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Running a business

This section contains useful information about some aspects of running a small business. However, it is not a substitute for obtaining professional advice applicable to your own situation.

Insurance

Insurance is essential, irrespective of the type business structure (company, sole trader or partnership) that is used to run a business.

Advice should be sought from a reputable insurance broker, as there are often industry-specific options available as a package. Without insurance, a business may find itself unable to cope when things go wrong, whether or not it is a problem with a customer or supplier, or if plant and equipment or business premises are damaged.

Some types of insurance are mandatory, like paying workers compensation premiums through the Return to Work scheme.

See the section on Insurance for more information about insurance generally.

Granting credit

Sometimes there is pressure from other businesses to provide credit, that is to enter into an arrangement whereby payment for goods or services is deferred. Whilst this is quite common, for obvious reasons it carries the risk of never being paid. In some circumstances a licence is needed to act as a credit provider, see Credit although this generally only applies when supplying goods or services to a consumer.

However, a business can legally demand payment in advance of delivery by either cash or bank cheque, generally known as COD (cash on delivery). Given the high level of debt, it may be advisable not to give credit as a matter of policy as debt recovery often fails to meet creditors' expectations.

There are ways to deal with business customers who ask to establish an “account”, including:

  • Asking for a personal guarantee from the director of a corporate customer;
  • Including a retention of title clause (ROT) in supply terms and conditions;
  • Supplying goods on a consignment arrangement if appropriate;
  • Following up payments early and imposing conditions on supply if payments are not made.

Additional details about these methods is discussed in more detail below.

Personal Guarantees

If you are the business owner, you can check to see if your customer is run by a company, by visiting either http://www.abr.business.gov.au/ or the ASIC register, which includes a database of companies and business names. More information about business names is available on the ASIC website.

If your customer is a company, you can ask the directors to provide a personal guarantee the payment of any debt owed to your business. That way if the company is wound up, you have recourse to the assets of the directors instead. Care should be taken with the wording of the guarantee, and it is best to get professional advice to ensure that the guarantee is enforceable.

If you are a director and are being asked by your supplier to sign a personal guarantee, don’t be surprised. Obtain independent legal advice about the effect of the guarantee, and ensure that you read and understand the terms of the guarantee carefully before signing. If you are not comfortable with signing a personal guarantee, then think about alternatives to ensure that your company can pay for goods and services. You could also negotiate the terms on which you agree to guarantee your company’s debts including:

  • Offering a bank guarantee instead
  • Limiting the amount for which you are liable, or the length of time that the guarantee lasts
  • Making the guarantee limited to your time as a director (so that if you resign, you are no longer liable)

It is also important to keep records of the personal guarantees that you give as a director. If you decide to exit the company and resign as a director, you should ensure that you contact each creditor and ask for a written confirmation of your release from your obligations under the guarantee for further debts incurred by the company after your resignation.

Personal Property Securities Register

The Personal Property Securities Register commenced operation in Australia in January 2011. It marks a change in the way that security interests in personal property (not real property) are registered and affects the way that businesses borrow money, and lease or buy and sell goods. It replaces numerous registers, including the ASIC register of company charges, combining into one single register that is accessible via the internet at www.ppsr.gov.au. Some examples of personal property that can be used as collateral include:

  • motor vehicles and watercraft
  • crops
  • livestock
  • manufactured items
  • shares
  • intellectual property
  • household items
  • accounts receivable
  • certain types of statutory licences (eg fishing licences issued under Commonwealth legislation)

but does not include state based licences, or fixtures to land, or land itself. The legislation also specifically excludes liens, which usually arise at common law on default in payment, and not by prior agreement with the grantor.

In essence, the Register operates like a notice board, where “secured parties” (lenders or creditors) record their “security interest” with “grantors” (borrowers or debtors).

Once registration is effected, a security interest is said to be perfected and will gain priority over other later-in-time registrations. There are exceptions to this rule, most notably Purchase Money Security Interests, which are discussed in the context of Retention of Title arrangements below.

A security interest can be any type of obligation, but is usually an agreement to repay a debt that is secured over collateral (namely the personal property to which the security interest “attaches”). The agreement giving rise to the security interest must be evidenced in writing in order to be registered, so it is not possible to register an interest without the prior agreement of the grantor. Any registration that is considered by the Registrar to be vexatious or frivolous may be removed by the Registrar, and a registration can also be removed by the Registrar at the request of the grantor in appropriate cases.

