me inc. the legal issues of starting your own business
Post on 20-Oct-2014
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This is a tool for entrepreneurs to identify some of the basic legal issues they will confront when starting their own businessTRANSCRIPT
ME INC. Legal Issues of Starting Your Own Business
Noah Sarna and Elizabeth ReidAssociatesBoughton Law Corporation
Introduction
Disclaimer
THE FINE PRINT
This presentation contains general information and not legal advice
No solicitor-client relationship or privilege attaches to an exchange of info
For a specific problem, consult a lawyer
Overview
A. Introduction
B. To Inc. or Not to Inc. How to choose among different legal structures
C. The Legal Nuts and Bolts of Me Inc. Choosing a name, directors/officers, method of
financing Implications for non-Canadians
Overview
D. Understanding Contracts that Matter Lease, supply and employment
E. How to Use Lawyers Effectively
Joe the Retailer
A short story about Joe Coulombe1966: Ran chain of 18 “Pronto Market”
convenience stores in LA7-11 was invading CaliforniaJoe needed to differentiate his product, had to come up
with new idea for his stores
Joe saw 1960s trends: 60% of young people in US would be going to college
More educated could mean more interested in other cultures
Boeing 747 meant recreational travel was becoming more affordable
Joe the Retailer
New client base “overeducated and underpaid”Trader Joe’s would sell exotic, gourmet foods
Then Joe saw 1970s trends: Recessions meant “overeducated and underpaid” had
even less moneyEnvironmentalism and health consciousnessEmphasis on supporting local economy
Rented out store space to local butchers
The rest is history…What legal issues did Joe need to confront when
he began Trader Joe’s?
To Inc. or Not to Inc.
What options are there? Sole proprietorship
Person carrying on business alone
Partnership (limited and unlimited)People carrying on business in common with
view of profit
CorporationLegal entity divorced from its owners with limited
liability
To Inc. or Not to Inc.
How do you choose?Limited liabilityOptimal tax positionControl over major decisions
Sole ProprietorshipPro: cheap to set up, Joe can deduct losses
from personal income, control everythingCon: no limited liability
To Inc. or Not to Inc.
Partnership: Pro: Joe can deduct losses from personal
incomeCon: no limited liability (unless limited
partner in limited partnership), reduced control
To Inc. or Not to Inc.
CorporationFeatures: immortality, limited liability,
transferrable shares, separate legal entity, capital
Generally, structure of choice, but degree of pros/cons depends on your situation and what you do with itUsually, high control, limited liability, tax
advantages
The Legal Nuts and Bolts of Me Inc.
Choosing a name Must be pre-approved Distinctive element + descriptive element
+ corporate designation No-no list: government, royal, pre-existing
Preparing Articles of Incorporation Features of how corporation will function
and behave Agreed upon by shareholders and government
The Legal Nuts and Bolts of Me Inc.
Shareholders AgreementUsed when two or more people start a business
together to define their relationship, rights and obligations
Features: control (e.g. one director per SH), non-competition/solicitation and confidentiality, how much each SH will contribute to and get from the corporation
Issuing sharesShare represents holder’s rights in the corporationUnique features: voting, dividends, priority on
dissolution, redemption/retraction, etc.
The Legal Nuts and Bolts of Me Inc.
Appointing directors/officersShareholders don’t manage the company,
directors do – governing from a step backOfficers not necessary, big picture vs. little
pictureDuties: of care and loyalty, to act in the
“best interests of the corporation”
The Legal Nuts and Bolts of Me Inc.
Methods of financing:Shareholder loan (internal debt)Share sale (equity)Corporate borrowing (external debt)
Implications for non-CanadiansNon-Canadian investors must notify Industry
Canada Investment Canada ActNot restricted from acting as director/officerTax consequences vary speak to an accountant
or lawyer
Understanding Contracts that Matter
What is a Contract?Enforceable exchange of promises for the breach
of which a remedy is availableThey are everywhere, even if not writtenElements:
Offer and acceptanceConsiderationIntention to create legal relations (presumed in commerce)Legal capacity Formalities and form of an agreement
Understanding Contracts that Matter
Life of a contract: Formation Performance Non-performance Breach Expiry of term or frustration
Contracts that Matter? Lease, supply and employment
Understanding Contracts that Matter
1) Commercial lease: a contract between a LL and T that grants the T exclusive possession of space on certain terms• What can it be used for?
• Gives right to tenant to occupy space for business use
• Used by lenders to look at financial position of tenant
• Different than a license – possession is exclusive, creates interest in land
Understanding Contracts that Matter
1) Commercial Leases (Cont’d)• What are the key elements?
