Me Inc. The Legal Issues Of Starting Your Own Business

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


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


Partnership: Pro: Joe can deduct losses from personal

incomeCon: no limited liability (unless limited

partner in limited partnership), reduced control


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


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.


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”


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


Life of a contract: Formation Performance Non-performance Breach Expiry of term or frustration

Contracts that Matter? Lease, supply and employment


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


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


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


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


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


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


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


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


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


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


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


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


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


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

Thank you

Noah SarnaAssociate

[email protected]

Elizabeth ReidAssociate

[email protected]

Me Inc. The Legal Issues Of Starting Your Own Business

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