Security interests may also be perfected without registration if the secured party takes possession of goods. In all other cases, the consequences of failing to register a security interest can be devastating, because if the grantor goes into liquidation and the security interest is not registered, the interest vests in the grantor. As a result, any title to the goods you supply to another company becomes meaningless – if you sell the goods on credit to another business that then goes into external administration, and there is an unregistered security interest, you will lose the goods.

Retention of Title Arrangements

Section 18 of the Sale of Goods Act 1895 (SA) sets out rules regarding when title to goods passes, including a rule that title passes if a contract is silent on the time of delivery or payment.

A well-drafted Retention of Title (ROT) clause ensures that title to goods is retained by the seller until the purchaser pays for them. Some ROT clauses include a right to enter onto premises and seize goods that have not been paid for, assuming that the goods can be identified. A lawyer should be retained to prepare an ROT clause, given that such clauses can be strictly construed and may have unintended consequences.

Since the commencement of the Personal Property Securities Act (PPSA) and Register (PPSR), retention of title clauses have taken on particular significance in business dealings.

If goods are supplied to businesses on an ROT basis, a supplier can obtain priority (known as a Purchase Money Security Interest or PMSI) over secured creditors as long as:

  • the ROT arrangement is properly registered on the PPSR; and
  • the ROT clause is well-drafted.

Registration of the ROT arrangement is particularly important to protect suppliers when purchasers of their goods default on payment, and prevents the default position under the PPSA where goods that are the subject of a security interest vest in the purchaser on the appointment of a liquidator, if the ROT clause is unregistered or if there is delay in registration [see s 588FL Corporations Act 2001 (Cth)].

The PPSA also creates a right to the proceeds where goods have been used and on-sold [s 32 PPSA], in cases where payment has not been made by the purchaser.

Given the importance of effective and timely registration of an ROT clause, professional advice should be sought to prepare supply terms and conditions, and then effect registration.

Further information can be obtained from the Personal Properties Securities Register at: ppsr.gov.au

Consignment Sales

Another way of supplying goods is on consignment, which is an arrangement whereby a business supplies goods to be sold by another business. The business selling the goods on behalf of the supplier does not own the goods, but rather holds them until sold and then pays the owner an agreed amount of the sale price. Artworks are often sold on consignment to galleries, although there are other industries that also use this type of arrangement.

A commercial consignment is considered to give rise to a security interest under the Personal Property Securities Act and as a result, businesses who supply goods on consignment are urged to register the security interest on the PPSR. There are certain requirements which must be fulfilled prior to registration of the interest, and professional advice should be sought.

If a commercial consignment is not registered on the PPSR and the company selling the goods is wound up, the goods may vest in the company and may not be able to be recovered from the liquidator.

Collecting Debts

Collecting debts from customers can be unpleasant and can often take considerable time away from the more productive aspects of running a business. Measures can be adopted to prevent problems arising the first place (see above under Granting Credit) and a well-run business will keep copies of any agreements, invoices or other document which show how much money is owed or the time date or circumstances of the debt.

Avoid entering into verbal agreements that might vary the terms on which goods are supplied, including extensions of time to pay. It is far better to have a written record of any agreement so that the business can easily prove any agreed final date for payment or other variation. Another way of dealing with customers who do not pay is withdrawing supply or only supplying goods COD.

Using debt collectors may be an attractive option if you do not have time to focus on debt collection. Debt collectors will generally charge a fee plus a commission of the debt recovered. Subscriptions are also offered for regular debt collection. Debt collectors will usually find out information such as the debtor’s or company’s registered address and will lodge a claim if the matter needs to go to court. The extra cost of debt collection cannot be claimed unless there was an express agreement that the debtor will be liable for the cost of debt collection.

Another option for businesses is to on-sell debts to a third party for collection.

Contracts

Businesses enter into contracts almost as a matter of course. Contracts are valid whether they are written or verbal. Unsigned contracts (that is agreements that are reduced to writing but never signed) whilst not carrying a lot of force may assist a Court in deciding what terms were agreed.

