Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Legal and Taxation Aspects of Your Small Business 3 rd Edition `08 IAN.BIRT

Chapter: 7 Specific Contracts Legal and Taxation Aspects of your Small Business IAN BIRT

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Objectives After reading this chapter, you should be able to: –Explain various written contracts entered into by small businesses –Identify laws that affect specific written contracts –Describe and negotiate the contents of specific written contracts

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Specific Written Contracts  Franchise agreements  Distributor agreements  Agency agreements  Insurance Contracts  Commercial lease agreements  Sale of business agreements  Lay-by agreements May be subject to State government Stamp duty Written agreement is legally unenforceable until Stamp duty is fully paid

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Franchise Agreements -1  Franchisor (owner of main business) grants exclusive rights to franchisee (small business distributor) to market franchisor’s established business system  Franchisee pays an entry fee + regular royalty fees to franchisor  Established Business System includes: –Products –Operating procedures –Technical know-how –Business names, logos & trademarks

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Franchise Agreements -2  Key terms of a franchise agreement: –Upfront entry fees –Ongoing royalty fees –Other fees (advertising levies) –Training & support provided –Period of agreement –Business location –Market area boundaries (postcodes) –Any operating restrictions –Rights of assignment –Termination grounds & procedures –Dispute resolution process  Code of conduct (federal): –Is compulsory –Applies to all franchising situations  Franchise Council of Australia –

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Distributor Agreements - 1  Key Terms of a distributor agreement: –Range of goods supplied –Quality of goods –Exclusivity of rights to acquire –Supply prices –Allowance for price variations –Discounts applying – e.g. quantity, prompt payment –Credit terms – limits & periods –Acceptable payment methods –Warranties/guarantees for defective products –Return policies

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Distributor Agreements - 2  Key Terms of a distributor agreement (Cont): –Consignment policies –Delivery methods & times –Technical backup –Sales support services –Any resale restrictions –Any exclusive selling areas –Period of agreement –Dispute resolution process Distributor agreement is subject to anti-competitive prohibitions found in Trade Practices Legislation

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Agency Agreements Agent acts as a ’Go-between’ between large suppliers & customers  Key terms: –Extend of authority conferred by principal –Remuneration basis (commission %) –Liability for delivery costs –Exclusivity of agency –Period of agency –Selling area boundaries –Any operating restrictions –Termination grounds & procedures –Dispute resolution process

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Insurance Contracts Regulated by Insurance Contracts Act 1984 (Cwlth)  Voluntary Insurance Codes of Practice also apply –Establish standards for good insurance practice by insurance companies and their sellers –Voluntary codes bind only insurance businesses that agree to accept them –Administered by ASIC -  Insurance contracts can be arranged through: –Insurance companies directly –Insurance agents (representatives of insurance companies) –Insurance brokers (independent professionals not tied to any insurance company)  There are two kinds of insurance: –General (or indemnity) insurance –Life insurance

Insurance - 1 Table 7.1-insurance Insurance typeWhat is covered General insurance Fire ( or building) Contents Loss of profits ( or business interruption) Public liability/public risk Product liability Professional indemnity (compulsory for some professionals) Workers compensation (compulsory for employers) Burglary Fidelity/employee dishonesty Cash in transit Comprehensive motor vehicle Compulsory third party (compulsory for vehicle owners) Third-party property Marine Plate glass Life insurance Whole of life Term endowment Personal sickness/accident Or income protection Damage to building caused by fire, water and other hazards Damage to contents of premises caused by fire, water and other hazards Extra cover for loss of income caused by fire or other hazards insured against Being sued for careless maintenance of business premises Being sued for faulty or defective product sold Being sued for the careless performance of services Claims for sickness or accidents to employees occurring in the workplace or during work journey Losses caused by burglary Losses caused by employee dishonesty Theft of cash in transit Theft and accident damage to motor vehicle; accident damage caused by motor vehicle Injury to passengers or pedestrians caused by motor vehicle caused by motor vehicle Accident damage to property caused by motor vehicle Loss or damage of goods in transit by sea Glass breakage Death of business owner Payment of lump sum at the end of a specific period Income losses caused by sickness or accident to business owner Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

