Building a solid legal foundation

Establishing a strong legal structure is an important piece when starting a business. In this one hour webinar, Goodlawyer lawyer and founder of Toronto-based law firm SM Legal Sam Michaels walks us through some important legal considerations including:

• Understanding different business structures
• Internal and external contracts
• Licensing and regulations
• Establishing best practices

Key takeaways

Understanding different business structures.

“If I want to have a brand, sell a product and separate my income from the revenue of the company, or if I want to sell under a different name than my personal name, there needs to be some proper business vehicle,” says Michaels, such as a corporation, a partnership or a sole proprietorship. 

A corporation is a separate legal entity that will be taxed and sued separately from the owners or shareholders. Michaels says this is good for businesses that require tax separation, liability protection and if you’re looking to bring in investors. 

If you’re doing business on your own, you are a sole proprietor. If you’re doing work as two or more individuals or organizations together, that is a partnership. 

A joint venture is when two companies or two other entities come together and form a third entity, says Michaels. Usually, this lasts for a specific project or purpose. 

Internal and external contracts.

Every business will need a few basic contracts in order to exist as a company. While it’s tempting to focus on the vision for your company and start making your idea a reality, it’s important that founders pause and cover their legal bases. 

“If there is more than one person in the company, there really should be a shareholders agreement, partnership agreement or joint venture agreement. Something that puts in place the rules for how these people are going to interact,” says Michaels.

Other important internal contracts include employee and contractor agreements.

For external contracts, Michaels recommends a non-disclosure agreement, a term sheet, service agreements for suppliers, and a terms of service contract with a privacy policy if you’re selling online. 

“You don’t check your contracts every day. It’s there in the background for when things go wrong,” says Michaels.

Licensing and regulations.

To operate your business, it is important to establish agreements that show you and your business are taking the necessary steps to protect your company and its intellectual property, says Michaels. The types of licenses and regulations a business needs is highly unique to each industry and sector. Generally speaking, businesses will need to follow health and safety regulations, secure insurance, adhere to environmental protections and pay taxes.  

Establishing best practices.

Startups can increase their odds of long-term sustainability by establishing key best practices from the start. Michaels specifically recommends businesses:

• Establish regular recordkeeping habits with specific details about payroll, suppliers, clients as well as notes about incidents, decisions or other events and actions related to the business. “Recordkeeping is a big part of staying organized and preparing for potential problems down the road,” he says.
• Practice disclosure is about making issues, problems or concerns known to multiple parties when it arises so parties are aware and can work to address the issue. This helps demonstrate you were acting transparently and in good faith in cases where the issue leads to a court battle.
• Gather evidence when problems arise. “If you have something that is becoming a potential legal situation—an unhappy client or unhappy supplier—at that point start gathering evidence. Whatever contracts they signed. Whatever emails you had with them. Whatever policy documents [are in place]. All that stuff is going to be important. If you go to a lawyer and say here is all my evidence, it is going to be easier to get a quote from that lawyer,” says Michaels.