A contract may also be binding even if you think you had not yet reached final agreement on terms. One critical aspect is the conduct of the parties, and if the parties perform under the proposed agreement, there is likely to be an inference that they intended to be bound. And if there are problems with establishing that there was a finalised agreement, that does not mean that the other party is prevented from claiming losses suffered.

Further information about the characteristics of a contract is set out in Making a Contract . Under the Australian Consumer Law (ACL), in certain cases business have the same rights as individual consumers under consumer guarantees. The exception is where the goods are purchased for:

  • Resupply
  • To use up in trade or commerce, either in manufacture or treating or repairing other goods.

In addition, the amount paid or payable by the business for the goods cannot not exceed $40,000, or the goods must be of a kind ordinarily acquired for personal, domestic or household use or consumption. There are varying interpretations by courts of the meaning of goods of a kind ordinarily acquired for “personal, domestic or household use or consumption.” Items costing more than $40 000 such as agricultural machinery, or aircraft would obviously be excluded, but in the case of carpet (domestic quality but installed in a night club) or an alarm system which could either be used in business premises or domestically, the situation is not so clear cut.

If you are supplying goods or services to individual consumers and you have written terms and conditions that are not usually negotiated with your customer, you should have the terms and conditions reviewed by a lawyer to ensure that the agreement does not contain unfair contract terms.

More detail is set out under Consumer Protection and in the section entitled Exclusion Clauses.

Pursuant to ss 23 - 28 of the ACL, a term of a consumer contract is void if it is unfair. A consumer contract is a type of standard-form contract, where the supply of goods or services, or grant or sale of an interest in land, is to a consumer for wholly or predominantly personal, domestic or household purposes. A standard form contract is one where a consumer is not given the opportunity to negotiate the terms. More information is set out in the section called Unfair Contract Terms.

Exclusion Clauses

A business may try to exclude or limit liability for things that might go wrong by including an exclusion or limitation of liability clause within a contract with another business. In certain cases, businesses will use an exclusion clause to allocate risk and work out who is responsible for insuring that risk.

A Court will interpret an exclusion clause in business to business contracts like any other clause, according to its plain and ordinary meaning, as long as it is properly incorporated into the terms of the contract [1].

If any onerous clause, such as an exclusion clause, is not drawn to the attention of the contracting party, there is a danger that the clause will be unenforceable. Therefore, it is important to ensure that all terms and conditions are brought to the attention of the other business, and that business given an opportunity to accept or reject the clause. Merely having printed terms and conditions that are not available at the commencement of the contract may not be sufficient.

In situations where an exclusion clause is ambiguous, or the weaker party is in need of protection, the Court will interpret the clause in accordance with the contra proferentum rule, that is, against the party that seeks to rely on it.

Businesses should also take care when goods and services they supply come under the consumer guarantees provision of the Australian Consumer Law.

Section 64 of the Australian Consumer Law (ACL) renders void any term of a contract that purports to exclude, restrict or modify a consumer’s rights to rely on the consumer guarantee regime.

Section 64A ACL permits modification of rights in certain circumstances, by allowing a supplier to limit the remedies available to the consumer if, and only if, the contract is for goods or services that are not ordinarily for personal, domestic or household use. So, if a business is supplying business type products to another business, the supplier can rely on the S64A. The limits on the remedies include replacement, repair or payment of the cost of replacement or repair (for goods) or supplying the services again or paying for them to be supplied again (for services). Section 64A(3) also imposes a reasonableness test regarding the imposition of the clause, and the supplier bears the onus of proving ‘reasonableness’.

Professional advice should be sought to ensure that standard form contracts that include exclusion or limitation clauses, whether used for business to consumer transactions or business to business transactions, do not breach the Australian Consumer Law.

[1] Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500

Resolving disputes between businesses

The Offices of the South Australian and Australian Small Business Commissioners were established to advocate for the interests and concerns of small businesses and to assist in the resolution of business-to-business and business-to-government disputes.

Office of the South Australian Small Business Commissioner

The Office of the South Australian Small Business Commissioner (SASBC) was established by the Small Business Commissioner Act 2011 (SA). The first Commissioner was appointed by the Governor on 29 March 2012.

