The first steps often taken by business owners in establishing their business are:
- to obtain an Australian Business Number (‘ABN’) and
- to register their business name through Australian Securities & Investments Commission (‘ASIC’).
Under the Business Names Registration Act 2011 (Cth) (‘the Act’) businesses are required to register their name if they are carrying on a business under a business name and do not meet one of the exceptions under the Act.
Exceptions under the Act are as follows:
- Where the business is run by an individual and the business name is the individual’s name;
- Where the business is run by a registered Australian company and the business name is the company’s name; and
- Where the business is a partnership and the business name consists of the partner’s names.
If I register a business name, does that give me the same protection as a trademark?
No. By registering a business name, a business owner is not protecting themselves against trademark infringements, or from other businesses who may later trademark a similar name.
Can the business name enter into contracts?
A common misunderstanding that arises time and time again, is that by obtaining an ABN or registering a business name a business owner is creating a separate legal entity capable of creating legal relations. This is incorrect – a business name confers no legal status.
You need to keep in mind that it is the legal entity behind the business name (that is, the entity that has registered the business name) that has the legal status to enter into contracts.
- With a sole trader or a partnership – the legal entity will be that individual or partnership and not the business name.
- With a company – the company is the legal entity behind the business.
Business owners will elect to operate as an individual or a company depending on the individual circumstances and what the risks and liabilities of the business are.
Why is this important?
Identifying the correct legal entity is crucial, particularly where the business wants to purchase or dispose of assets, or otherwise enter into legal agreements. This characterisation is crucial in ensuring that the agreement is validly prepared and executed, and to also ensure that liability and responsibility is appropriately apportioned.
What about when dealing with customers?
The same concepts apply when you are dealing with clients or customers. You must ensure that you correctly identify the legal entity behind your client or customer, and address all documentation (particularly contracts and invoices) to that legal entity, and not to the business name.
We have recently seen instances of suppliers noting their customer is the business name (e.g. Bob’s Fruit) – when in fact, the customer has a company registered in the same name (e.g. Bob’s Fruit Pty Ltd) as well as having a business name registered to the principal of the business as a sole trader (e.g. Bob Smith trading as Bob’s Fruit). It is then open to the customer to argue that they entered into the contract as the company – or as the sole trader – whichever position is more advantageous to them.
Further information about this can be read in our earlier blog answering the question Who is your customer?
You can access further information about business names, trading names and legal names at the following website: https://www.business.gov.au/registrations/register-a-business-name/business-name-trading-names-legal-names.
Contact the team at Shire Legal by calling 02 9526 3444 or by emailing email@example.com if you have any questions.