5 Legal Mistakes New Business Owners Make

When you’re building something from scratch, legal documents and corporate records can feel like paperwork for another day. But some of the most common legal mistakes new business owners make happen precisely because the legal side gets pushed to the bottom of the to-do list.

The good news is that most of these mistakes are preventable. A little legal planning at the beginning can save you significant time, money and headaches later.

Here are five legal mistakes we commonly see new business owners make, and what you can do instead.

1. Choosing a Business Structure Without Understanding the Consequences

Your business structure can have important implications for liability, taxation, ownership, financing and how you eventually sell or transfer the business.

For example, operating as a sole proprietor may be relatively straightforward to set up, but it generally does not create a separate legal entity between you and your business. Incorporating a business creates a separate legal entity and may provide certain advantages depending on your circumstances.

There are also different considerations when two or more people are starting a business together.

Before registering a business name or incorporating, it’s worth taking the time to understand your options and consider where you want the business to be in three, five or ten years.

2. Going Into Business With Someone Without a Shareholders’ Agreement

A shareholders’ agreement is one of the most important legal documents for a corporation with multiple shareholders. It can establish rules for how the business will be managed and what happens when things don’t go according to plan.

A well-drafted agreement can address issues such as:

• Who is responsible for what;
• How major business decisions will be made;
• What happens if shareholders disagree;
• How shares can be transferred;
• What happens if a shareholder wants to leave the business;
• What happens if a shareholder dies, becomes disabled or is unable to continue working;
• How a departing shareholder’s shares will be valued; and
• How disputes will be resolved.

No one starts a business partnership expecting it to fall apart. But a shareholders’ agreement isn’t about expecting the worst. It’s about making sure everyone knows the rules before a difficult situation arises. Think of it as having a conversation about the “what ifs” while everyone is still getting along.

3. Using Templates for Important Business Contracts Without Having Them Reviewed

And while free online legal templates can be a useful starting point, the problem is that a contract written for “a business” isn’t necessarily written for your business. The right contract depends on what you’re selling, who you’re dealing with, where your business operates and what risks you need to manage.

For example, depending on your business, you may need contracts for:

• Customers and clients;
• Independent contractors;
• Employees;
• Suppliers and vendors;
• Commercial leases;
• Business partners;
• Confidentiality and non-disclosure arrangements; and
• Intellectual property.

A contract also needs to be enforceable and appropriately reflect the laws that apply to your business. A generic agreement downloaded from an American website may not be appropriate for a business operating in British Columbia. The cost of having an important contract properly drafted or reviewed upfront can be much less than the cost of trying to resolve a dispute later.

4. Mixing Personal and Business Finances

When a business is just getting started, it can be tempting to treat everything as one big pot of money. You pay a business expense with your personal credit card. A customer sends money to your personal account. You transfer money back and forth whenever you need it.

It may seem harmless, especially when the business is small. However, keeping your personal and business finances separate is an important part of maintaining good business records and, where applicable, respecting the separate legal identity of a corporation.

If you’ve incorporated, your corporation is a separate legal entity from you. That distinction should be reflected in how you conduct your business. That means taking care with things such as:

• Maintaining a separate business bank account;
• Keeping proper corporate records;
• Entering into contracts in the correct corporate name;
• Properly documenting money you put into or take out of the corporation; and
• Keeping business expenses and personal expenses separate.

Your accountant can help you establish appropriate financial practices, while your lawyer can help ensure your corporate structure and records are properly maintained.

5. Waiting Until There’s a Problem to Call a Lawyer

This might be the biggest mistake of all. Many new business owners think of a lawyer as someone they call when something has already gone wrong. By that point, your lawyer may still be able to help, but your options may be more limited, and resolving the problem may be significantly more expensive than preventing it in the first place.

A business lawyer can be a valuable resource before problems arise. That might mean reviewing a proposed commercial lease, helping you incorporate your business, preparing a shareholders’ agreement, drafting customer contracts or simply talking through a legal issue before you make a significant decision. Sometimes the most valuable legal advice is the advice you get before you sign anything.

If you’re starting a business in British Columbia or considering incorporating your business, speaking with a business lawyer early can help you understand your options and set your business up for the road ahead.