Business and Commercial Law
Alan Priest has been advising clients in relation to business and commercial issues for over 30 years!
Which business entity is most appropriate for you?
Businesses can be operated by :
- a sole trader
- partnership
- company
- trustee
Sole Trader
A sole trader is a person who conducts the business on their 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
A business partnership may consist of up to 20 people. If there is no formal partnership agreement, 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 partner leaves the partnership or dies, liability for the debts of the partnership will fall on the other partners.
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. If you are an employee of the Company, the Company will have to pay superannuation and workers compensation for you.
Trusts
These may be more appropriate for holding business assets, rather than trading. There are several kinds of trusts.
The most appropriate entity for your business will depend on a number of issues and may change over time. The sorts of considerations that will apply are : taxation advantages and disadvantages for each entity, the type of business you are involved in, concerns about liability if things go wrong, the number of owners of the business. Setting up a new business should involve discussions with your accountant and your lawyer.
How important is my lease?
The lease is probably the most important aspect of your business if you are renting premises and is often the part that is neglected. The rent and the term of the Lease as well as the location of your business are critical aspects. Your occupancy may be subject to the NSW Retail Leases Act 1994.
What do I get when I pay for goodwill?
Goodwill is an asset of a business which forms part of the business. Goodwill arises for a variety of reasons such as the location of the premises, the absence of competition, the good reputation of the business. The value of goodwill generally reflects the earning power of the business. The problem with goodwill is that it can be destroyed quickly by changes over which the owner has no control such as loss of key staff, widening of roads or cancellation of a supply agreement
What is a franchise?
A franchise is a type of business ownership which allows you to operate and independent business under the banner of an already established business. Franchises are governed by the Franchising Code of Conduct. For more information about franchises, have a look at the franchising websites www.franchise.org.au
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.
Sale of Business contract
Most sales of businesses involve a contract and the assignment of a lease. The contract will deal with the value of the business and its apportionment between goodwill, plant and equipment and stock. It may also involve the transfer of the intellectual property of the business, employees who wish to continue on, the state of the plant and equipment and a restraint on the vendor to ensure that the vendor does not set up in business in competition with you.
What is a contract?
A contract is a legally binding agreement between two or more entities such as a person and a company or two persons or two companies. As consumers we enter into contracts with businesses on a daily basis. For example, you enter into a contract when you buy petrol or groceries or sign up for a phone plan. Traders will enter into Credit Contracts, guarantees, supply contract, sub-contracts for services or purchase contracts.
Contracts are governed by the general law evolved from decisions made by Judges and statutory law which are laws introduced by government such as the Trade Practices Act, the Fair Trading Act, the Credit Act and the Contracts Review Act. Some of the most interesting case law relates to Contracts. Masters v Cameron [1954] HCA 72 is the leading Australian case on when a contract is entered into .
A contract involves certain basic elements. They are:
- Agreement - which arises from an offer and an acceptance of the offer;
- Consideration -which is the exchange of some benefit or something of value by the parties Eg payment by one party for the work done by the other party; and
- An intention to enter into legal relations - which is that the parties intended to enter into a legally binding agreement
A person must have legal capacity to enter into a contract.
What happens if there is a problem with a Contract?
Once a contract is made, each party is entitled to rely on the terms of the contract which means that each party must also carry out its obligations under the agreement.
Problems often arise with contracts that apply to the future conduct of the parties. It is difficult for the parties to anticipate what future events may arise that were not considered at the time the contract was entered into. These events may have significant impacts on one or the other party to the contract. An experienced business lawyer such as Alan can assist you to consider possible future events and incorporate relevant clauses in the Contract.
Insurance policies may assist a party to minimise the damage caused by an intervening event but where insurance is of no assistance, the following may apply:
- General terms may be implied into the Contract by the law of Contract
- The parties may agree to vary the Contract or to terminate it
- The parties may seek the assistance of a mediator or lawyers to help them resolve the problem that has arisen.
- If the issues cannot be resolved, one or other of the parties may need to seek a Court order seeking damages to compensate them for losses which they have suffered.
- Under the New South Wales Contracts Review Act the terms of a contract may be altered or disregarded if they are unconscionable, harsh or oppressive. The Contracts Review Act only applies to contracts entered into for personal use not contracts for business or trade purposes.
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