The Canadian Chamber of Commerce estimates that there are approximately 1.3 million small businesses in Canada. As the true engine of our economy, I’ve chosen to highlight the top three common legal mistakes that small businesses make and how they can be avoided.
1. Failing to Incorporate
The first legal mistake small businesses make is failing to incorporate. You’ll often meet an entrepreneur and they’ll talk about their company, but more often than not, they’re not actually incorporated; they’re a sole proprietor. When you carry on business as a sole proprietor, you have unlimited personal liabilities. Your personal bank account, your car, your home, they’re all on the line and subject to claims by customers, clients, employees, suppliers and even landlords.
The benefit of limited liability is, when you incorporate a company, you create a separate and distinct legal entity. It has its own bank account, it files its own tax returns and it’s responsible for the debts and liabilities of your business.
You need to take all considerations into account when deciding to incorporate as a small business, but I believe incorporating right from the get-go is the best way to protect yourself and your exposure to personal liability. Now it’s the business that responsible for that, rather than you as an individual.
2. Failing to Maintain Corporate Records
Failing to maintain corporate records is another common legal mistake small businesses make. Once you’ve incorporated, there’s a requirement to file annual reports in Victoria each year, and maintain what’s called a minute book. A minute book is a binder that contains the annual consent resolutions of the company. Too many business people I see choose to do this themselves. If you don’t have a lawyer maintaining your corporate records, when it comes time to get a loan from a bank or a credit union — or you wish to sell your business — all those records have to be brought up to date.
As an analogy, I could make the argument that I would save money by doing my own oil changes. But the reality is, I’ll forget to do them and I don’t know how to do an oil change. If I did try to do it, I’d do more harm than good in the long run. I’d eventually end up with a mechanic to repair everything at increased costs. Essentially, it’s penny wise pound foolish. That’s why it’s best to leave it the professionals.
I think of a situation where a client was coming in to sell her business. I asked her for the minute book in order to sell it.” She said “what’s a minute book?” As a result of not being able to produce it, the entire sale fell through. She had an ex-partner that flew back to the country once he caught wind of the sale, claiming that he owned the business. We couldn’t actually determine who owned it, so now they’re in court, fighting one another about it. So, perhaps there were some savings of not paying to maintain corporate records, but at a net loss of hundreds of thousands of dollars because of the lost sale.
3. Failing to Have Commercial Leases Reviewed by a Lawyer
The final legal mistake small businesses make, is failing to have commercial leases reviewed by a lawyer. Eventually, your business will expand. You’ll need office space, a workshop, a warehouse and somewhere to hang your hat. Your leasing agent will provide you with what’s called the Landlord Standard Form of Lease; this could be up to eighty pages long. They’ll recommend that you get independent legal advice to review its terms and conditions.
Too often, I see businesspeople — or hopefully their company as the tenant — choose not to take that legal advice. The problem with that is that we can’t really help you after the lease is signed. It’s before it’s signed, that we can review it and add value, explaining its terms and perhaps catching provisions that aren’t in your favour as a tenant.
Your small business is your livelihood. Proactivity and diligence as an owner helps minimize risk and protects the bottom line. Avoid costly mistakes by incorporating your business, maintaining corporate records, and having your commercial lease reviewed by one of CBM’s talented lawyers today.