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Me Inc. The Legal Issues Of Starting Your Own Business

This is a tool for entrepreneurs to identify some of the basic legal issues they will confront when starting their own business

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Me Inc. The Legal Issues Of Starting Your Own Business

  1. 1. ME INC. Legal Issues of Starting Your Own Business Noah Sarna and Elizabeth Reid Associates Boughton Law Corporation
  2. 2. Introduction
  3. 3. 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
  4. 4. Overview A. Introduction B. To Inc. or Not to Inc.  How to choose among different legal structures B. The Legal Nuts and Bolts of Me Inc.  Choosing a name, directors/officers, method of financing  Implications for non-Canadians
  5. 5. Overview D. Understanding Contracts that Matter  Lease, supply and employment E. How to Use Lawyers Effectively
  6. 6. Joe the Retailer  A short story about Joe Coulombe 1966: Ran chain of 18 “Pronto Market” convenience stores in LA 7-11 was invading California Joe 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
  7. 7. 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 money Environmentalism and health consciousness Emphasis 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?
  8. 8. 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 Corporation Legal entity divorced from its owners with limited liability
  9. 9. To Inc. or Not to Inc.  How do you choose? Limited liability Optimal tax position Control over major decisions  Sole Proprietorship Pro: cheap to set up, Joe can deduct losses from personal income, control everything Con: no limited liability
  10. 10. To Inc. or Not to Inc.  Partnership: Pro: Joe can deduct losses from personal income Con: no limited liability (unless limited partner in limited partnership), reduced control
  11. 11. To Inc. or Not to Inc.  Corporation Features: 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 it Usually, high control, limited liability, tax advantages
  12. 12. 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
  13. 13. The Legal Nuts and Bolts of Me Inc.  Shareholders Agreement Used 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 shares Share represents holder’s rights in the corporation Unique features: voting, dividends, priority on dissolution, redemption/retraction, etc.
  14. 14. The Legal Nuts and Bolts of Me Inc.  Appointing directors/officers Shareholders don’t manage the company, directors do – governing from a step back Officers not necessary, big picture vs. little picture Duties: of care and loyalty, to act in the “best interests of the corporation”
  15. 15. 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-Canadians Non-Canadian investors must notify Industry Canada  Investment Canada Act Not restricted from acting as director/officer Tax consequences vary  speak to an accountant or lawyer
  16. 16. Understanding Contracts that Matter  What is a Contract? Enforceable exchange of promises for the breach of which a remedy is available They are everywhere, even if not written Elements: Offer and acceptance Consideration Intention to create legal relations (presumed in commerce) Legal capacity Formalities and form of an agreement
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. Lawyers: Who do they think they are anyway?  Costs can be considerable 2008 average hourly rate of lawyers in western provinces: $338 Residential real estate purchase: between $450- $2,000 Simple will: $220-$1,145 Two-day civil action trial: $81k average  But it may cost more not to hire a lawyer for certain things Evaluate the risks
  31. 31. Lawyers: Who do they think they are anyway?  Tips for maximizing your time with a lawyer Be organized (documents, timelines, names) Be able to tell your story clearly (summarize in advance) and trust your audience Be clear about what you want from them Keep track of any questions or important concerns Consult with your lawyer before making a certain legal decision
  32. 32. Lawyers: Who do they think they are anyway?  Tips for maximizing your time with a lawyer (cont’d) Get to know the lawyer’s assistants Keep in touch only when appropriate Be 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
  33. 33. Thank you Noah Sarna Associate 604.605.8334 nsarna@boughton.ca Elizabeth Reid Associate 604.647.4173 ereid@boughton.ca

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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 business

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