04 Jul Top 6 Mistakes Made By Start Ups
Starting up a new business can be difficult. There are lots of traps for new comers. We have compiled a list of the most common mistakes we see being made by start-up businesses.
1. Business plan
You should not start your business until you have a written business plan which includes detailed cash flow forecasts. Documenting a business plan will assist you in focusing your business strategy and ensuring your business is profitable. Your plan should also include an assessment of the regulation that might affect your business.
2. Business structure
You should get advice from your lawyer or accountant on the best structure for operating your business. The structures that can be used for establishing a business include: sole trader (i.e. you personally operating the business) partnership, trust, company or a combination of these entities.
Often tax outcomes will drive the selection of a business structure. Getting the structure right from the beginning is important, as it could potentially save you a significant amount in tax liabilities and avoid the need to pay tax or stamp duty down the track if you have to restructure your operations.
3. Asset protection
In business you should always plan for the best, but it’s important to have an exit strategy if things do go bad. Normally it’s too late to start planning for asset protection once things turn bad. There are a number of simple things you can do to protect your assets from business creditors. Some examples include:
a) using one entity to carry on the business and another separate entity to hold business assets;
b) protecting your spouse and family from the trading activities of the business by not including them as directors of the company;
c) avoid giving personal guarantees or indemnities; and
d) have the equity in the business owned by a family trust.
4. Relationships with business partners
It can be a great idea to go into business with a partner, but even best mates can have bust ups. So it’s important that you have legal documents which set out each parties’ rights and obligations. Depending on the structure of the business, these sorts of agreements go by a variety of names: shareholders agreement, unitholders agreement, partnership agreement or trust deed. These documents all govern the manner in which the business is to be operated, the circumstances in which partners may acquire or dispose of equity, rights to distributions of profit, decision making processes and dispute resolution.
Too often clients come to us because they have fallen into dispute with their business partner and unfortunately many times there is no formal agreement between the business partners. A good agreement should include dispute resolution processes which keep the parties out of court. Litigation or even the threat of litigation will often result in the premature death of a start up.
5. Intellectual property
If your business is reliant on valuable intellectual property it is important that this intellectual property is actually owned by the business. This issue is critical for technology developers, researchers and artists.
The default position is that intellectual property rights will normally vest in the creator of the intellectual property. For example if a business engages a person to develop its logo, in the absence of any contractual terms dealing with intellectual property rights, copyright in the logo will be owned by the designer. There are exceptions to this. Intellectual property created by an employee in the course of their employment will be owned by the employer. However, care needs to be taken when preparing employment contracts in order to ensure that intellectual property is captured.
If you want the best protection for your brand you should also think about registering a trade mark.
6. Tax planning
Due to current subdued economic conditions, there are less tax dollars flowing into the Federal Government’s coffers. In response to this, we are seeing a more aggressive approach being taken by the ATO in relation unpaid taxes or even for missing two consecutive BAS lodgements.
A common mistake we see is start-ups not making provision to pay income tax. In your first year of business, you generally don’t pay PAYG instalments for income tax. After you lodge your first tax return on or before 28 February showing a profit from your business, the ATO will require you to make PAYG instalments of income tax. You will normally be required to immediately pay income tax on your first year of trade plus income tax for the first and second quarter of trade in year two. This is called the ‘double whammy effect.’
Getting off on the wrong foot with the ATO is not a good way to start your business so make sure you make provision for the double whammy effect. Even in the first year it’s a good idea to start putting aside funds to pay for your income tax bill.
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