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Hope for the Best, but Prepare for the Worst: Tackling Legal Risk

Are you about to take on a new risk or address a current risk? During my breakfast seminar, I discussed four areas where legal risk must be tackled.

1. CHOOSING THE RIGHT BUSINESS STRUCTURE

It’s never too early to establish your business plan and choose your business structure. But what is the right one for you and your business?

A sole proprietorship is the easiest and least expensive to organize, however, it has the highest exposure for personal liability.

A partnership is an unincorporated business where there are two or more owners. This is more complex to organize, but you can limit some personal liability with a partnership agreement.

The third option is a corporation. A corporation is a separate and distinct legal entity. It is the most complex organization; but it limits your personal liability for business risks and debts.

The type of business structure you choose will largely be determined by your profession, the tax implications, your reasons for starting your own business, risks of liability and your personal, professional and financial goals.

This doesn’t necessarily just apply to when you are starting out in business. You may have picked one structure years ago and now that your business has grown and evolved it is time to consider whether another structure is necessary.

2. WORKING WITH OTHERS

As a business owner you have legal relationships with numerous people, including clients, service-providers, landlords, partners or other shareholders and employees. A written agreement is important to document all the rights and obligations involved in these legal relationships.

If you remember one thing when preparing for the worst, remember this: If it is not in writing, it doesn’t exist.
The most important reasons for having a contract in place is to ensure that both you and the other party have the same expectations. It also provides opportunity to clarify and confirm the scope of services, fees, timelines and any other issues. This will help to identify red flags sooner rather than later.

Bear in mind that entering into a written agreement does not always mean a cumbersome 35 page contract full of legalese. You need to determine the type of agreement required based on your type of business and your client. For example, a multi-million dollar master services agreement with a Global Media company warrants an extensive, lengthy legal contract while a design services agreement with a residential homeowner does not.

Once you have finalized the terms of the agreement, be sure to sign it and keep a copy.

Working with others also means having a good support team in place.

Behind every successful business there is a relationship with a bank. It is important to start establishing this relationship as soon as possible.

The Income Tax Act is the size of a phone book; this is just the tip of the iceberg in the financial sea you will venture into. An accountant can be a real asset to any business.

It is always prudent to seek legal advice from a lawyer before signing anything significant. A small expense today can save a lot of money and trouble tomorrow. As your business grows, so too will the importance of legal advice.

3. PROTECTING YOUR PROPERTY

As you build your business your assets and property increase. These can include hard assets like computers and equipment. A key way to protect these assets is to understand what it means when a third party wants to take an interest in them. For example, if the bank wants to take security in your property as collateral for a loan. Or if there is a provision in your lease giving the landlord the right to take your assets if you don’t pay your rent.

Another asset you may develop is intellectual property including the goodwill of your business.

There are certain things that you can do upfront to protect the IP of your business that cost very little in comparison to what failing to do them could cost you in the future.

For example, register your business name. This is a simple process that can be done online. But the registrations only last for five years.

For unregistered copyrighted work or publications that you want to protect, you should add a © together with your name and the date at the bottom.

If you have unregistered trade-marks, put a little ™ beside them. Once you register them you’ll change that ™ to the ®.

And if you are seeking help or input from others or pitching an idea, you need to make sure you protect your ideas, business plans, methodology, designs and work-in-progress. A confidentiality and non-disclosure agreement should be entered into from the outset.

4. YOU WON’T LAST FOREVER

Why estate plan? There are both personal and professional reasons why estate planning is important. For example, you might have agreements that require you to have certain provisions in your Will or to have a Power of Attorney.

As your business becomes more successful, you might wish to consider how you can protect your family and maximize the benefits to your estate by planning ahead and taking advantage of proper succession and tax planning.

It is also important to make sure you have a plan for the management of your business if you get sick and cannot work for a period time.

Super Quick Top Ten Estate Planning Considerations

  1. Choose your Estate Trustee(s) carefully;
  2. Consider using multiple Wills to reduce probate tax;
  3. Consider whether you need a Will in any other jurisdictions;
  4. Beware of joint accounts;
  5. Be careful with gifting;
  6. Know your beneficiaries - if you have minor children or beneficiaries in their 20s you may wish to divide their bequests;
  7. Be sure to appoint Guardians for your minor children;
  8. Be realistic - make sure your plans are consistent with reality;
  9. Involve your family to avoid future disputes; and
  10. Estate planning is not a crock pot - you can’t just “set it and forget it”. Revisit your estate plan every 4-5 years as circumstances do change.

Hoping for the best but planning for the worst is a practical approach to operating your business.

There are other ways you can tackle and manage your risk. Insurance coverage is essential. Check with your broker to learn what insurance is right for your business. Developing workplace policies is also key, for example, policies regarding workplace safety. Lastly, you should always keep informed of changes in your business sector and keep up to date on all applicable legislation.

This Article is not to be considered legal advice relating to specific facts or situations. If you have specific concerns or questions, please contact Denise Robertson, Mills & Mills LLP (Telephone: 416-682-7139 or Email: denise.robertson@millsandmills.ca).