Section 5 of the Act sets out the functions of the Commissioner, which include to:

  • receive and investigate complaints by and on behalf of small businesses in their dealings with other businesses, state or local government bodies;
  • facilitate the resolution of such complaints through measures such as mediation or representations to the other businesses, state or local government bodies;
  • provide information to small businesses to assist them to make decisions about their dealings;
  • create and enforce industry codes under the Fair Trading Act 1987 (SA);
  • monitor and investigate compliance with the Retail and Commercial Leases Act 1995 (SA); and
  • monitor, investigate and advise the Minister about matters that adversely affact small businesses.

Under section 12 of the Act, the Commissioner has the power to require a person to give information required by the Comissioner in the performance of the Commissioner's functions. The maximum penalty for failing to provide the information within the time specified by the Comissioner is a fine of $20 000.

Mediation is provided at low cost (currently $195 for each day or part day) or no cost, if the Commissioner is satisfied that it is appropriate to waive the fee in any particular case [see Small Business Commissioner Regulations 2012 (SA)].

The Office of the Small Business Commissioner is also mandated under the Farm Debt Mediation Act 2018 (SA) to arrange mediation for disputes between farmers and creditors relating to debt incurred in the conduct of farming operations [see Farm Debt Mediation Act 2018 (SA) ss 20, 22].

For more information, see the Small Business Commissioner SA website.

The Small Business Commissioner’s role in dispute resolution includes Franchising Disputes under the SA Franchise Code, see the Small Business Commissioner SA's page on the Franchising Industry Dispute Resolution Code.

Australian Small Business and Family Enterprise Ombudsman

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) was established in early 2016 and replaces the Australian Small Business Commissioner.

It advocates on behalf of Australian small business and provides information regarding setting up, running, growing and closing a business. The Ombudsman also offers a dispute resolution referral service, including where to get help.

More information about the ASBFEO is found on the Australian Small Business and Family Enterprise Ombudsman's website.

Leasing premises

Most businesses occupy premises leased from a landlord. The lease is usually for a set number of years ending on a specific date. The tenant obtains the security of a long term lease but also an obligation to pay rent for all of that period even if the tenant leaves the premises. A lease cannot be 'broken' before its term expires, free of liability, unless both landlord and tenant agree. Often the tenant is given a right to renew the original term of the lease for a further set period. This renewal is at the sole discretion of the tenant.

Leases of business premises in South Australia are regulated by the Retail and Commercial Leases Act 1995 (SA). Professional advice needs to be sought when entering into a lease, given that the Act is complex. The Act applies to any lease for rent that does not exceed $400,000 (an increase applicable to all leases notwithstanding the earlier threshold of $250,000). Premises covered by the Act include any business premises that sell goods by retail or provide services to the public, including offices. The minimum period for a lease under the Act is five years, except where there is a certified exclusionary clause (S20K) or the lease is for a fixed term of 6 months. The Act requires landlords to provide certain information to prospective tenants, and regulates expenses that can be recovered from tenants. For example, land tax cannot be recovered from tenants.

Usually under a lease, rent must be paid each month and a rent review clause allows the rent to be reviewed each year or each time the lease is renewed. If the lease is covered by the Act, rent reveiws are only permitted every 12 months, except in certain circumstances [s 22]. The lease will often state that interest is payable on any rent payment that is paid late.

The lease will place responsibility on the tenant for repairs to the premises caused during the term of the lease. An exception is usually made for structural repairs. At the end of the lease the tenant must usually leave the premises in the same condition they were in at the commencement of the lease, allowing for deterioration by ordinary wear and tear.

In addition to the rent, the tenant usually pays for council rates, water rates, building insurance, public risk insurance, plate glass insurance, stamp duty and half of the cost of preparing the lease documents. A lease may state that the landlord is to provide certain works in the premises before the tenant moves in. Those works and their completion date should be specified to avoid later disputes. A tenant must always obtain permission to alter the premises, even to nail holes in walls. It is best to obtain written consent from the landlord. A tenant who installs fixtures may be entitled to remove them at the end of the lease, but only if they are classified as trade fixtures (fixtures that the tenant must have to continue a particular business). If not, a tenant may well be adding fixtures to the premises that remain part of the landlord's premises. It is best to get written acknowledgment from the landlord that certain fixtures can be removed by the tenant before they are installed.

