The 7 most common legal issues for SMEs in Australia, and how to manage them

It may seem strange that when you’re setting up your business, you should focus on preparing it for sale. However, in our experience, a smart setup can facilitate a future sale. Even if you never plan to sell, treating your business as a valuable, transferable asset helps to ensure it’s legally sound, financially stable and operationally ready.

From protecting your brand and keeping accurate financial records, to choosing the right business structure and formalising agreements, the legal foundations you put in place early can protect your assets, reduce risk and set you up for growth.

In this article, we outline seven of the most common legal issues faced by small to medium enterprises (SMEs) in Australia — and practical steps you can take to manage each of them.

Contents

1. What should I know about intellectual property?
2. What should I know about employment records and entitlements?
3. What should I know about maintaining up-to-date financial records?
4. What entity should I choose for financial and operational activities?
5. What should I consider when entering into equity agreements?
6. What should I know about business lease agreements?
7. Do I need to document key contracts and keep them up to date?
   

1. What should I know about intellectual property?

Intellectual property (IP) is a critical factor to address when running a business, because branding and creations are among your most visible and vulnerable assets. Protect them with registered trade marks for exclusive rights.

Business names

Registering a business name with the Australian Securities and Investments Commission (ASIC) is a crucial early step for any SME owner. According to ASIC:

“A business name is a name or title under which a person or entity conducts a business.”

Australian laws require you to register a business name if it differs from your company name or your sole trader name, and you must have an Australian Business Number (ABN) to complete the registration. Check that your preferred business name is available before attempting to register it.

However, registering your business name is primarily a legal requirement. It doesn’t provide you with legal protection if someone else chooses to use your business name. While registering a trade mark for your business name ensures that you have exclusive rights to use it as a brand. Without it, someone else could legally trade mark your business name and stop you from using it.

Trade marks

IP Australia describes a trade mark is an IP right that:

“… distinguishes your unique brand, product or service from other competitors in the market. A trade mark can be used to protect your business name or aspects of your brand.”

You can trade mark several types of branding, including logos, words, phrases, colours, and sounds. They grant the trade mark owner exclusive rights, including the ability to take legal action against others for misuse. Some things can’t be trade marked, such as scandalous, illegal, confusing, or non-distinctive words, images, or phrases.

You can register trade marks through IP Australia or choose to leave them unregistered.

Unregistered trade marks offer limited legal protection under:

1. the principles of passing off, and
2. Australian consumer laws.

You must prove your brand’s reputation and establish that someone else’s use of your mark has caused you damage.

Conversely, registering the trade mark grants you exclusive rights to use or sell it in Australia and provides more effective enforcement of your legal rights.

Fees for trade mark registration start at approximately $250 (as of 2025) and lasts up to ten years before renewal. As part of your registration application, you’ll need to submit documents including:

• proof of business ownership and contact details;
• the item you are proposing to trade mark (for example, your business name or logo); and
• a list of relevant goods or services.

There are several advantages to registration, including:

• it helps to clarify the scope of the trade mark;
• as a business asset, it’s potentially more attractive to investors or buyers; and
• you can sell your trade mark or licence it for others to use.

Before applying for registration, search existing trade marks to ensure your proposed trade mark isn’t already in use. We can assist with this process. Then check the availability of website domain names and social media usernames. If they’re available, buy the domain names and set up the social media accounts immediately.

2. What should I know about employment records and entitlements?

Employment matters are heavily regulated, with many complexities surrounding governing laws and instruments of employment. When setting up a business, we recommend seeking legal help to ensure compliance with employment laws.

Employment arrangements should be documented to ensure clarity and reduce the risk of disputes. This promotes ongoing and effective worker management, and it’s also a crucial risk management strategy for preventing legal conflicts that can arise from misunderstandings or miscommunications.

Employment agreements must comply with the National Employment Standards (NES), which outline minimum entitlements such as:

• hours and flexible arrangements;
• leave entitlements such as annual leave, parental leave, personal leave (or carer's leave), compassionate leave, and long service leave; and
• termination procedures.

If you employ casual workers, you will need to seek advice about how the NES applies to them. Whether a worker is a contractor or an employee is a separate issue. You may need legal advice if the arrangements are complex or the terms are unclear.

If a modern award or enterprise agreement applies, record its name in the worker’s file, and provide the worker with details on where to find it (for example, a website URL). You must also comply with record keeping rules regarding pay and conditions.

Compulsory superannuation contributions are an essential consideration. As an employer, you must make regular contributions for eligible workers or risk significant penalties. As of 1 July 2025, the minimum contribution rate is 12% of ordinary time earnings.

Seek accounting and taxation advice to ensure that superannuation contributions are accurately calculated and set up.

3. What should I know about maintaining up-to-date financial records?

Staying on top of your financial record-keeping is crucial to your business's success because it enables you to:

• monitor its performance and financial health;
• implement changes as needed; and
• make informed and strategic decisions.

