Not sure what legal structure to adopt for your new startup business? Should it be a company, with shareholders and directors? Or should it be a partnership? And what’s the difference, anyway?
How Partnerships Work – Is This Structure Good For Your Startup?
A partnership is a more basic form of organisation than a company. It consists of two or more people pooling assets, engaging in a common business activity to generate income, paying their business debts, and sharing the profits. It is a relationship. The smart way to set it up is to have a partnership agreement, where the inputs and outputs of each partner are set out clearly. Having an agreement usually makes things run more smoothly, and prevents misunderstandings. It can map out how the partners will deal with all the important issues that they would be likely to encounter in their joint enterprise, including accepting new partners, leaving the partnership, splitting profits, leaving money in the business to fuel growth, and so on.
One important thing to appreciate is that both partnership and company structures work against a background of general legal principles. These principles vary from country to country, but a lot of countries have similar basic rules. One common rule is that each partner is 100% liable for the debts of the partnership, in relation to outside parties, even though they may have unequal shares of the business, internally. Therefore, if your partner disappears, even though you only own 10% of the business you will be liable to pay 100% of its debts. The solution the law offers you is to sue your partner, probably now your ex-partner, for his or her 90% contribution. This is what you might consider a downside of having a partnership.
There comes a point, for most startup businesses, where it becomes necessary to expand the human resources available to do the work of the business. There are only so many hours in a day, and for most startup founders, the size of the work involved every day in carrying out admin tasks, marketing, public and customer relations and so on becomes large enough to justifying getting a new person in to take on that load and free the founders’ time so they can devote themselves to doing what they really want to do, namely planning and executing the path of their business to the next level of growth.
So, what to do? Hire one of more employees? Hire temp staff from agencies? Hire casual staff or freelancers? Each one of these options has its pros and cons. This blog discusses some of those issues.
The term ‘Legal Tech’ can mean different things to different people. To the creators of the comic book hero Judge Dredd, now the leading character in some entertaining movies, legal tech in a post-apocalyptic future means empowering judges by equipping them with body armour, powerful guns and high-speed motorcycles so that they can roam cities to dispense quick and, where necessary, brutal justice. There is a core similarity between Judge Dredd the fictional, futuristic character and what legal tech means to most lawyers working in today’s pre-apocalyptic world: improving efficiency.
In many cases, legal tech simply means the adoption by lawyers of generally available technology and tools to make themselves more productive, such as word processing. While word processing may have been a great leap forward for all people who write letters, it is an even more fantastic tool for people who draft contracts that have multi-layered structures of headings, paragraphs and sub-paragraphs. When those documents were prepared on typewriters, inserting an additional paragraph into a long contract could mean hours of extra work for a typist if the insertion caused the pagination to change. This is an example of a technology that has helped everyone, including lawyers, but which has been especially helpful for lawyers.
The legal issues that are raised by branding, under Australian law, don’t fall neatly into one category. (Similar issues probably exist in other countries. This post focuses on Australia.)
Here are some of the issues:
- If goods and services are sold under a registered trade mark, then the trade mark is protected under the Trade Marks Act, and action can be taken under that law against people using the trade mark without the authorisation of the owner. But, if a trade mark is not registered, that doesn’t mean there is nothing that can be done to stop other people using it. Remedies may be available under the law of torts (e.g. an action for passing off), and competition law, the Australian Consumer Law, to stop misleading and deceptive conduct. Indeed, these remedies are probably also available against most abusers of registered trade marks, but may not be implemented because the Trade Marks Act provides a straight-forward enforcement method. Trademark registration is an important way to protect product and service branding.
It’s often the case, when someone starts a business, that they don’t have a lot of money. There are always a lot of things to buy, like equipment, and if the business has moved into rented premises then there is the cost of a new lease, which can be high. Among the many things on the to-do list may be to hire a lawyer to get a standard client agreement drawn up, or terms and conditions for product sales, or licensing IP, or a shareholders (or partnership) agreement, and so on. Then the startup owner(s) find out that legal advice can be expensive, and they decide to skip the legal advice or professionally drafted documents for the time being, and make do with downloaded documents (sometimes from a different country) or documents a friend has given them.
Everyone has a budget, and if you can’t afford a lawyer then that is your reality. But startup business owners who decide, for whatever reason, to skip obtaining legal advice should be careful. It is worth keeping the following things in mind, in this situation.
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