Sometimes a shopping centre lease requires a tenant to pay a contribution for promotions, building improvements, management costs and security costs. Also, the rent maybe a percentage of the tenant's takings, with rigorous requirements for book keeping placed on the tenant.

Most landlords will require the directors of a company leasing premises to guarantee the company's obligations as lessee. If a director agrees to this, the usual protection given by the creation of a company is lost on that lease. Alternatively, the landlord may ask that some other person guarantee the lease. There is no obligation on the company to give its financial details to a prospective guarantor, but if it does, this information must not be misleading. The guarantor is expected to ascertain whether the company is keeping up its lease payments.

The Act also sets out a strict regime for the assignment of a lease to a third party if a business is sold (Part 7). Care should be taken to comply with the requirements of the Act to ensure that the lease is effectively assigned and liability for rent does not remain with the original tenant.

Working finance

A major cause of business failure is lack of ready cash to pay for supplies and operating expenses. A lack of cashflow can lead quickly to business failure, even though a business may have many customers and produce good products. Many people choose to risk being in debt for the sake of a quick profit while others do not appreciate the costs involved in setting up a business.

The most common way for businesses to raise money is by borrowing it (debt) or by the people running the business putting in their own money. Either way, the debt must be repaid, although sometimes the business owners may not see their own capital repaid. Private investors may be prepared to put money into the business (venture capital), but generally it is illegal to raise money from the public without complying with the provisions of the Corporations Act 2001 (Cth).

Crowdsourcing / Crowd funding is a newly emerging method of raising capital for a startup venture or idea, but there are risks for the business owner depending on how the money is treated and what subscribers are offered, and could be considered to be a managed investment scheme in certain circumstance. There are serious consequences for being involved in an unlicensed managed investment scheme, and professional advice should be sought before raising funds in this way. Further guidance from ASIC here. The Australian Tax Office has some useful and important information about crowd funding and tax implications on their website also.

In any event, it is a good idea to prepare a business plan with anticipated sales and likely expenses. From this the net profit can be worked out. A third party lender will always require a business plan, budgets and other information to gauge the likely success of the business, before agreeing to lend money.

The financial and emotional cost of a failed business, especially on a family, can be high and every effort should be made to become acquainted with the current state of the market.

Intellectual property

A business owner with an original idea, design or product may ensure that no one 'steals' it by obtaining protection under laws relating to intellectual property such as the Copyright Act 1968 (Cth) or the Designs Act 2003 (Cth). Advice may also be needed to ensure that the owner does not interfere with protection already given to another person, see: copyright.

In addition, a product may be patented at the Patents Office. This involves a specialised procedure requiring technical drawings and specifications of the product. Usually machines, manufacturing processes or drugs are patented.

An owner may also have to be careful not to breach the law of passing off. This area of common law allows a court to prohibit a person who either deliberately or innocently provides a product or service in such a way that consumers may mistake it for another supplier's product which already has an established market. This will depend on whether the similarity of the products (or services) and their presentation is likely to confuse potential buyers of the established product into buying the new product believing that new product is, or is related to, the product with which they are confident.

Another aspect of intellectual property to consider is the business name and its protection as a trademark under the Trademarks Act 1995 (Cth). It is easy to overlook doing so because new business owners may think that the registration of the business name or company name is sufficient to protect others from using it, which it is not. Although it is an additional administrative burden and cost when starting a business it will ensure that the rights to use the name as its brand are protected.

Working from home

If customers and clients are likely to gather at your house in substantial numbers, you may well be in breach of planning regulations. Your council could order you to cease trading or fine you for every day that you continue to trade against their order. Similarly, if noise from your house becomes excessive, you face a similar fate. Under the Development Act 1993 (SA) 'home activities' are usually allowed in a residential zone and it is possible that these home activities can be business activities if they use an area of less than thirty square metres and do not detract from the amenity or quality of the area. However it is best to check with your local council. If a house is used as an office and a home mortgage is being paid, it is possible to obtain tax deductions for a portion of the interest paid. Deductions can also be claimed for a portion of council rates, water rates, strata rates, telephone expenses and building insurance premiums. A tax agent should be consulted for advice on home tax deductions.

    Running a business  :  Last Revised: Tue Jul 3rd 2012
    The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.