5 Legal Considerations for Starting a Business in Canada
Are you looking to start your own business? Since the peak of the COVID-19 outbreak in March, over 150,000 Canadian small businesses have turned to e-commerce to support themselves during the pandemic. However, starting your own thing is not as simple as picking a catchy name and letting everyone know you are open for business. There are some legal decisions you will need to make before you start earning revenue. So, before you begin choosing your website’s colour scheme, consider the types of agreements and which legal structure is right for your business to ensure your start-up gets off on the right foot.
1. Business StructureThe first decision you will need to make is how your business will be structured. Will you operate as a sole proprietor, a partnership, or will your company be a corporation?
A sole proprietor puts everything on your shoulders. In this business structure, you and the company will exist as one, and you will need to register and obtain a business license to get started. There are benefits of structuring it this way as there are low setup costs and you have complete control, but it comes with unlimited liability meaning that all of your assets, personal or otherwise, are linked to the business.
Entrepreneurs should also be wary that they do not find themselves inadvertently in a partnership. This can arise automatically when two or more persons are working in common with a view to profit. In a partnership, each individual is jointly and severally liable for all debts against the partnership as a whole irrespective of whether the debt was incurred by the business or one of the individual partners. In essence, it may be in an entrepreneur’s interest to consider if they are comfortable with the structure of a partnership and the amount of risk that partners expose themselves to.
If you want to be separate from your business as a legal entity, you will want to structure it as a corporation. This provides limited liability to you and any shareholders associated with the company and your liability is limited to the extent of your investment. It also is the preferred structure if you want to raise capital, which might be needed as this option is more costly and heavily regulated.
2. Term SheetsWhen it comes to raising capital, most start-ups turn to venture capitalists for funding once they have exhausted their own networks (family, friends). This is where you may get introduced to term sheets, as venture capitalists use this type of document to define funding arrangements. The term sheets will outline the terms of the investment from the venture capitalists and what you will provide in return. It also defines the guidelines of how both parties will act to protect the capital being put forward.
3. Shareholder AgreementsA shareholder agreement is a contractual agreement amongst the shareholders of a corporation that describes how the company plans to operate and outlines shareholders’ rights and obligations. It provides details regarding the relationship between everyone involved, the expectations of all parties involved, and how disputes will be handled if disputes arise. A right of refusal provision may also be included, which provides the holder of this clause to review any offers or transactions before it is presented to third parties or other potential investors. A shareholder agreement can provide you with a structure on how to run a company, satisfy stakeholder expectations, and set you up for entrepreneurial success.
4. Employee AgreementsUnless you are planning to do everything on your own, you are going to need some people to help. However, if you are going to hire employees, you may need an Employment Agreement to outline their terms.
This most often includes a job title, responsibilities, how much management and employees are compensated, how many hours they must work, and many other details that protect your company and the employee’s rights.
In this employment agreement, it is important for entrepreneurs to have a termination provision that employees can be terminated at the employer’s discretion. This may consist of the sum of their severance that they will be paid to the employee upon termination and the length of notice required—equal to or exceeding— the relevant provincial statutory regime.
5. Confidentiality AgreementsIf what you are working on is highly classified or proprietary, you might also want to consider a Non-Disclosure Confidentiality Agreement or a Non-Solicitation Agreement. Whenever someone new comes on board, or you share business trade secrets with members of your company, this agreement will protect your information from getting leaked to competitors or other entrepreneurs. A Non-Solicitation Agreement will prevent ex-employees from attempting to poach individuals they worked with or developed relationships with during the course of their employment.
Do You Need Some Legal Advice?Starting a business can be fun, but it does not mean you do not need to consider all of your legal obligations in order to be protected.
You do not need to navigate through these waters on your own. The BLG Business Venture Clinic can help you with your legal questions and guide you on how to get started with your new business. Contact us today to find how we can help you.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.