As the year ends and the new year begins, many of us take some time to reflect on our current situation and make resolutions to improve ourselves and our lives. It’s a time many people use to assess where we are and where we want to be, and to make the necessary changes to get there. If you’re like most people, you probably have at least one goal or aspiration that relates to health – whether it be reducing or eliminating unhealthy habits, improving nutrition, fitness, strength goals, weight loss, or maybe even something else.
This same idea of reflecting and improving can be applied to the legal health of a business. Just like our personal health, the legal health of a company is something that needs to be regularly assessed and maintained. As business owners, it’s important for us to regularly review and understand the legal aspects of our businesses, and to make any necessary adjustments.
I have been asked many times over the years by business owners what a “good” or “complete” legal checklist would look like. It’s an interesting question and one that I don’t think has an easy answer. In this post , we’ll talk about legal matters that apply to most types of businesses, but keep in mind that your situation might be different. There are some legal documents each type of business should have while others may or may not be essential, depending on your particular situation. The goal here is to educate on the types of things you may need to look at and adjust, but none of this is legal advice for you; you should always consult a professional for advice specific to you.
1. Is your business structure the best fit?
The term “business structure” refers to the way in which your business is legally organized. The type of business structure you choose determines how you and your business are taxed, how you might be held liable for the actions of your business, and the level of control you have over your business.
Does your current business structure align with your goals and objectives?
The most basic business structure decision involves choosing whether to operate your business as a sole proprietorship, a partnership, or a corporation. There are pros and cons of each of those, and as your situation changes you should consider whether that still works for your situation. For example, if you started as sole proprietorship, is it time to start running operations through a corporation?
On a more advanced level, you might be looking at optimizing for tax reasons or liability considerations, so it may be time to consider adding a holding corporation or a family trust into the structure. If one of your goals is to sell the company within 5 years, you may need to take certain steps to minimize tax on the sale or to ensure the shares qualify for the lifetime capital gains exemption. You might be more concerned about creditor proofing, or you might be looking to adjust the structure to have some key employees hold some equity in the company. Each of these factors might affect what your business structure should look like.
The point is that setting up your business structure is not a “one size fits all” approach; it needs to be tailored to your situation.
2. Do you have an up-to-date shareholder agreement?
A shareholder agreement is a legal document that helps protect the interests of the shareholders (i.e., the owners) of a business. It should address potential risks and conflicts that may arise, and can also have several other benefits, such as promoting understanding and cooperation among shareholders, resolving disputes before they escalate, and providing clarity and certainty for the future. A shareholder agreement can provide important protection and guidance for shareholders, helping to ensure that their interests are protected and conflicts are resolved in a fair and efficient manner.
If you own a business with other people, you need to have a shareholder agreement. You might not appreciate all of the issues the shareholder agreement could address and how important it is to get a that agreement in place, so get a professional to help create that agreement for you. Usually everyone is getting along pretty well at the time you get a shareholder agreement, so it can be hard to take seriously that you might have a serious disagreement in the future.
If you don’t have a shareholder agreement, get one. If you do have a shareholder agreement, it might be time to update it if things have changed. Here are some examples of things that might necessitate an update to the company’s shareholder agreement:
- Changes in the ownership, e.g., the company adds or removes shareholders, or there is a significant change in the ownership structure of the company;
- Changes in the company’s business, such as expansion into new markets or the introduction of new products or services, it may be necessary to update the shareholder agreement to reflect these changes.
- Changes in laws or regulations that affect the company;
- Changes in the company’s financial situation; or
- Changes in the personal circumstances of the shareholders.
It’s important to regularly review your shareholder agreement to ensure that it still reflects the needs and goals of the shareholders and the company.
3. Do you have an up-to-date minute book?
A “minute book” is the collection of certain corporate records. Every corporation needs certain documents such as articles of incorporation, bylaws, director resolutions, shareholder resolutions, share certificates, share registers and ledgers, and director/officer registers. These documents are kept in a binder that is called a “minute book”.
A minute book is an important record-keeping tool for a company because it documents the actions and decisions of the company’s board of directors and shareholders. It provides a written record of the company’s governance and can serve as evidence in the event of any legal disputes or regulatory investigations. It also helps to ensure that the company is operating in accordance with its governing documents, such as its articles of incorporation and bylaws.
There are some really common minute book mistakes we come across when a business owner does their own incorporation. One of those mistakes is they don’t even create a minute book at all. They probably don’t realize that every corporation is required to have a minute book. Another big mistake is failing to update the minute book on an ongoing basis. Creating or cleaning up a minute book months or years down the road can be time-consuming and expensive.
4. Do you have written agreements with employees, contractors, suppliers, landlords, etc.?
There are 3 general objectives with a written agreement:
- Make the transaction legally effective (ie, making sure a contract actually exists under the law).
