Starting a business is exciting, but it’s essential to build your foundation on solid legal ground. For entrepreneurs and business owners in Australia, understanding the legal steps involved and having the right contracts in place is crucial for long term success and risk management. Fifty percent of all businesses that start in Australia do not exist after 3 years. Many of those that fail wouldn’t have if they had addressed the issues in this article.
In this article, we outline the key legal steps to set up a business in Australia, highlight the essential contracts every business should have, and touch on recent court cases and developments that show why getting it right from the start matters.
Step 1: Choose the Right Business Structure
The first decision is choosing the legal structure that best suits your goals. In Australia, the main options are:
- Sole Trader
Simple and inexpensive, but the owner is personally liable for debts and obligations.
- Partnership
A business owned by two or more people. Liability is shared and personal.
- Company
A separate legal entity offering limited liability providing lower tax rates than individuals, however, it is subject to more regulation and reporting.
- Trust
A trustee operates the business on behalf of beneficiaries. Often used for asset protection and/or tax planning.
Each has different legal and tax consequences, so it’s wise to consult a lawyer and an accountant before deciding.
Step 2: Register Your Business
Once you’ve chosen a structure, you’ll need to:
- Apply for an Australian Business Number (ABN).
- Register a business name if trading under something other than your own.
- Register for Goods and Services Tax (GST) if turnover is $75,000 or more.
- Obtain a Tax File Number (TFN) if operating as a company or trust.
If setting up a company, registration must be done with the Australian Securities and Investments Commission (ASIC), and you’ll need to adopt either a constitution or ASIC’s replaceable rules.
Step 3: Comply With Licensing and Regulatory Requirements
Depending on your industry, licences or permits may be required. For example, in construction, food services, or financial advice. The Australian Business Licence and Information Service (ABLIS) is a useful tool to identify what applies.
You’ll also need to ensure compliance with:
- Employment laws if you hire staff
- Privacy laws if you collect personal data
- Work health and safety (WHS) obligations
- Consumer law requirements if you sell goods or services
Recent privacy reforms highlight why compliance matters. In 2025, Australia introduced a statutory tort for serious invasions of privacy, giving individuals a direct right to sue businesses for breaches. The Office of the Australian Information Commissioner (OAIC) has also gained stronger enforcement powers. A high profile recent examples were Kmart and Bunnings’ use of facial recognition technology, which regulators found breached the Privacy Act because customers had not been properly informed. For SMEs, this means privacy policies and data handling processes are no longer just paperwork, they are a key risk area.
Step 4: Protect Your Business With the Right Legal Contracts
Well drafted contracts are the backbone of a business. They set expectations, protect assets, and reduce disputes. Key agreements include:
- Founders’ Agreement (Shareholder Agreement, Unit Holder Agreement or Partnership Agreement, depending on your business structure)
For businesses with multiple owners, this agreement sets out roles, responsibilities, profit-sharing, and exit strategies. Early clarity prevents costly disputes later.
- Shareholders’ Agreement
In companies with multiple shareholders, this agreement regulates share ownership, rights and obligations, and dispute resolution. The 2024 Victorian Supreme Court case BBHF Pty Ltd v Sleeping Duck Pty Ltd confirmed that while disagreements are normal, unfair treatment of shareholders can lead to successful “oppression” claims under the Corporations Act. Having a clear agreement reduces this risk. (Founders’ Agreements and Shareholders’ Agreements can sometimes be found combined into one agreement).
- Employment and Contractor Agreements
If you’re engaging staff or contractors, compliant contracts are vital. They should cover pay, duties, termination, confidentiality, intellectual property ownership and many other matters.
This is an area of increasing legal scrutiny. In CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations v Jamsek [2022] HCA 2, the High Court confirmed that contract wording is central in deciding whether someone is an employee or contractor. More recently, legislative reforms to the Fair Work Act 2009 (Cth) introduced a “whole-of-relationship” test, making it easier for contractors to be reclassified as employees. SMEs that misclassify workers risk back pay, penalties, and claims, thus getting written agreements right is essential.
- Service Agreements or Terms and Conditions
Whether providing goods or services, terms should address payment, deliverables, refunds, and dispute resolution. Without these, businesses may find themselves exposed if customers challenge invoices or claim refunds.
- Privacy Policy and Website Terms of Use
If you collect customer data (for example, via a website or mailing list), you may be legally required to have a compliant privacy policy. The determining factor depends on your business’ turnover (exceeding $3 million) or if your business trades in personal information or operates in a specific sector of industry, e.g. healthcare. Terms of use also protect your intellectual property and limit liability for website content.
- Non-Disclosure Agreements (NDAs)
When sharing sensitive information with suppliers, investors, or collaborators, NDAs ensure confidentiality is preserved.
Step 5: Seek Legal Advice Early
Templates found online often fall short of Australian legal requirements. Worse, they may fail to reflect your specific business arrangements. The cost of getting advice upfront is far less than the expense of defending a dispute or regulatory action later.
As recent cases show, from shareholder disputes in Sleeping Duck, to privacy breaches at Bunnings and Kmart to misclassification under the Fair Work Act, the law is evolving, and businesses that take shortcuts can find themselves exposed.
Key Takeaways for SMEs
- Choose carefully
Your business structure affects liability, tax, and growth options.
- Get your contracts right
Courts are increasingly focused on written agreements, especially for employees and contractors.
- Privacy is critical
New privacy laws and enforcement actions mean every SME must take data handling seriously.
- Governance matters
Shareholder and founder disputes are common; agreements set expectations and reduce risks.
- Legal advice saves money
Investing early in tailored advice avoids costly disputes and penalties later.
Final Thoughts
Starting a business in Australia involves much more than a logo and a good idea. The right legal structure, proper registrations, regulatory compliance, and carefully drafted contracts are critical to setting your business up for success.
By learning from recent cases and legal developments, SMEs can see that legal risk is not theoretical, it plays out in real businesses every day. Getting it right from the start will protect your investment and help you build a business that can grow safely and sustainably.
If you’re planning to start a business or want to review your current setup, our team is here to help. Contact us today to arrange a consultation with one of our experienced commercial lawyers.
About the Author: This article has been authored by Steven Brown. Steven Brown’s legal career covers working with multinational corporations and Australian listed companies to family-owned businesses. This range of experience has equipped Steven with the unique ability to offer tailored legal services that make a significant difference to businesses of all sizes.
