Financial advisors should seek legal advice before starting a new business, say lawyers who regularly advise business owners. That way they can avoid problems that may arise in the future.
Whether you’re working completely on your own or operating under the umbrella of a dealer, there are several issues you should deal with up front so you can steer clear of potentially sticky legal issues.
> Insurance. Just because your dealer network has its own insurance doesn’t mean you’re protected. You can still be exposed to liability, says Brian Maude of Maude Law Office in Moncton, N.B. He advises his clients to get extra insurance — at least, when they’re starting out.
So, you should look into: errors and omissions insurance to protect against lawsuits alleging bad advice; property insurance to protect against fire, theft and damage to equipment; and disability insurance to cover the business in the event of an extended medical absence involving key personnel.
“If something does go wrong, then it can add up fairly quickly and easily,” Maude says. “The difference between the bare minimum and something that’s reasonable is usually only a few hundred dollars.”
> Shareholders’ agreement. If you’re starting a company that will have more than one shareholder, ensure that there is a shareholders’ agreement. There can be personality conflicts in privately held companies and you need to be able to get out if problems arise.
“A shareholders’ agreement gives you a guaranteed out, especially if you include a shotgun clause,” Maude says.
An agreement helps avoid future conflict because everything is spelled out right from the beginning.
> Leasing. When you’re leasing office space, get a tight lease with a termination clause in your favour. Leases tend to be drafted by landlords, and their termination clauses don’t tend to favour tenants. A lawyer will ensure that there’s a general termination clause that both allows you to get out of the lease in case you need to grow or shrink your practice and gives you a reasonable amount of notice.
“Have a clause in your lease that allows for you to get out of the lease in the event that your licence is suspended or terminated,” says Maude, “so you’re not stuck renting a space or trying to sublet a space if you can’t actually practise anymore.”
> Employees. If you are hiring staff, set up an employment agreement that has a termination clause and that spells out employee responsibilities. Addressing matters such as confidentiality and non-competition can end up saving a business.
A range of payroll taxes and deductions must be submitted to various government agencies; help with payroll issues is available from the Canada Revenue Agency’s Web site. It’s also a good idea to become a GST registrant from Day 1, even if your revenue is not high, to take advantage of possible rebates.
> Incorporation. Incorporate if you can, advises Meldon Ellis of Ellis Business Lawyers in Vancouver. Incorporation — if it is allowed by the regulators — offers several benefits, including liability that is limited to the company and its assets. That protects your personal holdings, such as the family home, from lawsuits.
Incorporating also offers tax advantages, says Ellis: “The corporate level of tax for a small corporation is much lower than the personal level of tax for the same amount of income. So, once you reach a certain level of net income per year as a small business, it becomes advantageous to incorporate, provided that you’re not simply taking all the money out of the company.”
Related to that is a third advantage — cash flow. Someone who incorporates a business and starts operating it in mid-January would have up to 12 months to declare the company’s fiscal yearend.
“So, you wouldn’t pay taxes and that tax return wouldn’t be due until the following year,” Ellis says. “Corporate taxes are due June 15 for the previous tax year. So, when you’re starting out, you have a huge ability to defer taxes.”
The advantage of deferring income taxes is especially useful if you’re reinvesting in the business.
When you’re building a business, another advantage of incorporating occurs when you sell it, as you’ll receive a capital gains exemption on the increased value of the company.
At the beginning, the business’s assets will probably be nominal, but if you build up the business to the point at which it has a goodwill value beyond the assets, Ellis says, the shares can someday be sold with a capital gains exemption. IE