The Legal Stuff | Accelerator
It’s time to talk about one of the most ignored but often most important part of starting a company – the legal stuff. Whether you are a hobby business, a social enterprise or a high-tech startup, there are legal considerations that must be made.
Please note that I, nor EntreLaunch, is a lawyer and this lesson is only an overview of things to consider. It is HIGHLY RECOMMENDED to consult with a lawyer or legal team that specializes in your business area.
Things to ask when choosing a lawyer:
- What is the focus of their practice?
- How many years have they been practicing this area of law?
- Do they have experience with your business style?
- Is there a startup legal program available?
- What standard costs can you expect to pay each year?
Depending on the type of business you are starting, your legal needs will vary greatly. If you are using your own name (with no additional words or terms such as “Consulting,”) you often do not have to register your business provided you make under $30,000. You also do not need an HST number for your business until your business income exceeds $30,000. Please confirm the needs of your business with a lawyer and an account – setting up your business structure now will save you in the long run as it will prepare you to take the appropriate actions.
In Canada, there are currently 3 legal forms of business: Sole Proprietorship, Partnership and Corporation.
A sole proprietorship is a business owned by you alone. It is an unincorporated business and you will pay personal income tax on the net income generated. Many sole proprietors choose to operate under their own name, however you can also register a business name. Sole proprietorship is often the best option for hobby businesses. This is the simplest business type to set up though you should always check with a lawyer as to whether it is the right choice for you. A business that has a higher risk level (construction, medical, restaurant) may find there is some extra protection for the individual through Incorporation.
Working with a partner? A Partnership allows two of more individuals or parties (including corporations and trusts) to form a partnership to carry on business. Partnerships utilize a trade name as a Business Name. Consider the purpose of the partnership and your potential partner. Consult with a lawyer as to the best protection for all parties. Partnerships can go sour, even among best friends. If you are running a 6 figure business, you will want to make sure you protect your personal assets as well as your business.
An incorporated business created a distinct legal entity. You will need to pay corporate taxes and maintain a division between your personal and business assets. Many corporations have more than one owner (shareholder) though a for profit corporation may have as few as one owner. This business structure takes a little more time to set up and requires the issuance of shares along with Articles of Incorporation, By-laws and a variety of registers. Canada offers an excellent Canada Federal Incorporation guide. I highly recommend consulting with a lawyer before setting up an Incorporation, especially if you have no legal experience and have more than one person in the business. You will also want the advise of a lawyer as to whether to incorporate federally or provincially.
Not for Profit Corporation
A Not for Profit (often referred to as an NGO or non-governmental organization) is another type of incorporation. A Not for Profit is different from a Charity though Not for Profits can register for charitable status. A typical Not for Profit focuses on social benefit, civics, recreation or other purposes where the end goal is anything but profit. Note – a Not for Profit should be sustainable and can make a profit though any profit gets re-invested into the organization and no shares are issues. Examples of not for profits are service organizations, sports teams and community organizations.
Not for profits require a minimum of 3 directors thus they are not something you can start on your own. If you wish to gain Charitable Status, you must apply to the government to register as a Charity. Speak with a lawyer if you are looking to set up a not for profit as there are many different aspects you will want to discuss.
Social enterprise (not to be confused with Corporate Social Good) is a business style that focuses on reinvesting a portion or all of its profits into a social mission. Tom’s Shoes, mentioned earlier in the course, is just one example of a social enterprise wherein the sale of a product or service ultimately benefits another with the buy a shoe, give a shoe program. Clearly.ca, a discount online optical store, also has a socially minded program through their corporate head office of Essilor.
Canada does not currently have a registered business type for social benefit companies or social enterprise, nor do most provinces though Nova Scotia is working on the Community Interest Companies Act (“CICA”)and BC has introduced the Community Contribution Company (CCC). Many entrepreneurs choose to incorporate as a for profit Corporation and state their intentions to reinvest profits within the company. In this case, shareholders do not usually receive a share of any profits generated though it may vary based on your corporate documents. You may also wish to become a certified B Corporation (refer to this article by BDC).
A B Corp is designed to benefit the community and the B Corp certification is just one way your business can declare this mission. Patagonia and Beau’s Brewery are both certified B Corps. Beau’s Brewery is a Canadian company that has added a community and environment focus to their primary business of craft beer.
In other countries, social enterprises may be registered as distinct business types such as the Community Interest Company (CIC) in the UK or Low-Profit Limited Liability Company (L3C) in the United States.
Choosing the Right Lawyer, Law Firm or Registration Process
At this point, you have likely chosen a desired business name and a preferred business type. It is time to start the process to register your business.
Unless you have extensive legal and business experience, it is very highly recommended to consult a lawyer. You will need to ensure your business name is unique and that you are correctly setting up the legal structures and paperwork. A NUANS search will need to be completed to identify potential matches to your proposed name. It is also recommended that you check the Canada Trademarks and US trademarks databases and social media channels to ensure your name is not being used and can be secured. This is something you will want to complete before registering your business.
When choosing a law firm, it is recommended to use one that is familiar with your business style. The lawyer (or firm) should have a primary focus in Corporate Law. Legal work can be expensive though nowhere near as costly as having to have a lawyer redo work done incorrectly the first time.
In Toronto and other major cities, you will find many large firms have Startup Legal Programs. I suggest reaching out to various firms to find out whether they have a program you can access. If you are looking for a consultation, please tell the law office or firm that you would like to ask questions about setting up a company to ensure you are choosing the correct structure. There may be a charge for this service however, in the long run, spending a little now to get the proper advice will save you time, money and effort in the future.
Canadian Startup Legal Programs
- Blakes Nitro
- Dentons VentureBeyond
- Osler Startup Program for Emerging & High Growth Companies
Should you choose to move forward on your own (with or without a legal consult), you can follow the guides below to set up your business. Read carefully and follow all instructions. Even those with legal experience can make errors.
Government and Other Business Setup Companies