What do you want to do with your business?

When you start your business, you need to a vision of the end game in mind as this will impact the form that your business should take. 

If your aim is ultimately to grow you company and sell it for lots of money to make yourself a millionaire, then you will need to establish your organisation as some form of company with a shareholding so the ‘shares’ can be sold in due course.

If you aim to simply earn a good living for yourself and your family, you might want to consider being a sole trader or establishing a partnership.

If you are establishing some form of membership organisation, you may choose to be a company limited by guarantee.  This is relatively unusual and is generally reserved for peak bodies, professional organisations, and other organisations of this type.

Activity

What do you think you want the long term future of your business to be?  What do you want as exit strategy in the longer term?  How does this reduce the choices you have now on how you set up your business?  Discuss your thoughts in the Exit Strategy forum.

Regardless of the form of your organisation, unless you plan on ‘bootstrapping’ completely from the start (ie self-financing), you are likely at some point to need to gain funding of some  form, whether it is a bank loan, investment capital (through pitching to venture capitalists), or applying for grants or government funding schemes.

The Australian Government has a website outlining the different forms of organisations and responsibilities here:

https://www.business.gov.au/planning/business-structures-and-types/business-structures

ASIC offer comparisons between them here:

https://asic.gov.au/for-business/small-business/starting-a-small-business/setting-up-a-business-structure/#differences

Looking at these, it seems that sole traders and partnerships are the easiest and cheapest ways of getting going, and they are.  But they have unlimited liability and this needs considering.

LIMITED LIABILITY AND INCORPORATION

Limited liability means that an organisation is an entity in its own right (like a legal person) and it is fully liable for the debts and obligations of the organisation.  This means that if something goes wrong, unless the Directors have acted criminally or negligently, they are protected from anyone making a claim against the company, and cannot be pursued personally for their assets to cover the company’s debts or obligations. 

Unlimited liability means that the individuals running the business are fully liable for anything that goes on within that business.  Insurance can cover some of this, but the risks are greater if you are not incorporated as a company.

It costs around $500-$1000 to set up a business, but it establishes the business as it’s own legal entity and separates it from you, the Founder.  This both protects the founder, and allows the business to be sold or taken over in the future.  Accelerator programs, incubators and venture capitalists will also require a share holding in the company in return for their support and investment, and this cannot be facilitated if you are a sole trader or partnership.  It is also difficult to value a business when it is not its own legal entity.

Activity

Often people start their business as a sole trader and then expand either into a partnership, a proprietary limited company.  For your business, map out how you might start as a sole trader, and the outcomes that would need to occur in order for you to take the step into the next step of formation.  Share this in the Growth Wiki and see if you can get ideas from others plans also.

BEING DISRUPTIVE

Many people are now starting their businesses because they want to disrupt the norm of how an element of their lives are operating.  They can see an alternative way of doing things, and how this can benefit more people. 

Social enterprises are organisations that are for profit for good, so as well as making an economic impact, they are making a social impact.  Normally 50% or more of profits are channeled to the social good, and the remainder can be distributed to the shareholders, or impact investors.

Activity

Social enterprises can take any organisational form.  Which do you think would be the best form for them, and why?  Disucss your thoughts in the social enterprises forum.

Social enterprises rely on behavioural economic models to underpin their existence.  This means that they rely on people making decisions on a basis that is not solely economically rational – as consumers and investors are starting to see the need for bigger picture thinking.

Traditionally the basis of organisations have been based on rational economics and behavioural economics.  Both lead us to models of competitive advantage, where by we succeed best by being competitive with each other and the aim is to ‘win’.  However, recently we have seen the growth of collaborative advantage and organisations forming for collective good.  These forms include co-operatives (with shared ownership), social enterprises (organisations with a commitment to profit for social good), and other emerging forms in the collaborative economy.

In order to understand this shift, we need to understand the basics of economics.

Rational and Behavioural Economics

In order to understand how markets work, you need to have an understanding of basic economics.  If you are new to economics, a good introduction to the theory of economics is in this THINK2016 talk by Paul Ormerod.  He gives an introduction to traditional economic theory and behavioural economic theory.  You may be wondering what this has to do with forming your company, but your economic understanding can alter the choice of organisation form you decide to go for.

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The rational choice of economics, or the behavioural economic models, can underpin how you value your company for a pitch deck, investment proposals, and business decisions.  Most people try to apply rational thinking and decision making to markets that are driven by irrational behaviours as consumers are motivated and influenced by other factors than simple economic rationality.  It is important to understand this as you will want to leverage traditional and behavioural economic arguments in your pitch deck.

Understanding the Macro Economic Picture

Let’s start by understanding how the capitalist financial markets work, how organisations gain and lose value on the stock market, and how the majority of the world will be ‘judging’ the success and net worth of a business venture, and the volatility of markets.  George Soros explains this very well in his theory of reflexivity and this short video is one of the clearest explanations we’ve found.

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Now most of you are not going to need to worry about this for quite some time yet, but if you are planning on going for venture capital, you need to understand the basis on which financial markets work and how they influence the ‘value’ of an organisation.  Much of it is about perceptions and the ‘real value’ of an organisation is probably only ascertained at the time at which is floated, or bought or sold in a takeover or merger, when the offer price is more generally related to the balance sheet and profit performance.

Many people are starting to claim that the capitalist model is not sustainable because it is founded on the premise of growth.  The assumption of ongoing economic growth in perpetuity was challenged by a study which used a computer simulation to forecast the outcome of continued economic growth on the basis of the 1970’s economy, and was published as ‘The Limits of Growth’ – it is an interesting if depressing read if you want to plough through it.

Meadows, D. H.; Meadows, D. L.; Randers, J.; Behrens III, W. W. (1972) The Limits to Growth: a report for the Club of Rome's project on the predicament of mankind. Universe Books.

While many criticised the study, it did start debate and questioning of whether the assumption of continued economic growth was sustainable and hence questioning whether it was the best basis on which to model business and economies.

Jonathan Porrat challenges the notion of consumerism, and how our belief in the need to spend more each year as a means of economic growth is not sustainable.  This brings the idea of materialism which underpins capitalism to the individual level of our personal consumption.  This video was made in 2011, but not that much has changed….

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If you are now starting to question whether your business is dependent on sustained economic growth for survival, you may want to consider your business model.  Are you reliant on consumerism or are you fighting this trend?  Is there a way that you can model surviving whether there is business growth or a recession.  Modelling for a growth economy is easy, but how can you prepare and model for recession? 

The Microeconomic Reality

In the relentless pursuit of growth, the reality of survival for organisations is to compete.  Growth occurs from either establishing new markets or, for an individual organisation, take more market share from the competition.  This leads to organisational growth.  

Competitive Advantage

Michael Porter is perhaps the best known published author on competitive advantage with his ‘5 forces model’ of competitive advantage. His book was summarised in his Harvard Business Review article below

Activity:

Complete the 5 forces analysis for your business idea.  Reflect on what actions you now want to take given this analysis.  Post it in the 5 Forces Wiki for others to share and see if you can pick up ideas from others.

Now let’s look at some alternative economic models to see how this might change our thinking, business model and value proposition.

Collaborative Advantage

While competitive advantage may be one model for success, collaborative advantage is an alternative.  This is founded on the idea that advantage is gained through collaborating with others to ensure survival of the many rather than the survival of one at the expense of the others.  Rosabeth Moss Kanter first talked about this idea in 1994 in the Harvard Business Review, and defines it in terms of supply chain leveraging, as she has framed the idea within the competitive economic discourse and language framework. 

Activity

Think about your value proposition and how you can leverage it for collaborative advantage by collaborating with someone else in the supply chain.  What do you have to offer the supply chain, and what would you like to gain in the trade off?  Post in the Collaborations Forum and see if you can find someone you can partner with for collaborative advantage.

Collaborative Consumption

One step on from collaborative advantage is the notion of collaborative consumption.  This is the leveraging of ‘ownership’ by sharing.  It is much like the old bartering system before we had money, and establishes the sharing economic model which underpins ventures such as AirBnB, Uber and Zipcar, and the notion of collaborative consumption.  One person owns the goods, many people consume them.  Rachel Botsman is a huge advocate of this economic model.

http://www.fastcoexist.com/3046119/defining-the-sharing-economy-what-is-collaborative-consumption-and-what-isnt

This THINK2016 talk explains the economics and systems of the shared economy, with Jared Meyer from the Manhatten Institute discussing how the shared economy is becoming self-regulating by consumer information rather than the need for government regulatory intervention.

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Activity

Think about your value proposition and where there may be opportunity for collaborative consumption.  How might you develop this as an alternative value proposition to the one that the 5 forces template gives you?  Discuss you ideas in the Alternative VP Forum.