Well-organised, accurate financials make it easier to prepare for sale and improve business valuation, facilitating smoother and faster negotiations.

Legal and regulatory compliance are the most important reasons for maintaining good financial record-keeping. Accurate financial records ensure your business satisfies its obligations under taxation laws, corporate regulations and financial reporting standards. Ensure that you lodge your returns on time and that you have an effective budgeting system in place. Also, ensure that your accountant is up to date with your tax information.

Proper record keeping increases lender confidence as transparency helps to increase your credibility and access to capital.

Due diligence is the process by which a potential purchaser investigates a business to identify possible legal, financial, or operational risks. Well-organised financial records play a crucial role in due diligence, as they can expedite the process, foster trust, and give the purchaser confidence in the business. For these reasons, creating a solid foundation for effective financial record-keeping throughout the life of your business is an excellent strategy.

Keep all relevant financial records from the past three to five years, ensure they’re easily accessible, and set up a system for regular review.

Financial records can include:

• tax returns;
• profit and loss statements;
• balance sheets;
• cash flow statements;
• sales records;
• business valuation reports;
• accounts receivable and payable;
• paperwork for any financing arrangements or debts; and
• relevant bank statements.

4. What entity should I choose for financial and operational activities?

Take care when choosing a business structure, as it will significantly impact your business operations, including your personal liability, taxes, how you raise money and your credibility, and continuity, contracting, leasing and employment agreements. The most common structures are sole trader, partnership, company or trust.

Here's a quick summary:

Sole trader

As a sole trader, you are the only owner of the business, so you have complete control over and responsibility for everything within it. You’ll either operate in your own name or under a registered business name, with an ABN for invoicing and taxation purposes.

Setting up a sole trader structure is quick, inexpensive, and can usually be done without the need for legal assistance. However, you also face unlimited personal liability if anything goes wrong. If the liability risk is too high, consider a company structure or investigate your insurance options.

Other considerations include:

• separating business and personal bank accounts will help with record-keeping and taxation, including Goods and Services Tax (GST) compliance;
• you will have personal liability for any contracts, so exercise care when negotiating supplier agreements or client contracts;
• if you plan on entering into a lease agreement, you will be personally liable, which may risk your assets if things go wrong; and
• you can employ staff, but you must meet all regulatory obligations, including superannuation, taxation and workers compensation.

Partnership

You can form a partnership with at least one other person, agreeing to run the business together and to share expenses, income, and debts. There are various types of partnerships, and the type you choose will depend on the level of investment and the extent of liability exposure.

Like sole traders, partnerships can be established quickly and inexpensively; however, partners share joint liability and also have separate “several” liability. If another partner incurs a debt on behalf of the partnership, each partner is responsible regardless of whether they were aware of or consented to it. Any or all partners can be sued for the entire debt. It means there must be a high level of trust between the partners for this structure to operate successfully.

We recommend having a written partnership agreement for clarity, particularly regarding financial benefits, rights and obligations, and liability.

Other considerations include:

• set up dedicated business bank accounts, consider whether all partners will be signatories, and how this will impact cash flow and finances;
• consider how partner activities are to be controlled and monitored, for example, entering into contracts that bind the partnership;
• similarly, an individual partner can enter into a lease agreement, binding the partnership. Your personal assets may be at risk if anything goes wrong; and
• the partnership can employ staff but must meet all regulatory obligations. Any penalties will be against the partners personally.

Trust

In a trust, the business becomes an asset of the trust, managed by a trustee according to the terms of the trust deed. (the trustee can be a person or a company). This arrangement means the trust operates the business for the benefit of its beneficiaries. It’s responsible for profit, loss, and distribution.

Trusts are attractive due to their tax benefits and asset protection capabilities, and various types of trust structures distribute income in different ways. However, keep in mind that often, beneficiaries must pay tax on their income from the trust. Additionally, establishing a trust can be complex and costly, and it also involves strict reporting requirements, so the trustee must ensure compliance with these requirements.

Other considerations include:

• establish bank accounts in the trust’s name, with the trustee as signatory. This helps compliance with taxation and distribution requirements;
• the trustee can enter into contracts and other agreements on behalf of the trust;
• the trustee can enter into lease agreements; and
• the trust can employ staff, including the beneficiaries, if allowed by the trust deed. However, the trustee is responsible for meeting regulatory obligations, including tax and superannuation.

If you’re interested in setting up a trust to manage your business, seek our legal advice.

Company

A company is a separate legal entity. In other words, you can set it up to own and operate your business, separable from its owners (shareholders) by allowing it to own assets, incur debt, and take other actions. Liability is limited to the company assets, so a company offers more legal protection than the other structures. If you are a director of the company, you manage the affairs of the company, and as a shareholder you share ownership and profits (in the form of dividends) with other shareholders.

