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. 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
We are both junior lawyers at Boughton Law Corporation, a large downtown law firm. I do primarily business law, some tax and some estate planning, while Elizabeth deals with labour, employment and human rights law.
It wouldn’t be a presentation by lawyers without a bunch of fine print. Essentially, it says that you should take what we say as information specific to your circumstances. This is meant to be educational.
The first objective is about understanding legal documents that affect businesses.
The second objective is about accomplishing a legal result that satisfies business interests.
These are the concerns people apply to determine which structure benefits them most. First, limited liability – how much risk is there that I will lose my house because of my business? Second, optimal tax position – how can I prevent paying the most money to the government? Third, control over major decisions – how important is it that I determine which direction the business will take?
A limited partner in a limited partnership is essentially an investor. Usually, for any type of partnership, it’s a good idea to have a partnership agreement.
Even though a corporation has limited liability, lenders will often asks for personal guarantees from shareholders or directors before they lend money to a corporation, particularly a young one with no assets.
Two main tax advantages of incorporation for small business owners: (1) the small business deduction; and (2) flexibility in tax planning, how to distribute revenue, deferrals, etc.
Suppose you choose a corporation, what do you need to decide?
In terms of a name, think of Boughton Law Corporation. Can you think of others?
The articles set out most of the rules and consequences that direct how a corporation will act and what rights and roles different people will have in it. They aren’t entirely free from the government’s hand – a lot of what’s included in these articles is set down by the government in return for being able to capitalize on the benefits that come with incorporation.
Shareholders agreements involve similar concerns to partnership and co-ownership agreements. How much say will each SH have in the corporation? How much will each contribute or receive? How can shares be transferred? What happens when a SH dies?
Consider the Wise decision: there are many stakeholders involved in a corporation (e.g. shareholders, creditors, employees, local community, etc.), but who do the directors have to answer to?
An additional method of financing is generating profits, but that usually doesn’t happen at the beginning.
A director does not even have to live here to fill the post.
Investment income could be treated very differently depending on the original taxing jurisdiction (i.e. the person’s country of residence) – for example, whether Canada and that country have a tax treaty (e.g. the US).
I’m going to spend a bit more time on this type of agreement just because no matter what you do after your degree – an employer or employee – it will be important. Many people have their employment agreements looked at by a lawyer before they sign it, including lawyers. If you’re an employer and you have a lawyer deal with preparing it, it will save you money in the long-run.
If you’re going to treat someone like an employee (i.e. direction and control, use of your tools, etc.), then you should consider them to be an employee.
Regarding termination, you have to allow the parties to end the relationship at some point. For the employer, the idea is they should be able to terminate immediately in the event of “just cause”. This is a legal buzzword that is important to include in employment agreements. It is defined contextually, so make sure some further explanation is given, which will make it easier to show.
Without cause is where it gets tricky. That’s why you need to contract out of common law notice. What factors do courts look at for common law notice?
TIP: whenever you agree to pay them more, get a new contract. They’ll be happy about the raise, so use the opportunity to add greater obligations or new duties.
Courts are upset by what they see as “restraint of trade” in non-competition clauses. Many cases have come up where those clauses have been struck. They must be reasonable relative to the needs of the business and the ability of the individual to make a living.
Non-competition means you can’t put a shingle up next door. Non-solicitation means you take away my business (i.e. clients) or my ability to do business (i.e. employees).
You will need to have a lawyer once you start a business, so it’s important to understand how to use them wisely.