Business Backbone
Business Owners
Business Review Report
Before moving too far, anyone contemplating going into business needs to understand
their legal and financial obligations. These are substantial, that is why we have collated
the relevant information into the Business Review Report.
The Business Review Report is a simple diagnostic tool that is used by one of our
mentors (or the business owner if they feel confident enough) to analyze a business.
The Report is divided into the same sections as this BACKBONE each dealing with a specific
topic. Simple questions are asked, comprehensive answers / tips are provided. The Business
Review Report is to be used by advisers to constantly monitor a client for weaknesses whether
they be structural, human resources, equipment resources, OHS, sales, marketing or
distribution.
Wills
Making a Will is the best way of ensuring that your wishes are taken into account when
you die.
If you die without having made a Will (this is called intestate) your estate will be
distributed according to a rigid legal formula, the consequences being that your assets may
not go to those you may have intended. Invariably, there may also be time delays and expense
in settling your estate.
Anyone who has divorced or re-partnered has compelling reasons for making a new Will.
For example, marriage may automatically revoke your Will. Similarly, divorce can automatically
revoke aspects of your Will.
Enduring Powers of Attorney
An enduring power of attorney is a legal document that gives someone else the power to make
personal and/or financial decisions on your behalf. "Enduring" means that the power continues
even if you lose the capacity to make the decisions yourself.
You may not always be able to make decisions when you need to. You may be too ill to make
choices about your medical treatment or where you should live. Giving someone enduring power of
attorney means that your attorney will have the power to make decisions in your interests and to
sign all the necessary legal documents.
Having an Enduring Power of Attorney is a wise decision. We recommend everyone (whether in
business or not) to have one.
Superannuation
Self Managed Superannuation Fund (generically referred to as SMSF) - many clients will be
approaching their Accountant to ask "why do I need a SMSF?" Depending on your answer you may
need to establish a SMSF.
Shareholders Agreements (for company structures)
A Shareholder Agreement is an important document that supplements the Constitution.
If you have, or are considering purchasing a minority shareholding in a company, you need to
know that certain basic facts about the company are not going to change.
A Shareholder Agreement sets out the terms and conditions upon which the shareholders will
manage the business and conduct its operations (including the ability to appoint directors,
time spent in the business by directors/shareholders, who the company employs/on what terms,
focus of the business, ability to change the company direction, funding/loans/interest), how
directors/shareholders will act in the event of a difference of opinion, whether shareholders
can transfer shares to a third party without the prior approval of existing shareholders and a
whole lot more. Essentially it is your company rulebook.
Sometimes, it is important that the shareholders have a say in the affairs of the company.
In a Shareholders Agreement, these things are set out in black and white. Standing in the
shoes of a shareholder for a moment, if the company was to alter its business or embark upon
another business, would you still want to be an investor when those businesses are totally the
opposite to the business you invested in? There should always be certain things that need the
approval of shareholders.
Division 7A and Division 974 Company Loan Facility Agreements
What appear innocent transactions, may in today's tax environment, carry substantial
financial consequences. If a company loans monies to a shareholder or an associate of a
shareholder (for instance a family member), then unless that loan is documented (at the time
the loan is made) and meets certain criteria set out by the ATO, the monies loaned are deemed
to be income in the hands of the recipient. If this is the case, the company does not obtain
certain tax benefits it would otherwise have done.
Conversely if a shareholder or an associate of a shareholder loans monies (or provides some
other financial benefit) to the company, and this loan/advance is not correctly documented,
then the repayment of monies/interest by the company may be deemed by the ATO to be dividends
not interest.
Rather than risk the financial penalties we strongly suggest that your corporate clients sign
a Division 7A Loan Facility Agreement now so that they can continue their current activities
without fear of falling foul of the Taxman.
We have a combined Division 7A and 974 Loan Facility Agreement for those that need both, as
well as a Division 974 Agreement for those people that have already documented their Division 7A
loans.
Partnership Agreements (for Partnership structures)
It is always better to agree upon the terms and conditions of a Partnership before the
business is started. If a Partnership Agreement is not signed by the parties, then the terms and
conditions upon which they will undertake their Partnership business, will be governed by the
Partnership Act.
The following matters are essential for any Partnership Agreement. They must be discussed by
the partners and agreed -
- description of what the Partnership business is, what the business can do. Is it to be an
Accounting Practice that specializes in Taxation, or a retail store that sells a particular
type of product. You need to consider exactly what the Partnership will do;
- how are the Partners to contribute to the capital of the business. Who is to pay what
amount to get the business up and running;
- how are the Partners to share in the profits of the business - who gets what. Perhaps
this will need to be linked to those parties that have contributed more to the capital of the
business than others;
- the liability of the Partners for debts/liabilities of the business is both joint and
several. This means that a creditor of the business (someone you owe money to) can sue either
just one of the Partners, or all or any number of the Partners to get his money back. Yes -
he need not sue all of the Partners together, he may just sue you. Accordingly you need to
have a say in certain aspects of the business - contracts of a particular size/value, issuing
of guarantees, paying money, signing cheques, contracting with suppliers. Make sure you know
that only certain things may be done without your express permission;
- if one Partner loans funds to or pays moneys on behalf of the Partnership, how and when
are those monies repaid, do they carry interest;
- what does each Partner provide to the Partnership in terms of time, money and resources.
Are all Partners to be full time or part time;
- have protocols been established to govern how the business is to be conducted - your
image, regularity of Partnership meetings, policies to be implemented and followed, when must
there be unanimous approvals for something, new Partners, how can a person retire from the
Partnership, procedures to resolve problems between Partners.
These are general Partnership terms. They need to be discussed prior to a Partnership
Agreement being signed.
Buy/Sell Agreement (for company/partnership structures)
This is a contract entered into between business partners which requires a surviving partner
or partners to buy out the other partner's interest in the business should a specific event
occur.
Specific events which may trigger a Buy/Sell Agreement include death, divorce, long-term
disability, retirement or bankruptcy.
Buy/Sell Agreements are usually linked to an insurance policy on the life of certain
individuals. The policy provides the surviving partners with the money to be able to buy out the
deceased/disabled/departing partner's interest.
Buy/Sell Agreements are a simple, effective "no stress" way of disposing of an interest in a
business at a time when the family is generally under substantial emotional stress that finding
a buyer for a business (or part of a business) is the least matter on their minds.
Deed of Access, Indemnity and Insurance (for company structures)
In today's litigious environment, many potential directors will require a Deed of Indemnity
and Access before agreeing to act as a director of a company.
A typical Deed of Indemnity and Access include:
- a personal indemnity from the company to the director;
- a requirement for the company to ensure it pays directors' and officers' insurance
premiums and provides evidence of payment to the officer;
- an obligation to provide directors with access to company documents so that they can
defend themselves if they are sued; and
- a requirement to continue to comply with the above obligations for a period of time
(usually 7 years) after the director leaves the company.
Director's Information Survival Pack
Yes, it is easy to say "I agree to be a director of XYZ Pty Ltd". But what does this
actually mean? For most directors, they have no idea what obligations and liabilities go
with the positions director, company secretary or officer of a company.
The potential liabilities are substantial ranging from hundreds of thousands of dollars
of fines to imprisonment. Before a person consents to be an officer of a company, they need
to read the Director's Information Survival Pack. This document provides the reader with a
review of the liabilities, obligations and duties of a company officer, examples of how
things can (and do) go wrong and the dollar amounts involved. This document is not for the
squeamish!