Personal asset protection is a key reason to choose a company structure. Taxation may also be more favourable. However, it must meet strict regulatory and reporting obligations. You will likely need legal and accounting help to establish and operate your company.

Other considerations include:

• set up separate bank accounts in the company name with directors as signatories. This helps maintain clarity for financial record-keeping and compliance;
• the company can enter into contracts and other agreements, protecting you and the other directors and shareholders from legal exposure, especially in respect of personal assets unless the directors are required to give personal guarantees;
• the company can enter into lease agreements, but as a director, you may be required to give a personal guarantee. You will need to consider your potential legal exposure; and
• the company can employ staff, including shareholders and directors.

Choosing the best structure is a foundational decision because it affects almost every aspect of how you operate your business. The right structure supports compliance, reduces legal and financial risks, and simplifies transactions. For example, commencing trading under one structure such as a sole trader with an intention of changing to a company at a later stage may trigger tax consequences and result in additional legal and accounting costs. Seek our legal help to make the best decision for your circumstances

5. What should I consider when entering into equity agreements?

“Equity” in this context refers to the ownership a person has in a company or unit trust. The most common examples are shares or units. The amount of equity (shares or units) a person holds determines the division of profits and often voting rights, among other things.

An equity agreement (commonly known as a shareholders’ agreement or unitholders’ agreement) should be clear, comprehensive and in writing to minimise the possibility of misunderstanding or disputes. Agreements generally cover:

• the parties’ rights and responsibilities;
• ownership percentages and dividend policy;
• dispute resolution procedures; and
• exit clauses and valuations.

Agreements must comply with Australian company laws, particularly regarding the issuance of shares, directors’ duties, and reporting obligations.

Equity agreements provide benefits such as:

• attracting and retaining talent by offering equity in the entity;
• facilitating raising of capital as it sets out clear terms for how equity is to be issued and what rights come with them;
• managing risk by setting out the rights and obligations about how the company will operate and how important decisions are made; and
• specifying what happens if an equity holder leaves, dies or wants to sell;

An equity agreement gives certainty, fairness and stability which helps the business operate smoothly, making it more attractive to investors and lenders.

“Sweat equity” refers to a worker (such as a contractor) providing services in exchange for equity (rather than payment). For example, a start-up business may use sweat equity to hire market-leading skills that they otherwise couldn’t afford. In these cases, it’s important to clarify that the service provider is not an employee (under employment and taxation laws).

Seek our legal advice if you’re considering an equity agreement.

6. What should I know about business lease agreements?

As a tenant, you have the legal right to occupy and use the premises according to the terms of the lease.

The lease should cover essential terms such as:

• premises;
• rent;
• outgoings;
• term of the lease and further options;
• permitted use of the premises; and
• rent reviews.

Before entering into a lease agreement, you need to ensure that:

• the lease addresses all aspects of the agreement between the parties;
• the property meets your expectations regarding its condition and suitability for the business operations (as at the commencement date unless negotiated otherwise);
• you can comply with legal requirements, including building codes and local council planning laws under the relevant zoning for the intended use of the premises; and
• it specifies who is responsible for any modifications, renovations, or repairs.

Don’t enter into a lease agreement unless it is in writing. Having certainty about your business premises will play a key role in your business’s success, so a written agreement will help with stability: it will minimise the risk of misunderstandings, disputes, sudden eviction, financial loss and difficulties in securing finance.

If you’ve renewed or plan to renew your lease, make sure you keep all executed lease documents from the start of your tenancy. You may need to access them if you choose to sell your business.

Seek our legal help for lease negotiation and review, prior to signing and occupying the premises.

7. Do I need to document key contracts and keep them up to date?

Your key business contracts may include:

• supplier agreements;
• sales contracts;
• loan agreements;
• client service agreements;
• employment agreements; and
• lease agreement.

Contracts and agreements can be legally binding even if they’re not in writing. However, ensuring they’re documented helps minimise misunderstandings, clarifies expectations and reduces legal risk. These factors contribute to building trust and establishing the professionalism and commitment of both parties.

Regularly review your contracts and agreements to ensure they have not expired, remain compliant with current laws and serve your business needs. Updates may be necessary to reflect regulatory changes, market conditions, and the impact of new technologies (such as artificial intelligence). Build contract reviews into your business processes to maintain clarity and avoid penalties.

We recommend keeping all expired or terminated copies of contracts and agreements, ensuring that current documents are easily accessible, particularly for risk management, audits, or changes to your business. Seek our help to negotiate, review, and document key agreements and contracts.

Summing up

Whether your business is in its early stages, you’re preparing it for sale, or anywhere in between, early attention to these seven legal issues can offer protection, support growth, and ease a future sale. Want to know more about common legal issues for SMEs? Get in touch with one of our business lawyers; because a smart legal foundation starts with the right advice.