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4 Common Legal Traps To Avoid When Starting Your Business

When starting a business, it’s always exciting to talk about your ideas and plan how you’ll put them into action. When it comes to the legal side of it, not so much. It’s understandable why people don’t want to preoccupy themselves with making sure every legal requirement has been met, but if anything falls through the cracks – then it’s on you. In this article we’ll discuss the common traps new business owners fall into and how tackles these early on so that you can spend more time on the stuff that matters to you.

Not registering it the right way

It’s important to understand what you want to register your business as. You may have been told that you can choose to be a sole trader, partnership or company, but many people underestimate just how different they are. Your business will have different reporting requirements, protections and tax obligations depending on how you register. It’s also not the easiest process to alternate between the structures. If you decide later on to change your business structure, it can be a time-consuming and costly process.

The most common business structure is a sole trader. This is less expensive and less complex that registering a company. Conversely, sole traders are liable for all their business’s debts and are taxed within their individual income. To be a sole trader, you have to register for an Australian Business Number (ABN) and a business name if you choose not to trade under your individual name.

A partnership brings other people into your business, and has to register for a separate Tax File Number (TFN) than the partners involved. To establish a partnership, the partners need to have a partnership agreement. A partnership agreement provides security to both partners by outlining how the business will work, how profits will be distributed, termination and how a dispute will be handled. Once a partnership has been established, both partners will be liable for any debts.

A company is an entirely different beast. A company pays tax under corporate tax rates. However, directors of a company are not ordinarily held liable for company debts. A company is considered a separate entity from those who run it and is identified by both an ABN and an Australian Company Number (ACN). Different to sole traders and partnerships, companies have reporting requirements to the Australian Securities and Investments Commission (ASIC). Companies also have more financial reporting requirements, many of which are available on public record.

Not protecting your Intellectual Property

Depending on what your business does, intellectual property can form a significant part of its value. People come up with ideas all the time, so if your business is based on an idea or something that you’ve invented it’s important to have a patent. Similarly, business names, logos and slogans can also be protected by registering a trademark. If you don’t have these protections, it may be difficult to enforce your intellectual property rights.

Not having adequate insurance

Things go wrong sometimes, without it being anyone’s fault. That’s especially true for businesses. Your insurance needs will differ depending on what your business does. The most common forms of business insurance include public liability, professional indemnity, contents, workers compensation, and others. It’s likely that you will need a combination of these, if not more. Businesses often find themselves in trouble when something happens and their insurance policy doesn’t provide enough to cover their losses.

Not understanding your tax obligations

Although we’ve already covered the different business structures, it’s important to have a comprehensive understanding of your tax requirements. The taxes involved in running a business can be individual, company and also can include other taxes such as GST, Payroll Tax, PAYG and others. Further, businesses which have registered for GST (those that make over $75,000 per annum) need to lodge Business Activity Statements (BAS) with the Australian Tax Office (ATO). These are due 4 times per year, and there are penalties for those who lodge them late or not at all.


Jackie Olling is the Content Manager at LawPath and manages the content team.