Insurance - 2  General insurance: –Insured person pays a regular insurance premium (or price) to the insurance company –Insurance company promises to indemnify (compensate) the insured person if a specified event - such as fire or theft - causes loss –An excess may be negotiated for some types of general insurance to reduce premiums. An excess is the agreed portion of any loss that is met by the insured person  Life insurance: –Insured person or someone else pays a regular premium (price) to the insurance company –Insurance company promises to pay an agreed sum upon a specified event occurring, such as a birthday or death  Insurable interest: –To insure anything, you must have an insurable interest in it, that is you will suffer a financial loss if the insured thing is lost Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

Insurance 3 The written contract of insurance is the insurance policy document issued by the insurance company  Insurance contracts often arranged through an insurance agent or broker  Insurance agreements require the parties to be completely honest with each other  The person requiring insurance completes a proposal form and sends it to the insurance company  A completed proposal is the offer to take out insurance  The contract is made if the insurance company accepts the proposal  Anyone requiring insurance is under a strict legal duty to disclose all known relevant facts to the insurer  There are legal consequences for a person who provides dishonest responses to questions asked in the proposal form  Falsely stating relevant facts will generally allow the insurance company to void (cancel) the insurance contract made Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

Commercial Lease Agreements - 1 A lease is a contract where a property owner - the lessor - grants another person - the lessee - exclusive rights to occupy the property The exclusive right to occupy is granted in return for rent payments Commercial leases  Leases for commercial properties. The parties in commercial leases can freely negotiate the terms of their agreement  Under specific state and territory legislation, leases must be in a prescribed written form to be legally enforceable  Commercial leases for a period of three years or more (one year or more in South Australia) must be registered at the state land titles office registry  In all states and territories, specific retail leases legislation applies to regulate retail shop leases

Commercial Lease Agreements - 2 Key terms to consider in any lease for commercial premises: –Free set-up time –Lease commencement date –Security deposits –Permitted use of premises –Any compulsory insurance required –Rent amount and frequency –Periodic rent reviews –Tenant contributions to property outgoings – e.g. rates –Initial lease period plus any option period –Rights to assign lease and sublet premises –Obligations to repair premises –Any special conditions added –Termination grounds and procedures –Dispute resolution process Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

Sale of Business Agreements Vendor – seller – agrees to sell their business to the purchaser – buyer – for an agreed price. The price of the business ­ normally consists of values for goodwill, plant, equipment and fittings, plus any stock on hand Agreement is usually in writing Key terms to consider in a sale of business agreement: –Purchase price –Value of any stock on hand –Continuation of lease (by assignment or renegotiation) –Restraint of trade clause (which must be reasonable) –Retention of employees –Liability for accrued leave of employees –Transfer of business names, licenses and permits –Payment time and date of completion of agreement –Collection of existing debtors and payment of existing creditors –Period and form of seller’s assistance

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Lay-by Agreements - 1 Contracts where customers agree to pay for goods bought from retailers by instalments Retailers hold the goods until the full purchase price is paid In NSW: –State fair-trading legislation regulates lay-by sales –Lay-by sellers must provide customers with written lay-by statements upfront –Lay-by statement summaries the agreed lay-by terms Statement should include: –Date of lay-by –Lay-by number –Purchase price –Description of goods –Deposit paid –Duration of lay-by period –Instalment amounts and dates –Cancellation charge payable (if applicable) –Consequences of failing to pay on time –Procedures to follow to cancel the contract

Lay-by Agreements - 2  Retailers –Can apply a cancellation charge only if included in the lay-by statement given to customer –Any cancellation charge must not exceed reasonable selling costs –Businesses are entitled to cancel lay-bys if customers have breached the lay-by terms –Businesses must give customers at least seven days notice to fix any breaches  Customers –who cancel lay-by’s are entitled to a full refund of any payments made, less any reasonable cancellation charge specified in the lay-by statement –In the ACT, specific lay-by sales legislation applies: Lay-by sellers must provide ­ customers written information at the time of the lay-by agreement Information includes a sales docket, a written copy of the lay-by terms and a written summary of the statutory rights of the parties –In other states & territory, there is no specific legislation regulating lay-bys. Lay-by agreements are regulated by general contract law rules Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia