Business Structure & Startup Q's for a Subscription Website

So I have an idea for a website that could make life easier for a group of people and am interested in giving it a crack. I'd expect it has the potential to attract hundreds (if not 1000+) users and would be looking at charging a monthly fee for access. Build costs I haven't yet had quoted, but would expect it to be in the vicinity of $10-20k.

Ownership would likely be split across 1, 2 or 3 individuals (will obviously have this locked down before progressing much further).

From a structuring perspective I'm thinking a company would be best if the site were to take off, but I presume it's also going to be greater effort & more $ to get that setup and having it operate in that format... it would be especially frustrating if I spent the time and money starting a company, got the site operational, it didn't take off and had to wind it up not long later.

Can anyone share any personal experiences with structuring a similar business (no staff, no office, no stock, just cost of site build and ongoing site development/maintenance/hosting)?

Do I need a bank account in the company name to fund the start-up costs or can I just use my own funds and then attribute the expense to the company?

Would a partnership be an easier structure to start with and what would be the downsides of doing so (is it difficult to go from partnership -> company down the track)?

 

A company is a separate legal person so it would definitely need its own bank account. You would be breaching the corporations act if you took company money. Consider how the company will use your funds - probably best if you lend the money to the company.

Partnerships mean each partner is liable for the whole debt = very dangerous. I have never ever set up a partnership for a client.

If you set up a company consider how it is structured as well.

If you don't go anywhere the company could be used again in the future for something else.

 

Thanks for the insights @Terry_w.

Holding onto the company for future use is something I hadn't considered. That may be less painful than winding it up.

 

My partner in the law firm specialises in IT startups.

If there will be other significant shareholders in the company then I would highly recommend
A shareholders agreement
Each shareholder required to have a special purpose vehicle (ie discretionary trust) to hold their shares

If it was something that developed significant intellectual property then you would normally separate the intellectual property from the trading by way of separate entities.

Everything above can soon add up to a few dollars though so it depends on where you think it was going. From a practical perspective you probably want to start smaller and then if you are getting somewhere split off the IP later.

If you are going in with others then I would, at a minimum, get everyone to setup a clean discretionary trust (personal trustee is fine) each to be shareholders so that you don't end up in bed with someone else's creditors.

BUT

If you are not sure where you are heading at first and the service you are offering is not risky can you start it in a personal name first (preferably someone who has no or little assets) and then if you start getting traction setup your entity and transfer the website business across (before it makes a profit).

 

RPI,

would setting up a unit trust with a corporate trustee suit this endeavour? That way if needed further units could be issued later if seeking capital raise and adding other shareholders or equity partners.

The owners of the units could be personal/individual or invested via DFT. It would be the unit trust and company as trustee at risk wouldn't it not the actual unit holders?

Hope that makes sense.
Thanks if you could elaborate further.

Cheers,
Player

 

Hi Player

Depends on the state. In QLD transfer of units are a dutiable transaction, transfer of shares are not.

Whether you have a corporate trustee and unit trust or a company this provides for top down asset protection not bottom up. So the only thing at risk (personal guarantees and director penalties aside) if something goes bad in the unit trust or company are the units or shares. But if your fellow unit/shareholders hold their units/shares in their own name and then go through a divorce, go bankrupt, get sued etc for something completely unrelated to the unit trust/company then you can find yourself in business with someone's creditor, receiver, ex wife/husband etc. That is the reason that we recommend using a discretionary trust that is only allowed (via the shareholder agreement) to own the units/shares so that if the person behind the trust goes under it shouldn't impact the unit trust/company.

If a group of unrelated people are going into a venture together then a Unit Trust can be good (in QLD) if
1. the individuals have an effective tax rate of <30% and
2. they are not planning on listing/ capital raising in the future (once the venture is worth something)

Even if their effective tax rate is >30% then it can still be good to not worry about having to pay tax at the venture level and leave it to the venturers

 

THIS.

I subscribe to the Ben Horowitz school of thought on this. Google Ben's blog or grab his book, The Hard Thing about Hard Things. Great read on startups.

 

Thanks for those insights RPI. And also agree with Geoff, of course get through the process of verifying what is being developed and offered actually solves a problem and can be monetised.
2340 do you have all the skills to set up the platform or are you employing others? Are the others involved coding and programming or investors? Keep it lean initially in case it doesn't hit a home run and needs tweaking or canning to then work on something else. Good luck.

 

It's likely to be either myself & my wife or myself, my wife and one other in the industry, with ownership being an even split in either case. What's the purpose of the discretionary trust? Would you still consider it if only the two of us?

Thanks for the input, still very early, one or both of the other business partners are in the industry which would hopefully be an advantage. Once I have a thorough site plan, wire frames and probably the site build roughly costed I'd intend on taking the idea to a small group in the industry to get feedback and hopefully gauge viability.

I would "project manage" a designer and developer (likely sourced from UpWork or similar) to construct the site based on a detailed site plan, description and wire frames that I'll put together.

 

Have you considered offering equity to your developers ? This would keep your development costs down to zero in the event that the project failed. There are plenty of people with IT skills here & they are likely to have far more enthusiasm for a side project & a better attitude than an Upworker..... if I had recent web dev skills I'd certainly be PMing you to get in on the ground floor of a startup.

A startup that I worked for (just before the tech crash in 2000) offered equity to the lawyer, me & a couple of others, rather than paying actual $$$. (That's how I lost my first couple of $M ).

 

Thanks for the suggestion @keithj. A few years ago I tackled another site build with oDesk (since rebranded as Upwork) and found the developers very keen and apart from some small difficulties with language (having to explain a few things in more detail than I would with someone who spoke English natively) I was satisfied with the process and outcome.

If I paid for developers with equity it could get messy if they didn't have all the skills required to build the site, I don't like their output/ideas or they don't give it the time required with it being a side project.

I will get the site build costed with a local firm or two as well, but based on past enquires I'd probably be looking at over double the cost (although back then the AUD was a lot higher, so maybe the difference is not so large today).

 

Once you have finalised your requirements. Post a link here and if anyone is interested they will get in touch.

Cheers,
Oracle.