The five legal questions every entrepreneur should be asking themselves
BY DEMETRIO ZEMA
Most entrepreneurs and self-employed professionals that I meet generally go about their daily work without thinking too much about the legal aspects of their business. With only 24 hours in a day, and about 10-12 actual working hours, entrepreneurs focus their time and energy on clients, marketing and working rather than reviewing the management and operations of their business.
Every person in business faces some form of risk, be it personal risk, financial risk or other risks. Every entrepreneur should take a couple of minutes to review the below five legal questions in assessing their legal standing:
1. Am I a person or a business?
I do not pose this question in any philosophical way, rather to highlight the important legal distinction between whether you are a business owner or a freelancer operating under your own personal name. Is there any separation between personal and business bank accounts? Do you hold an ABN? Are you registered for taxation/GST purposes? Do you issue invoices and/or quotations to your clients? Are these compliant dependent on your structure?
The difference comes down to what business structure you operate in (or not). If you are a sole trader with no distinction between personal and business, then you are the business and all your liabilities both financial and personal rest with you. Not having distinction between yourself and the business provides significant exposure particularly to your savings and other assets in the event you are sued. Further you will not be able to apply for a business loan, protect your IP and assets, or obtain a line of credit.
2. How do I contract with my clients?
Whether you are a freelancer or a company, you ought to have some form of signed document to establish the basic scope of work which will be undertaken and on what terms such work is being provided on. A good contract or services agreement can protect you in the event a dispute arises and ensures that all parties are “on the same page” in terms of project scope, expectations, payment and timeline. You should have a standard agreement which you work through with each client and modify accordingly to be reflective of the parties intentions.
3. Are you a contractor or an employee?
With more and more businesses of all sizes using contractors and freelancers these days, it’s important to understand the legal distinction between contractor and full-time employee. This is true whether you are the one being hired or doing the hiring. The legal classification boils down to independence and control and this is critical from both an insurance and taxation perspective. Contractors often have the freedom to determine how a certain job should be done. Ask the following questions: who decides when and where to do the work? Who chooses the tools/equipment to use? Who defines how the work should be done or the sequence of the steps?
In addressing number 2 above, any contract should clearly state the relationship between the parties to ensure there are no ambiguities and no later consequences from a superannuation or taxation perspective.
4. How do I manage and track income and expenses?
Regardless of your industry or line of work, any business ultimately boils down to how much money comes in and how much goes out. There are countless reasons to have a firm grip on your company’s financials, including reporting requirements for taxes, as well as determining how much you owe or should charge a service provider. Keeping a log of your hours and expenses for each project, and keep/scan all relevant receipts and correspondence. That way, if there’s ever a client dispute over charges, you’ll have all the documentation needed to back up your side of the story.
5. How do you handle disputes?
Being in business, often involves some risks and responsibilities that employees typically don’t assume. For example, an independent contractor is accountable for satisfying certain performance expectations and deliverables and is responsible for the issuing of invoices and following up of same. Whilst most deals will come and go without a hitch, you should have a set procedure in place in the event any issues arise.
Particularly your contract or services agreement should set the expectations for the work to be performed (including the number of allowable revisions, if applicable). Keep a paper/email trail that documents your client correspondences—particularly documenting any delays on the client side that will impact the overall schedule and any variations which may have been agreed.
The hardest part of being in business as an entrepreneur is actually working for yourself and having to be accountable to yourself for your actions. It is however important to remember the legal implications of being an entrepreneur particularly dependent on the relevant structure you choose to adopt. Being an entrepreneur is exhilarating. We are often motivated by drive and passion to succeed. However, be sure to not loose sight of the bigger picture to protect you and your business as much as possible.
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