• Parties: legal vs. beneficial owner/LL, identity of T may not yet be settled
• Premises: location and delineation (especially if space not yet subdivided, constructed)
• Rent: usually depends on square foot or percentage of revenues, may begin as estimate
• Duration: start date must be fixed or fix-able• Other items depend on parties: e.g. access easement
Understanding Contracts that Matter
1) Commercial Leases (Cont’d)• What are the key considerations?
• Termination/Assignability: how long will I be on the hook for rent if things don’t go well?
• Renewal/Expansion: can I lock in the rent or take over neighbouring space if I need to?
• Responsibilities: which party will take care of what? • Uses: what can I use the space for? When can I
enter/exit? What time can I open/close?• Space: what do I have access to?
DEPENDS ON YOUR GOALS AND PRIORITIES
Understanding Contracts that Matter
1) Commercial Leases (Cont’d)• How does the process work?
• Make contact, negotiate, and then negotiate through documents What are the key documents?
• Initially…• Term sheet/Letter of intent: sets down generally or
specifically terms to include in the lease• Is it binding? You decide.
• Offer to lease: contains key element, but leaves out most that are important to LL; has time window
• Ultimately…• Commercial lease: comes in many forms, depending on (1)
type of building (multiple tenants?); (2) how rent charged (flat fee?); (3) type of business
Understanding Contracts that Matter
2) Supply Agreement: a contract between a manufacturer or supplier and a retailer or consumer for certain goods in exchange for money• Less complicated than commercial lease• Starting tips: have it in writing (to reduce
uncertainty and prevent disputes), define the terms well, discuss GST, must be commercially reasonable, follow legal formalities
Understanding Contracts that Matter
2) Supply Agreements (Cont’d)• What are the key elements?
• Parties: corporation or individual• Goods: what will be delivered by supplier (buyer will
have option to inspect items pre-shipment, supplier must make good if not agreed goods)
• Price: how much will be paid by the buyer per item (shipping costs, currency, interest/penalties on late payments/delivery), increase (e.g. inflation)
• Duration: how long will the terms continue• Other items depend on parties
Understanding Contracts that Matter
2) Supply Agreements (Cont’d)• What are the key considerations?
• Fixed price vs. variable depending on revenues• Same supply each month vs. on demand• Exclusive supply vs. supply to anyone
DEPENDS ON YOUR GOALS AND PRIORITIES
Understanding Contracts that Matter
2) Supply Agreements (Cont’d)• How does the process work?
• Negotiations, then document, then revise document• Usually shorter negotiations than commercial lease• Should result in a supply agreement
• Are there different types of supply agreements? • More flexibility, less constricted than commercial leases
just about buying and selling items
Understanding Contracts that Matter
3) Employment Agreements• Initial considerations:
• Employee vs. independent contractor• If you have employees, there is an agreement
whether you like it or not so it might as well be spelled out in writing!
• Type of agreement depends on type of employee
• CEO vs. administrative assistant
Understanding Contracts that Matter
3) Employment Agreements (Cont’d)• Important elements – CEO/AA:
• Who (the parties)• How much (the salary, including benefits)• What (job description, subject to change)• What to keep secret (confidentiality)• How can it end (basis for termination)
• The biggie NOTICE• Common Law vs. Statutory Notice• Can mean massive severance packages
Understanding Contracts that Matter
3) Employment Agreements (Cont’d)• Important elements – CEO:
• Non-competition (time, geography, vocation)• Non-solicitation (no stealing clients or raiding
employees)• Who owns what (ownership of inventions)• Change of control (prevent canning by new
owners)
• The biggie NOTICE• Common Law vs. Statutory Notice
Lawyers: Who do they think they are anyway?
A. How to use them effectively They usually request retainer
Estimate of whole/part of the work they will do for you, proof of financial commitment
Charge by the hour, usually not contingency Usually won’t charge for first meeting Invoice monthly, after service complete
Lawyers: Who do they think they are anyway?
Costs can be considerable2008 average hourly rate of lawyers in western
provinces: $338Residential real estate purchase: between $450-
$2,000Simple will: $220-$1,145Two-day civil action trial: $81k average
But it may cost more not to hire a lawyer for certain thingsEvaluate the risks
Lawyers: Who do they think they are anyway?
Tips for maximizing your time with a lawyerBe organized (documents, timelines, names)Be able to tell your story clearly (summarize in
advance) and trust your audienceBe clear about what you want from themKeep track of any questions or important concernsConsult with your lawyer before making a certain
legal decision
Lawyers: Who do they think they are anyway?
Tips for maximizing your time with a lawyer (cont’d)Get to know the lawyer’s assistantsKeep in touch only when appropriateBe an active client
Ask how you can help, what you can prepare, any footwork you can do, educate yourself as much as you can about the law and your lawyer
Discuss fees early and regularly and pay any bills on time
Don’t wait until something goes wrong, get a lawyer involved early