Full steam ahead: Is your hospitality business structured correctly?
You’re passionate about hospitality. You’ve got the business idea and you’re ready to launch. But how will it operate and what’s the best way to structure it? We spoke with Hillhouse Legal Partners’ Managing Director Zac Herps about the different ways to structure your hospitality business. Here is his expert advice on maximising your prospects for long-term success.
Launching a hospitality business is exciting. You’ll no doubt have poured a significant amount of time, energy and resources into getting it off the ground and ready to open. But have you got the foundations right? Before you open the doors, make sure you consider the best way to structure your business, and know how it will actually operate.
Start with the end in mind and get the right advice
What will your hospitality business look like in five or 10 years’ time? How do you grow and protect what you’ve worked hard to create? What do you need to do to be able to sell it easily, and for a great profit?
Business structure is a big decision and it’s important to talk with a trusted financial, legal or business adviser about your long-term business goals. It’s hard to think of expanding or selling your business before you’ve even started, but having a long-term vision is critical in establishing your business structure from a financial and legal perspective. It can be very difficult and costly to change down the track.
Advisors will help you determine the likely tax ramifications, potential personal liability, ongoing costs and reporting obligations of each structure. They can provide advice on how to best protect your assets.
Understand business structures
This is the simplest structure and gives you full control. Sole traders are legally responsible for all aspects of their business and there are minimal reporting and tax requirements. Sole traders can use their own personal tax file number and bank account. This structure is best suited to micro businesses or mobile businesses (e.g. coffee carts). You can hire people as a sole trader, but as your business grows you may want to share risk with others, as well as profits or losses.
A partnership business structure has two or more people who distribute profits and loss between them. Partnerships are still relatively easy to set up and have limited reporting requirements, but must use an Australian Business Number (ABN). Additionally the tax implications are more complex than they are for a sole trader. It is important to consider who you are going into business with and ensure you have a formal partnership agreement in place.
Companies can be complicated to set up, but suit people who expect their income to be variable. A company structure is ideal when you plan to grow and scale your business. You can have multiple shareholders, making it possible to raise capital for your venture.
A company stands alone as a separate legal entity and can incur debt and be sued. Shareholders and directors of companies are not liable for a company’s debts, but if directors have been found to breach their legal obligations, they can be held personally liable. If you have more than one shareholder, you should have a shareholder agreement.
Franchises might look like an easy option where everything is done for you and you can begin earning immediately, but there are lots of risks involved as well. In most instances, franchise agreements are usually heavily weighted in favour of franchisors. Make sure you look carefully at a franchise agreement before signing and obtain the right professional advice. Otherwise you may risk being locked into something for years without seeing much financial benefit.
Organisational structure, policies and systems
Spend time at the start to establish and document your structure, operations, systems, processes and policies. You should ensure service and supplier agreements are easily understood by your team, as well as external legal and financial advisors. These documents are also vital for potential buyers or business partners who may want to join you or buy the business down the track.
Documenting your operations ensures your business runs efficiently and facilitates optimal communication within your team. Staff and contractors should be able to take care of the daily running of your business, leaving you to focus on high value activities like strategic direction, new products and service offerings. They also ensure the business can continue to trade in the event you are unable to work or want to take a period of leave.
Turnover of staff can be one of the biggest headaches and costs for businesses. Staff who love their job and believe in what they do will energise your customers and keep them coming back for more. As a minimum, you should ensure that all staff are engaged with employee agreements (full-time, part-time or casual). You can read more about that here.
The right place and space
Where will your business be located? Will you be roasting from home, from a rented premise or in a shared space? Or are you hoping to open a hospitality hub that becomes the go-to spot for professionals, university students or families? Think carefully about your target customers, where they gather and what they need. Visibility, street presence and appropriate access is key. Safety, insurance, food services, local government regulations and lease agreements are all critical legal considerations that may need specialised advice. If you require capital for shop fit-out or to purchase assets, this may influence your decision about the legal structure of your business.
Let them come!
No business structure is complete without a supporting marketing plan. Branding, logos, brochures, websites and social media are all about telling your story and inviting your customers to join you on your business journey.
As a general rule, if you plan to sell your business or bring on another partner, it is best to avoid naming your business after a person or place. Of course, you don’t actually have to go ahead and sell the business you have worked so hard for — but it’s always worth asking whether it would be easy to hand over if you did! If you have created something unique, you may need to seek advice about protecting your intellectual property with patents, copyrights or trademarks.
These preliminary considerations in getting the fundamentals right from the beginning will set you up for long-term success.
The team at Hillhouse Legal Partners are proud to assist members of The Coffee Commune and can provide you with an obligation-free call to discuss your business goals. Get in touch by emailing [email protected] or telephone 07 3220 1144.
Want to know more?
Join us in person at The Coffee Commune on Wednesday 23 June 2021, where we’ll walk you through some of the key legal considerations you’ll need to ensure you are covering the basics. Register here.