determines many things, including how tax is paid and how profits are disbursed, and it should be geared to help you achieve maximum benefits.
The types of structure you may ask your solicitor to discuss with you include:
- Sole trader: With this structure you intend to conduct your business on your own or with employees but no joint owner. As a sole trader you are responsible for all debts and may have to mortgage or sell your personal assets to pay the debts of your business.
- Partnership: Up to 20 people may form a business partnership. A larger number is possible for some professions, such as accountants. If no formal partnership agreement exists, partners are deemed by law to be equal owners. Liability for all debts may fall on any of the partners jointly and severally – if one absconds or dies the others may be left with the liabilities.
- Limited liability company: If you form a company, the shareholders have limited liability; you may also become an employee and a director with certain duties, liabilities and strict responsibilities set out in the Corporations Act. Companies are subject to their own tax, record-keeping and reporting obligations.
- Trusts: These may be more appropriate for holding business assets, rather than trading. They will necessitate seeing your Solicitor.
How is a franchise set up?
Franchising is a type of business ownership which allows an individual, partnership or company to operate an independent business under the banner of an already established business. Before entering into a franchise you should check the reputation, track record, and financial stability of the franchisor very carefully. Also find out what advertising budget and back-up services the franchisor offers.
The fees payable to the franchisor must be clearly stated, along with the terms of sale for goods supplied by the franchisor – you will need to know if you can purchase stock from outside the franchise network.
A franchise agreement is a written document outlining the rights and obligations of both the franchisor and the franchisee. It is a legal contract and much attention should be given to its contents – ultimately it contains the rules and regulations upon which your future income and security will depend. Also, the franchisor must give you a copy of the Franchising Code of Conduct as well as a ‘Disclosure Document’, and allow you at least 14 days to consider them before signing.
What do I get when I pay for goodwill?
Goodwill is a way of describing a special asset of a business for which a purchaser can be called upon to pay. It arises for a variety of reasons, for example, the location of the premises, the quality of the products sold, the performance of the staff, the absence of competition, etc. It is generally reflected in earning power but can be destroyed quickly by changes over which the owner has no control, for example, zoning, widening of roads or cancellation of a supply agreement.
The real value of goodwill should be thoroughly assessed by your legal adviser and your accountant as capital gains tax issues may arise.
Are there any Government fees to pay?
Often there are certain permits, multi-purpose licences and certificates you are required to have in order to carry on business legally, for example, a council licence which takes account of Department of Health regulations, a factory registration certificate, tobacco retailer’s licence, trade waste agreement or liquor licence. In many cases these are not transferable by the seller and a new permit or licence must be obtained by you and a new fee paid. In most cases NSW Government stamp duty will be payable by the purchaser.
What sort of insurance will I need?
Usually, the only business insurance you are required by law to carry is workers compensation, though landlords and franchisors may also require you to have certain insurances. The rest is up to you, but you would be foolish to neglect to cover such obvious risks as fire, burglary, public liability, personal disability and loss of profits.
There are many other types of insurance which might be appropriate for your business and these should be discussed with your solicitor to get an impartial assessment.
How does my sale or purchase affect staff entitlements?
It is important that the purchaser of a business knows what accrued staff entitlements it will be responsible for after acquisition, for example, long service leave, sick pay or holidays. Provision for these obligations should be clearly settled with the previous owner in negotiations before the sale.
The owner should be aware, too, of the effect of fringe benefits tax on any benefits given to valuable staff to induce them to stay on.
In many instances, staff are the most vital single asset when you buy a business, but it is difficult to prevent them from leaving. It can be important to many businesses to ensure that any staff who leave, or even the previous owner, do not set up in opposition using special knowledge or confidential information which has been gained from the business you bought.
Will the Government help me?
Some businesses are eligible for assistance from the Government of New South Wales. The Government also funds a comprehensive range of publications, audio-visual material and computer assistance available through Business Enterprise Centres in regional areas around the State.
- Law Society of NSW
- 170 Phillip Street
- Sydney NSW 2000
- DX 362 Sydney
- T: (02) 9926 0333
- F: (02) 9231 5809
- E: email@example.com