It’s common for career executives to arrive at a cross-road in their professional life when their knowledge, experience and expansive network of contacts are such that they consider going into a consultancy for themselves.
In my experience, executives who take this path often have good intent but also business ‘blind spots’. In this article, I discuss a number of the legal matters that need to be considered when establishing your own consultancy.
While the opportunities of a new venture will certainly drive energy levels, it is important to ensure the foundations of your new venture are sound in order to shore up your future as a successful consultancy owner.
Business structures
Favouring simplicity and cost when getting started is understandable, however establishing a structure that covers your immediate needs AND considers how the consultancy may evolve in the future is essential.
While requiring more effort and cost initially, there are five important benefits correct structuring from the outset can bring: i) Tax effectiveness, ii) asset protection, iii) definition of ownership, iv) simplicity & flexibility for operating the structure and, v) suitability for succession.
Most importantly, it will also minimise the need for spending time and money restructuring as your consultancy evolves in the future.
Consultancy businesses commonly use one of the following entities: Sole trader; Partnership; a Family Trust; Unit Trust or Company. With all of these options deciding on the structure that’s right for you usually only becomes clear following collaboration between your financial adviser, accountant and lawyer.
This is because each structure addresses different aspects of your business as well as your personal financial affairs, tax, asset protection, succession and estate planning needs. And, it’s not always straight forward as the best structure may in fact be a combination of structures that limit the disadvantages of one structure and take advantages of another.
For example, the consultancy could be operated by a unit trust and the units in that trust could be owned by various family trusts. This structure could allow the income from the consultancy, owned by the unit trust, to be spread widely to enable potential tax efficiencies.
Similarly, a partnership can be a partnership of trusts. This structure can provide some asset protection and potential tax minimisation. While a Sole Trader structure is simple and easy to transfer ownership at a fundamental level, for the consultancy owner’s estate planning, a Company structure may be more suitable for transferring to multiple beneficiaries such as children. In short, you’ll need the right advice for your circumstances.
Stakeholder agreements
Handshake agreements with friends and associates simply won’t cut it, especially if push comes to shove. If you intend to include more than one stakeholder in your consultancy, you will need to implement an agreement that governs your business relationship. Depending on your business structure, this may take the form of a partnership agreement, shareholders agreement or unitholders agreement.
Stakeholders are generally defined as those who have a financial interest in the business such as an individual who may be the sole trader, business partners if the entity is a partnership, shareholders in a company or beneficiaries or unitholders for a trust.
Employment law
While many consultancies often begin small with the founders covering all the bases, a workforce inevitably follows. No matter how small your consultancy, all employers should have written agreements with their employees. Further, as an employer you are obliged to be aware of, and observe relevant employment laws which can be complicated.
Employment law is heavily favoured toward the employee and with an increasingly litigious employment environment, employers can find themselves dealing with costly and time-consuming legal matters. While there is no ‘silver bullet’ for most employment disputes, if there is no formal agreement in place from the outset, it is incredibly difficult to defend a claim.
Contracts
Contracts and client agreements are an important aspect of every consultancy. Not only for providing clarity relating to your scope of work and fees, but for avoiding or minimising damages in the event of legal disputes.
Generally speaking, indefinite timeframes; incomplete details such as who is responsible for what; vague conditions or clauses that provide for “agreements to agree” where the parties leave material decisions to be agreed at a later stage, are among the common reasons for contractual disputes as they leave the door open for interpretation and argument. A contract should set clear and fulsome terms for the relationship between the parties and be easy to understand.
To find out more about establishing a consultancy and avoiding the business blind-spots that can impede your success, please contact Zac Herps on (07) 3007 2080 or email contact@executivestrategies.com.au
Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.
The information in this article is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate, we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.
