- 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 business and your ability to be organised and well structured. Speaking of confidence in your business…
- 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 benefits are:
- Limited Liability. This advantage is the one everyone knows- 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 but taxes are only an issue if you’re making a profit.
The bottom line– if you’ve got good business insurance, work in a field where the risk of a significant claim against you is low, are not interested in attrating investors and you’re using every cent you make from your business to fund your personal needs, incorporation may not be a top priority.
- 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- a club teaching axe-throwing vs a studio where you learn to paint landscapes. However, all businesses are at risk of suits from disgruntled employees, dissatisfied clients and allegations of trademark and/or copyright infringement.
Could your small business survive if you had to pay legal fees of $30k? 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 in place a plan for dealing with lawsuits before they arise.
- 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’re 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.
Vox Law LLP
The Law Firm Built With Love for Small Business™
This 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 acknowledge 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 lawyer.