The sharing economy is continually developing and this RSA event streamed on 16 May 2016, is a discussion with Rachel Botsman looking at where the sharing economy will be going next.  The sharing economy effectively empower consumers, empowers workers, and empower entrepreneurs.  This is quite a long recording (just over an hour) but is a good watch if you want to explore the sharing economy further as for your value proposition. 

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Co-operatives and shared ownership

One step on from collaborative consumption which is one owner - multiple consumers, is the multiple owners – multiple consumer model which is the basis of co-operatives where co-ownership becomes a model of development. 

Perhaps the best example of a cooperative is the Mondragon worker cooperative which was created in 1956 in the Basque region of Spain to help regenerate the area after the War.  The idea was set up by a Jesuit Priest who argued for worker ownership and within three years of establishing the first cooperative, a cooperative bank was established to spread the cooperative movement further.  The Mondragon story is told in this video.

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Or there are many books written on the subject, or you can visit their website here.

And an article in The Conversation about how they survived the global recession can be found here.

Activity

Would your value proposition suit a shared ownership element?  How could you establish and manage this?   Discuss your ideas around how you might be a cooperative in the Cooperative Forum.

Financing your Venture

When most people consider starting a business or launching a value proposition, one of the first questions that comes to mind, given our programming by society, is how are we going to fund it.  Crowd funding and microfinancing are alternatives to venture capital or a bank loan.

To start, watch Simon Dixon’s TEDx talk on ‘Crowd funding – economics for the greater good’ which talks about the future of fundraising and finance and how generosity, greed and the greater good intersects with the world of finance.

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This great talk takes you through financing yesterday, today and in the future and challenges you to think differently about financing your business.

This Ted Talk is Muhammed Yunus talking about microfinancing and banking, and how you can succeed with virtually no money to start with because of humans natural entrepreneurial spirit.

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 https://www.youtube.com/watch?v=6UCuWxWiMaQ

Crowdfunding is when you source funding from the public through many small investments rather than trying find a single investor to back you.  In essence it is a vote of confidence in your venture prior to you launching it, by selling directly to your audience.

Watch TEDx talk by Victoria Westcott on Crowdfunding 101 for examples of how to do it –

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Activity

Consider how you are going to fund the launch of your value proposition.  If you were to crowd-fund, what would be the basis of your pitch?  Draft an outline pitch and share it in the crowd-funding wiki for others to give you feedback on.

Bitcoin and Blockchain

If you haven’t come across Bitcoin yet, you need to.  This is the internet money transfer system that effectively does banking transactions without there being a bank.  In effect it is a decentralised system for money transactions rather than it being centralised through a bank or government. 

This TEDx talk by Jeremy Rubin is complex but possibly the best explanation of Bitcoin and Blockchain and how they work.  One for those of you want to understand the technology. 

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https://www.youtube.com/watch?v=Vzjtvt77mgc

For those who simply want to understand how to use it and how it differs from other monetary exchanges, watch Eric Spano’s TEDx on Bitcoin – distributing power and trust.

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For those who want to understand more than how the banking side works, watch ‘New kids on the Blockchain’ where Lorne Lantz gives a TEDx talk on how Bitcoin is doing the banking for us, and how the Blockchain technology can be used for multiple purposes beyond banking, because the Blockchain is underpinned by a shared trust.

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https://www.youtube.com/watch?v=A1Vbrxkqjwc

For those of you who prefer to read than view the videos, try Vikram Kumar’s article which questions whether the blockchain impact is being overstated.

Kumar, V. (2016) New kid on the blockchain. Acuity. March. Pp18-22.

Activity

Consider how Bitcoin can benefit your value proposition, it at all?  What do the developments of Bitcoin and Blockchain add to your value proposition.  Post your ideas in the Bitcoin Forum for discussion and feedback.

Decisions, decisions!

So, there is a lot more here than simply making a decision based on a simple legal comparison.  The good thing is, that with most of these formations, you can change them at a later date.  The shared ownership options are the more difficult to do that with as the ownership is not yours to change.  This is probably the key point to make at this point.  Choose an ownership structure and legal formation that gives you the amount of control that you want at this point in time, but protect yourself as much as possible.  Also note that you may need to move from being a sole proprietor if you want to work with certain customer bases.  Government for example generally require you to be a company, as do many large organisations.

It is by far easier to contract staff than it is to employ them!  Having said that, if you only contract people then they don't work for you and are not part of your company, so it is hard to build up loyalty, and they could go and work for anyone else at any point in time.

