Toronto Lawyer - 5 Tips to Protect Your Business

Numerous studies show that over 75% of all businesses fail within their first five years. How do you avoid becoming part of this number?

A leading cause of business failure is a lack of management experience. In real terms, owner-managers often do not have the savvy to recognize that an issue can hurt its business or pursue a course of action to avoid such danger. It is true what they say. What you do not know can hurt you.

This is especially true when it comes to the entrepreneur’s understanding of the law. Yet, you are faced with legal dilemmas every day of your business life. A productive way to tackle these issues is to consider taking some of the following steps.

1. Choosing the Right Structure

There are three basic for-profit business structures in Canada: sole proprietorships, partnerships and corporations. The first two structures are typically easier to operate but expose the owner-manager to personal liability.

Most businesses of a considerable size incorporate a corporation. A corporation is a separate legal entity from its owner-manager. As such, a corporation does provide some degree of protection to the owner-manager, provided no personal guarantees are granted or the director has not otherwise been exposed to personal liability.

What separates great businesses from good businesses is the ability to utilize separate corporations to minimize liability. A manufacturing business may have one corporation own the plant; a second own the equipment in the plant and a third produce and sell the goods produced. All three corporations may be owned by the same individual. However, each corporation’s liability is confined as not to expose the other two operations. If the goods are allegedly harmful to the general public, the corporation which owns the plant or the equipment is generally sheltered from any potential lawsuit.

2. Credit-Proof Yourself

Canada is an increasingly regulated and litigious society. The result is the growing ability of public and private bodies to seize your personal and business assets. Anyone who has been audited is well aware of this trend.

Choosing the right business structure is a good start. But, it is often not enough. Before you become too asset-rich, it is best to undertake some prudent tax and financial planning with qualified professions. The object of this exercise is often “to own nothing and control everything.”

For example, some owner-managers transfer valuable assets, such as their primary residence, to their spouse to appear paper poor. If these people are sued, there is generally little for a litigator to seize.

Other business-people often become registered lenders in their own company. In the event the business has to be liquidated, the owner-manager has a better right to recover some monies than if they were unregistered lenders.

3. Protecting Your Intellectual Property

We live in a global economy. As such, your brilliant idea can be stolen and sold on the internet in a matter of weeks. You can reduce the possibility of this threat by requiring third parties to sign confidentiality agreements. Proper care should be taken to protect your ideas by registering copyrights, trade-marks and patents.

You may also be doing business with manufacturers in other parts of the world. Thought should be given to whether you wish to prohibit these manufacturers from reverse-engineering your product and selling it elsewhere. Exclusivity and non-circumvention agreements are two possible steps to help protect you in these circumstances.

4. Ensure Your Business Relationship is a Profitable and Peaceful One

It is often said “good paper makes good friends,” and nowhere is this saying more appropriate than with your business partner. A co-ownership agreement, called a partnership or shareholders agreement depending on the business structure, covers the legal bases between you and your partners and sets out the ground rules in case one of you leaves.

A typical co-ownership agreement may grant you a right to buy out your partner at any time, prevent your partner from stealing your customers if you part ways, and protects your business if one of you die or become disabled. Business partners usually negotiate a co-ownership agreement shortly after the company is created. It adds to the start-up costs but it is a necessary short-term expense for long-term success as the following example shows.

5. Make the Fine Print Work for You

A contract is the foundation of any business relationship. Verbal agreements are valid but are always subject to “he said, she said” arguments as time passes. Great businesses always get something down on paper.

However, a contract should deal with more than just payment terms. A good contract is a mini-business plan between the parties and should ideally answer questions such as: who owns the intellectual property, what is the refund and exchange policy, can the contract be sold or transferred to a third party and how do you terminate the contract before its expiry date.

For some small and medium sized businesses, the law can appear daunting and over-whelming. However, the proper use of the law can have the opposite effect. Appropriate legal strategies can help you save money and protect yourself and your business. A good first start in this road to success is to consult a lawyer who can help discuss many of the general issues raised here. A visit may help you avoid becoming a mere business failure statistic.

Albert Luk is a Toronto based small business lawyer known as the Entrepreneur-Friendly Lawyer.