By: Zachary Murray and Meghan Boyer, Mann Lawyers, LLP
Eureka – you’ve developed an excellent business idea you are passionate about and want to see brought to life. Perhaps you found a partner or two that you get along with; your values, goals and ambitions are aligned – so you think…
As eager entrepreneurs, you jump in full throttle. You decide to incorporate – how hard can it be? You and your business partners jot down a business plan on a napkin with little thought to division of ownership, financial decisions, or profit sharing.
As your business grows so do the assets (and often, liabilities which are (or are not) necessary for growth). The excitement of the vision carries the business forward for some time, but the day-to-day reality of being a small business owner brings a different set of expectations and responsibilities.
Questions begin to arise. Who has decision-making authority? Is it the individual who invested significant funds for start-up or the individual who has invested significant time, energy, and expertise through services? Who is responsible for the day-to-day running of the business? Who is authorized to make financial decisions? Should you each be liable for any losses incurred by the other? I did not authorize the borrowing of that debt; can my partner do that? How do I get my partner out of the business?
The business relationship begins to deteriorate. Maybe you and your partner disagree on the division of control or liability, or perhaps one partner begins to drift, not contributing their share to the business. The foundation is exposed; it is slipping out from under your feet.
In the excitement of starting a business, it is easy to overlook long-term planning. Your focus is the success of the business, you’ll worry about that later. Unfortunately, this can have significant consequences for the business, but also for you personally.
You went forth with incorporation, but what is the right decision? Selecting an appropriate business structure is crucial for several reasons, including:
- Ownership
- Business credibility
- Exit strategies
- Apportionment of liability
- Costs
- Delineation of roles, responsibilities, and control
- Tax implications
- Distribution of profits
Give forethought to the ground on which you stand. Mitigate future risk by preparing for the storm.
So, what steps can I take in planning?
Speak to a professional
A professional may recommend incorporation, or the recommendation may be to start as a sole proprietor or as a partnership. Assuming incorporation is right for you, professional assistance when incorporating can ensure the business is tailored to the specific circumstances.
Ultimately, a corporation is an excellent business vehicle in that it allows for greater delineation in the business organization with shareholders, officers and directors operating according to legislation, fiduciary obligations, and the rules of the corporation and its by-laws.
But without time and energy into the ownership structure and organization of the corporation many of the benefits are lost. So, give good thought to having organizational documents for the corporation.
Consider a shareholders’ agreement
A shareholder’s agreement can initiate tough conversations at a time when there is open communication, trust, respect, and cooperation among the various shareholders. A corporation is one of a few different business structures.
Having informed discussions about those different business structures can help determine if incorporating is right for you and is a great step in building the foundation.
Zachary Murray is an associate with the Mann Lawyers Business Law team. Meghan Boyer is an Articling Student with Mann Lawyers.
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