In all of the excitement of establishing and growing an online business, it’s easy to make mistakes along the way. But, with a little forward thinking, they’re all preventable.
In 2020 alone, Australians spent more than $50 billion on online shopping, a year-on-year increase of 57 per cent, according to recent Australia Post figures.
It’s no secret that eCommerce is booming. Online businesses are growing faster than ever before, and a lot of small business owners don’t want to be left behind.
While figuring out how to grow and maximise success, business owners can easily overlook the crucial legal requirements of running an online business in Australia.
Don’t worry, though – it’s never too late to put better structure around yours, no matter how long it’s been running.
Just ask Damin Murdock, the legal practice director of Lawpath, Australia’s leading online legal software platform for small businesses. Murdock helps hundreds of online businesses with their queries every single week. Disrupting the expensive world of traditional legal services, Lawpath has assisted more than 200,000 businesses in Australia with their legal needs, providing a more cost-effective, technology-powered approach to quick – and important – legal advice.
Murdock takes us through five of the most common mistakes online businesses make and how to avoid them.
1. Growing bigger but not changing your structure
This one is all about planning for future success.
“As a company grows, it may be time to reconsider the corporate structure for the purposes of risk mitigation and exit strategy,” Murdock tells Kochie’s Business Builders.
“For example, where the company has spent a significant amount of money on machinery or technology, whilst also trading and signing up larger contracts that have larger liabilities.
“If this is the case, that company may wish to consider separating its assets from its trading arm. This way, if something happened to the trading business, the assets would still be protected by being held in a separate entity.”
Murdock says there may be tax implications by doing a corporate restructure, but doing so may provide greater protection for your business long term.
“It is important to consider restructuring the business before a company starts an aggressive growth strategy,”
2. Having an incomplete understanding of when, and how, to raise capital
Every day we hear about online businesses taking off, but how you choose to capitalise on that requires some strategic thinking.
“There are two primary ways to grow your business: either by way of organic growth or completing a capital raise,” Murdock says.
“The capital-raising process normally involves issuing new shares in the company, in exchange for cash, or a loan. If a company is raising money, the first step is to prepare a proper business plan so the company knows how much it wishes to raise, and how that money will be used.”
Some of the mistakes about raising capital that Murdock has seen are:
- the company has raised too much money and is unable to spend the money. In this situation, the company would have been better off to have raised a lesser amount, grow the business, and then to raise again at a higher valuation so the founding shareholders do not get diluted down as much.
- the company has engaged a person to assist with the capital raising, but instead of being paid on a success fee basis, they are paid a retainer amount
- the company enters into a loan, and then is unable to re-pay it on the due date.
3. Copying someone else’s terms and conditions from the internet
Not having solid service contracts which stipulate your terms and conditions – or using standard ones you’ve found online – can see issues with customers and suppliers escalate – so it’s worth bedding them down for your products and services right at the start.
For example, the Ts and Cs for your nursery business wouldn’t be the same as the ones for someone selling beauty products.
“Preparing terms and conditions for your business is essential as it will provide protection moving forward,” Murdock advises. “For instance, it will provide a company with the opportunity to suspend services, terminate the services, or recover unpaid bills. It also ensures that both parties are on the same page and understand what they will be receiving.
“Certain clauses which require particular attention is the definition of the services or goods, for instance, providing sufficient detail to what is actually being received, and when it will be received.
“Other clauses to consider are having a detailed variation clause, ownership of intellectual property, confidentiality, limited liability and a well-defined termination clause.”
4. Forgetting that contracts need review
As a business grows, so too should their terms and conditions. Murdock recommends regular review of service contracts for this reason.
“It is important to reconsider the standard terms and conditions the company uses for its clients,” he says. “Over time, a company normally starts offering more products and services, and it may be the case that the existing terms and conditions drafted many years ago do not align with what the company is presently offering, and in this case, the company may not be fully protected.”
If you’re no longer a startup, employee contracts may also need to change. “As a company grows, employees’ salaries often also increase,” Murdock says.
“The Fair Work Act says that where an employee ceases to be employed, all accrued but untaken annual leave entitlements are paid at the most recent salary. Therefore, it is important for a company to consider implementing annual leave policies which do not allow their employees to have excessive leave, which generally means more than four-weeks accrued but untaken leave.
“Otherwise, the employer can be left having to pay out a large liability when an employee’s employment is terminated.”
5. Not treating intellectual property like a growing asset
In the world of online businesses, it’s common for competitors to claim another business is copying their work by outright breach in intellectual property (ownership of an idea) or similarity in product. A recent issue between two candle start-ups – and former friends – in Sydney who claim to be ripped off by each other comes to mind as an example.
It can also become problematic when you commission someone to produce something for you, such as a graphic designer, website creator, or even a social media administrator.
Things can become murky very quickly as to who owns the work, and which way they can use it, Murdock warns.
“Where a company engages a contractor, no matter how small that engagement may be, it is important to have an agreement which states that the company owns all of the intellectual property in the work which is provided, or at the very least, a perpetual, irrevocable, worldwide, unlimited licence to use, modify, adapt and sub-licence that work,” Murdock explains.
“We have seen companies at their exit stages either being unable to complete a sale due to not being able to prove ownership of their intellectual property, or alternatively, having to try to contact past contractors from many years ago and have them sign an IP Assignment Deed. This can be a costly and timely exercise.”
Essentially, don’t leave your work, or work you’ve paid for, open to an ownership claim by someone else.
And of course, make sure you’ve got your domain name registered and your trademark applications sorted (Lawpath has more info on that here).
Don’t want to spend $600 an hour on legal advice? Contact Lawpath for affordable online legal for your business.
In Lawpath’s Legal Advice Plan you’ll get access to an on-call business lawyer and be able to make 30-minute calls to help with any legal need. Commercial law, trademarks, employment, starting an online business – it’s all covered. Plus access to more than 300 legal documents. Get smart with your legal and save time and money with Lawpath today.
This article is brought to you by Kochie’s Business Builders in partnership with Lawpath.
Disclaimer: Information in this article should not be considered legal advice. Consult a lawyer via Lawpath to get certainty about your legal obligations.
Feature image: Adobe Stock