Clients often wonder what my role is in starting their new business. Whenever I’m asked this, I like to give them examples of the kind of situations they could be faced with if they did not seek legal advice in advance.
Consider a situation where two best friends have a great business idea. They start carrying on business without any initial legal advice and within the first year they are already making money. But now that there is money, the two owners start disagreeing about how the money should be divided. One owner assumed that all profits would be divided 50-50 between the two of them, no matter what. The other believed that the profits would be divided based on the amount of money that was spent by each of them on the start-up costs. They were working so hard to get the business going that they had not discussed who was entitled to what share of the profits. Since they were best friends, they believed they would be able to agree on everything as each situation arose and they did not prepare a legal Agreement addressing these issues. As a result, not only did this cost them thousands of dollars to settle the dispute, it also cost them their friendship. All of this could have been avoided with a little bit of planning and advice which is what my role is in starting their new business.
When incorporating a business, I always recommend two things to clients: 1. Speak with an accountant and 2. Prepare all of your agreements now. Speaking with an accountant is very important to ensure that any tax advantages and consequences are considered right at the beginning so clients can prepare for them. Additionally, when setting up the company’s share structure, it is helpful to set it up in a manner that reflects the client’s intentions with regards to tax benefits. If the client does not set it up in an advantageous manner initially, they will have to amend the incorporating documents in order to take advantage of those benefits, which can be more costly than making those decisions when incorporating. I work closely with the client’s accountant to make sure that we incorporate the client’s company in a manner that will work best for them in the long term.
I also recommend preparing your agreements when you incorporate. Preparing them up front might seem like a costly decision, but having them already in place will ensure your company runs more smoothly. What agreements you need prepared will be specific to your situation. For example, a Shareholders’ Agreement may be beneficial if, like the situation above, two people are forming a new company. An employment agreement might be helpful should your company intend to hire employees. Perhaps you will be working as an independent contractor and will need a contract to supply your services to your customers? Having those documents already at your fingertips will make starting and running your business much simpler and save you a lot of headaches. These agreements do not need to cost a lot of money and some lawyers may give you an option to bundle them with your incorporation for some added cost savings. As your company grows and becomes more complex, these agreements can be modified to reflect that.
All small businesses need good advice from both a small business lawyer and a professional accountant. This is a must for all businesses and even more so for new businesses. Contact us for more information and to book your initial consultation today.