Posted on

Top Ten Legal Questions Every Business Owner Should Ask

Written by Andrea Henry

10 legal questions for business owners, provided by mompreneur Andrea Henry of Vox Law LLP

Can I protect my name and my brand?

Choosing a name and establishing a brand can be the most fun part of starting a business, but it can also be fraught with difficulty. For most entrepreneurs, part of choosing a name for their new business is doing a Google search and then searching the business name database to ensure no one else has registered that name. With your Master Business Licence in hand, you feel sure your business name is protected and no one else can use it but not so fast… have you checked to see whether the name has been trademarked?

I have had clients who started a sole proprietorship, registered a business name and happily used it for a few years before realising, only when they applied to register their trademark, that someone had beaten them to it. The problem is, the business name database and the registered trademark database are not the same things, and obtaining a business name registration does not mean that you have the exclusive right to use that name to distinguish your business in the eyes of consumers. The only way to make sure that only you can use your brand name, your logo or your tagline is to register it as a trademark.

If the owner of the trademark you want has not used it for three or more years, you can request the Registrar of the Canadian Intellectual Property Office to, essentially, strike the registration from the list, but that requires a long and expensive court battle.

Avoid long and expensive court battles; search the trademark database before you start using a name and apply for trademark protection as soon as possible.

Am I too small or new to incorporate?

This is a conversation you need to have with your accountant AND your lawyer. At any stage of its life, there are many ways a business can benefit from becoming a corporation. Just a few of these are:

  • Limited Liability. This advantage is the one everyone knows about – if you carry on business as a sole proprietor or a general partnership, your assets are at risk if the business incurs any liability. That means that if a client sues your business, really, he’s suing you, and your house and car and bank account are all at risk. A corporation is a separate legal person with its own assets. That means if a client sues your corporation, he can get at the corporation’s assets, but not your personal assets.
  • Increased credibility. Seeming bigger and more established than you really are is crucial when you’re the newest one in the pool.
  • Ease of raising capital. How do you sell a part of your business if your business is you? While maybe some investors would take a kidney, issuing shares in a corporation is the easiest way to exchange a share of your business for that influx of cash you need to grow.
  • Tax reduction or deferral. A big reason why people incorporate is to reduce or defer the tax they pay and to provide flexibility in finances.

The bottom line? If you’ve got good business insurance (speak to Tony at TruShield), work in a field where the risk of a significant claim against you is low and you’re using every cent you make from your business to fund your needs, incorporation may not be a top priority.

Do I need to keep a record of this?

Hands up if you know where all the invoices and receipts are from that first week when you had more than 5 customers! Anyone? ….. Anyone?

It’s really easy in the first few months of panic and overwhelm for business owners not to pay close attention to records, because of all the other seemingly urgent stuff going on. I’ve been there and have the scary invoices from my accountant to show for it.

Good record keeping is the difference between an HST credit and a CRA audit. Between the growth that comes from an injection of funds through a loan or credit facility, and the stagnation from a business that doesn’t have enough money to invest and gradually dies. Even if you throw everything into a shoebox and leave it for your bookkeeper, keep ALL of your business records.

What happens if I use my personal assets to run my business?

“Piercing the corporate veil”… no, it’s not the name of the latest romance novel; it’s when the courts put aside the limited liability of a corporation and find the directors or shareholders of a corporation personally liable for its debts. It can happen when you, the business owner, do not separate your personal assets from your business. You can use your credit card and other personal sources of financing as long as you properly record it (see No. 3 above) as a shareholder loan or, when you start the business, as a capital contribution. However, if you mix personal and business assets as if both were your own, you can lose the protection of a corporation.

How can I raise capital?

The textbook answer that a corporate finance student will give you is that you should have both equity and debt financing. Arlene Dickinson, who has built an empire from her sheer will, says equity is the most expensive form of financing there is, as you’re giving up a part of your business. Whichever option you pick, it is important to have your records in order so that your potential lender or investor can have confidence in your company and your ability to be organised and well structured.

How do I make sure my business is compliant with all regulations?

In Canada, we have 4 levels of regulation: federal, provincial, regional and municipal. It’s a lot to keep track of, but failure to comply with any one of the myriad regulations can cost you in the form of fines, or even worse, time during which your business can’t open. Your local library is often a great source of information regarding what regulations apply to your particular industry but if you are in any doubt, a lawyer who works with small business owners will be able to provide you with clear information as to which regulations affect your business and what you need to do to be compliant.

How likely is it that I’ll get sued and what can I do to reduce that risk?

As soon as you start to run a business, you open yourself up to the possibility of a legal claim against you. Some businesses have a higher risk than others, such as a club teaching axe-throwing versus a studio where you learn to paint landscapes. However, all businesses are at risk of suits from disgruntled employees, unsatisfied clients and allegations of trademark and/or copyright infringement.

Could your small business survive if you had to pay legal fees of $30,000 or more? That’s the average cost for legal fees for a matter up to and including a two-day trial in Ontario, and that doesn’t include the cost to you if you lose. Those eye-watering sums are what you’re trying to avoid by putting the right protections in place.

There is no way to guarantee that someone won’t sue you, but if you put the right contractual and regulatory protections in place you dramatically reduce the chance it will happen. If you haven’t been sued before, being served with a claim can be terrifying and disorienting, so it’s smart to get professional advice and put a plan in place for dealing with lawsuits before they arise.

What happens if my business grows more quickly or more slowly than I had expected?

Unless you can predict the future (in which case, you’re my new best friend and we’re going to Vegas tomorrow), there’s no way of knowing what your business’ growth will look like. That’s why it’s so important to have the right structures in place so that you balance flexibility and protection.

As examples, in your incorporation paperwork, you may not want to place limits on the type of business the company can do; when you file for a trademark you want to dream big and apply for registration for all the different categories of goods and services you will want to provide under that trademark in the future, even if you’re not doing it now.

What contracts do I absolutely need?

Ideally, any relationship in which rights or duties are involved requires a contract. Whether it’s the terms and conditions or service that a client accepts, a confidentiality agreement for a possible investor, or an agreement that lets your employees know that after two written warnings they can be fired, properly drafted agreements can be worth their weight in gold if there is ever a dispute. For most businesses, if you have to pick only three, get an employee contract, a client contract and an agreement among or between co-owners if that’s your set up.

If I have a business partner, what happens if we have a disagreement that we can’t sort out on our own?

The legislation that governs businesses doesn’t provide much protection for business owners with respect to their disputes with partners. Minority shareholders can bring a claim if the directors are acting in a way that is damaging to them, but when it comes to equal partners, which is how most small businesses are set up, you’re pretty much on your own.

If you ignore everything else I’ve written, GET A PARTNERSHIP OR SHAREHOLDER AGREEMENT. And if you’re in business with friends or family, you ought to have gotten it yesterday. If things go wrong, you need to have a way for one or more of you to exit the business without blowing it up. The most difficult, bitter and costly disputes and sadly, the most frequent disputes, are the ones involving family and friends who go into business with each other with nothing written down.

mompreneur Andrea Henry of Vox LawThis article is made available by Andrea Henry of Vox Law LLP for educational purposes only and not to provide specific legal advice. By reading this article you understand that there is no solicitor-client relationship between you and Andrea Henry and/or Vox Law LLP. The article should not be used as a substitute for competent legal advice from a licensed professional lawyer.

Leave a Reply