Ultimately, for your business to grow, you will need to employ staff, but while you start out, you can keep costs down by using contractors only.

The main difference between the two is that contractors work for themselves.  This means they invoice you for the work they do for you, and you pay the invoice.  You can either find contractors yourself by advertising for them, or you can use agency sites/brokerage sites such as Fiverr, Upwork, AirTasker etc.  Contractors can be more expensive per hour.

If someone works for you and you employ them, you are responsible for their salary, PAYG tax, superannuation and safework cover, as well as reasonable expenses etc they incur during the course of your work.  They also get holiday pay and sick pay, and are entitled to pay slips, minimum wage, etc.  There are also standard contract terms that apply, including those relating to Health and Safety at work. 

Activity

Complete the Hiring or Contracting Template to work out the advantages and disadvantages for your business of each option.  These will change over time as your business circumstances change so you may want to review this regularly to see which has the better balance as circumstances change.

For an insight into small business work safety, this video gives a good example.

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The Small Business Superannuation Clearing House makes paying superannuation payments easy for businesses employing up to 19 staff.

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The Fair Work Ombudsman website provides lots of useful details that we will not reproduce here as they will keep this up to date with the most relevant legislative positions.  You can find there website here.  The Fair Work Commission is the national workplace tribunal, while the Fair Work Ombudsman educates people (employers and employees) in the tribunal rulings and how they are applied.

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Necessities

Everybody who is able to get it, should get Professional Indemnity insurance.  This covers you for losses that can occur as a result of somebody relying on your advice in your job role or on the advice issued by your company.  If you provide a service that results in a loss then your PI insurance should cover it.

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If you are working with the public at all, or the public come onto your premises then you also need public liability insurance.   This covers situations where someone is injured on your property or as a result of something you or your staff/company has done.

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Finally, for all your employees, you need to pay the respective State work safe agency the work cover insurance for your staff.  This is to cover the costs of work cover that you can claim back in the event that a member of staff goes of sick as a result of their work and puts in a claim.

NICETIES

The nice to have policy is the management liability insurance policy as this covers you for losses made from making a genuine mistake, but not everyone has this or can afford it.

Many entrepreneurs forget about their retirement in the hope that they will be a millionaire by then, but it is actually important to invest in your superannuation also, as soon as you can afford to.

ADDITIONALS

Additional insurances that you may wish to have and offer to your staff include health insurance, travel insurance (particularly if your staff travel a lot with work), and fully comprehensive car insurance if you run a fleet of company cars, as well as broader risk insurance around accidents and health issues.  This next video outlines the sorts of things you need to consider with work cover and broader insurance - it may surprise you.

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Activity

Consider your insurance requirements and discuss them with others in the Insurance forum.  Are you very risk averse and want lots of insurance, or do you think there are some areas that you might not bother with for now?  Have you found a particularly good, cheap source of insurance you can share with others?

WHY REPORT?

The reporting requirements for companies exist to ensure that there is transparency to shareholders and investors in how their investments and shares are performing, and to ensure that there is a trust in the Australian stock market to encourage future investors into the market.

The requirements for reporting in organisations can be found here and include everything from quarterly reporting of financial activity to the Australian Taxation Office to the lodging of end of year returns with ASIC.

The main ASIC requirements is that the Directors pass a solvency resolution statement each year, when they pay their annual registraiton fee.  This resolution says that in the Directors' opinions, the company can pay all its debts.  Giving a false resolution could leave Directors liable for debts, even though the company has limited liability.  

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Activity

Do you think that ASIC plays a legitimate role in regulation or is just a money making regulator that doesn't add any security to the market?  Discuss your thoughts in the ASIC forum.  Would this put you off being incorporated?

MEETING REQUIREMENTS

If you are a sole trader or unincorporated partnership, the reporting requirements are relatively simple and can be done by you through the ATO portal.  

Once you start having to audit accounts and have audited accounts listed with ASIC, you require an accountant to manage this process and oversee the validity and reliability of your accounting processes.  This need not be particularly onerous and most small businesses do much of their own bookkeeping through software packages such as Xero or Mind Your Own Business, and then their accountants work from the records entered in these.

These are not something that you need to worry about, simply something you need to comply with and appreciate that there is a cost involved.  To ensure you don't miss anything, it can be easiest to use your accountants premises as your 'Registered Office' when you register your organisation.  This means that nothing will get 'lost in the post' if you move premises, or if there are staff changes in your organisation.