- Reduce risk, and provide appropriate legal protections if there is a dispute.
- Prevent legal disputes altogether.
Having your agreements in writing can provide a lot of legal protection for you and your business. It helps to ensure that all parties involved understand the terms and conditions of the agreement, which can help to avoid misunderstandings and conflicts.
Litigation is time-consuming, emotionally draining, and expensive. We want to make a major dispute highly unlikely and, if one does arise, to have an effective mechanism for dealing with it.
If there is a dispute, a written agreement provides evidence of the terms that the parties agreed to. Overall, having agreements in writing can help to ensure that all parties involved are on the same page and can provide legal protection in the event of a dispute.
One of the main areas businesses run into trouble is not having written agreements with their workers, whether they be employees or independent contractors.
Even though you do not technically need an employment agreement to have a valid employer/employee relationship, it is almost always better to have it written down in case there is a dispute between the business and the employee in the future. The courts will usually interpret an unwritten agreement in favour of the employee. To avoid the uncertainty associated with an undocumented employment relationship, the company should prepare a letter of employment or employment agreement with each of its employees which sets out the employee’s job description and responsibilities, term of employment, compensation, and benefits. It should also specify the employee’s entitlements upon termination, any limitations on the employee’s ability to compete with the company or solicit its customers and employees after the employee’s termination, a prohibition against disclosing confidential company information, and the company’s ownership of the employee’s work product. It may also cover other issues.
If your workers are independent contractors rather than employees, it is also important to document the relationship with a written agreement. An independent contractor serves clients through their own business, while an employee works as a part of their employer’s business. Employment relationships involve greater rights and obligations for both parties than independent contractor relationships, and the company could face significant liabilities if the worker is treated as an employee. If you misclassify a worker as an independent contractor and that worker is later found to be an employee, it can lead to a variety of problems since you would have been applying the wrong set of laws without even realizing it. If a worker is an employee but is treated like an independent contractor the employer could face liability for unpaid wages, overtime pay, vacation pay, holiday pay or termination pay, liability for unpaid income tax, CPP/EI contributions or workers’ compensation premiums, a claim for wrongful dismissal damages following termination of employment, or fines or other penalties. Several factors come into play in determining whether a worker is an independent contractor or an employee, and the terms of the written agreement can be a big factor in how the employee is classified.
Other important agreements should also be in writing, not just employment agreements and independent contractor agreements. For example, if you have a primary supplier or customer you might want an agreement in writing setting out the rights and responsibilities of each party and specifying things like how much notice has to be given for the contract to be terminated, since you don’t want to be caught off guard and left high and dry if there was no agreement and the supplier suddenly terminated the relationship. Any lease for office space should be in writing.
There are a lot of other examples, but I think you get the idea.
5. Is your intellectual property protected?
Intellectual property can be some of the most valuable assets of a business. “Intellectual property” is the term used to describe intangible assets, which are often inventions, symbols and names, images, and so on.
Intellectual property is usually grouped into three main types:
- invention-related IP, which can include patents which protect new, inventive, useful products and technologies;
- branding-related IP, which can include trademarks; that is the words and symbols used to identify the brand; and
- protection of expressive works and other subject matter, of which copyright is the mechanism for protection.
To receive patent protection, you have to apply. Patents tend to be time- sensitive, with any public disclosure jeopardizing the ability to secure patent protection.
The owner of a trademark has the right to stop third parties from using confusing marks with similar goods or services. Unlike patents, trademark “common law” rights can arise through use, independent of registration, but the registration of a trademark provides some advantages.
Copyright can provide protection for: software code, database structure; website structure, layout, and content; user guides; print and video advertising, jingles, and theme music. A creator’s copyright rights arise automatically upon creation of the work. However, like trademarks, there are certain advantages obtained by registering copyright.
Think about your business’ intellectual property and whether you should take steps to protect it. In addition to traditional intellectual property, businesses should also consider other forms of IP, such as trade secrets and confidential information, and take reasonable steps to maintain their secrecy, such as implementing non-disclosure agreements and limiting access to sensitive information.
6. Do you have a personal Will and Power of Attorney?
Having a will is an important way for business owners to ensure that their assets are distributed in accordance with their wishes. It can help minimize disputes among family members or other potential beneficiaries.
A power of attorney is also an important document to have in place, as it allows you to appoint someone to step in and deal with your legal and financial affairs if you are incapacitated for some reason.
To recap, we talked about 6 things to look at for your business owner’s legal health checkup:
- Review your business structure to make sure it fits your goals and objectives;
- Have a unanimous shareholder agreement and that it is up to date;
- Have a minute book and keep it up to date;
- Put your agreements in writing;
- Protect your intellectual property; and
- Have a will and power of attorney.
There could be other essential legal issues you need to consider depending on your particular situation, which is why you should always consult with your own lawyer.