Prepared by Ron Knowles Algonquin College & Jennifer Rouse Barbeau Canadore College Legal Concerns Anticipate Potential Surprises 8-1Copyright © 2011 Nelson

Prepared byRon KnowlesAlgonquin College

& Jennifer Rouse BarbeauCanadore College

Legal ConcernsAnticipate Potential SurprisesAnticipate Potential Surprises

8-1Copyright © 2011 Nelson Education Ltd.

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Chapter OverviewChapter 8 will:Introduce you to the legal issues of small

business.

Help you decide which legal form of business—sole proprietorship, partnership, corporation, or cooperative—is best for you.

Help you get started on the management and personnel sections of your business plan.


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Learning Opportunities Decide which legal form (sole

proprietorship, partnership, corporation or cooperative is best for your business.

Anticipate potential legal surprises. Explore the pros and cons of incorporating. Conduct secondary research into

corporations and incorporating. Explore legal regulations that may affect

business.


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Learning Opportunities Understand patents, copyrights and

trademarks. Develop tactics for finding the right lawyer

and accountant. Develop questions for probing the mind of a

lawyer or accountant. Understand the importance of having a will

and succession planning. Describe and understand the bankruptcy

process.


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Legal Forms of Ownership

Standard legal forms of ownership are:Standard legal forms of ownership are: Sole proprietorship. A business that is

owned by one person. Partnership. An association of two or more

individuals carrying on a business to earn an income.

Corporation. A legal entity with the authority to act and have liability separate and apart from its owners.

Cooperative. An organization owned by the members who use its services.


Sole ProprietorshipAdvantagesAdvantages Relatively easy &

inexpensive to set up. Directly controlled by

the owner or operator. Flexible, with little

paperwork. Business losses can be

deducted from other income.

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DisadvantagesDisadvantagesOwner can be held personally liable for debts and obligations of the business.Opportunity for continuity is restricted.Owner’s ability to raise capital is restricted.Income is taxed at a personal rate.

Copyright © 2011 Nelson Education Ltd.

PartnershipGeneral PartnershipGeneral Partnership Each partner manages

the business. Each partner assumes

unlimited personal liability for debts and obligations.

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Limited PartnershipLimited PartnershipComposed of one or more limited partners and at least one general partner. The general partner manages and assumes the downside risk. The limited partner does not manage; liability is limited to the amount of his or her original investment.


Partnership: Advantages & Disadvantages

AdvantagesAdvantages It is easy to set up New partners can be

easily added It involves few legal

requirements Risk is generally shared

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DisadvantagesDisadvantagesTax and estate planning options are limitedPartners can be personally liableDecision-making and dissolution can be difficult


Partnerships:Cautionary Notes

Get everything in writingEach partner must have their own lawyerHave a written partnership agreement.Consider a shotgun clause:

Example: One partner can make a buyout offer to the other partner for his or her share of the business. The receiving partner has the option of either accepting the offer or buying out the partner under the same terms.


CorporationAdvantagesAdvantages There is greater

potential for limited liability

There are possible tax advantages

It can upgrade image It offers ease of

continuity

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DisadvantagesDisadvantagesThere are potentially fewer tax write-offs at the beginningThere are higher start-up costsThere is increased paper work and complexity


Shareholders AgreementA shareholders agreement is a legal document which establishes:

1. the rights of shareholders (owners) and 2. the duties and powers of the board of

directors.


Shareholders Agreement A shareholders agreement is not legally

required but is strongly recommended Keep the agreement simple Consult professional advisors (especially a

lawyer and accountant) before you sign any agreement

Include a buy-sell option:as with partnerships, consider a shotgun

provision


Cooperatives: Seven PrinciplesAll cooperatives are guided by the same All cooperatives are guided by the same

7 principles:7 principles:1. Voluntary and open membership 2. Democratic member control 3. Member economic participation 4. Autonomy and independence 5. Education, training, and information 6. Cooperation among cooperatives7. Concern for community


CooperativesAdvantagesAdvantages There are potentially

more sources of start-up capital

As owners, members are potentially more motivated than employees

There is increased opportunity to network and share ideas

There is limited liability

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DisadvantagesDisadvantagesIt is sometimes difficult to get agreementThere may be management conflictsExternal financing may be difficult


Your Business Name: “Red” Tape

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Your Business Name• Protect your business name• Do a name search• Request a NUANS

Canada Revenue Agency—Major Start-Up Requirements• Business Number• Payroll deductions• Federal Income Taxes• GST or HST

Provincial Sales Taxes• Provincial sales taxes (PST) differ for each province• Register to collect PST


Patents and Copyrights

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Patent:Patent: federal government grant that gives an inventor exclusive rights to his/her inventions.

cover new inventions, or any new and useful improvement of an existing invention

CopyrighCopyrightt:: exclusive right to copy a creative work or allow someone else to do so.

provide protection for artistic, dramatic, musical or literary works


Trademarks

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Trademark: Trademark: word, symbol or design, or a combination of these, used to distinguish the goods or services of one person or organization from those of others in the marketplace.

Three basic types of trademarks are:

1. ordinary marks

2. certification marks

3. distinguishing guiseCopyright © 2011 Nelson Education Ltd.

Get a Lawyer, Accountant & WillGet a Lawyer & Get a Lawyer & AccountantAccountant• Network your contacts• Consider including a

lawyer in your team of advisors

• Action Step 40 will help you get started

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Get a WillGet a Will•Don't do your own will•Get a lawyer•Make your lawyer aware of all your business arrangements•Decide what you want to happen if you should die•Choose an executor•Don’t procrastinate; Do it now!


What isSuccession Planning?

The process of establishing the procedures to change or transfer ownership or control of a business.

Be proactive.Key issues to confront:

Do you want a family member to continue the business? Who should be included in the decision-making? What is your vision for the family business? What qualities should the next company leader have? How can you make a graceful exit and not look back? If you die, how should control and ownership be

transferred?


BankruptcyTen questions you should be able to answer:

1. What is bankruptcy and what are the benefits to the debtor?

2. How do you become bankrupt?3. What happens to your possessions?4. What kind of forms will I have to sign?5. Does the bankruptcy affect my co-signers?6. When is a bankrupt discharged?7. What is the effect of a bankruptcy discharge?8. How does bankruptcy affect employment?9. What happens to your credit rating?10. Does it cost anything to go bankrupt?


Chapter 8 helps complete Parts F & G of your business plan:

Management &Management &PersonnelPersonnel


Business Plan Business Plan Building Block

Explain why you selected your legal form of ownership.

Do you plan to protect your idea, product, or service by obtaining a patent or copyright and/or by registering a trademark?

What professionals have you referenced in your business plan, and did you allow for the appropriate cost?


Checklist for Your Business PlanYour Business Plan

What are the major legal risks for your industry, and how will you address them?

Are you prepared for the legal red tape?

Do you have a will and a succession plan?


Checklist for Your Business PlanYour Business Plan

Case 1: Your Pal SteveThis case study will help you to decide what

legal structure is best for your business.

Answer the Chapter 8 case study questions to learn:Would a partnership agreement have protected

Phil?What are the advantages and disadvantages of a

partnership agreement?Would you have advised Phil to have a corporate

structure and a shareholders agreement? Why? Why not?


CaseStudy

Case 1: Cooperatives What are the major reasons for considering

a cooperative? Why did Mountain Equipment Co-op (MEC)

choose the cooperative legal form? How do you become an owner of MEC?


CaseStudy

Case 2: Fatal AccidentGeorge Lopez’s fury over his friend’s unnecessary death led him to invent the IV Click Lock.

Answer the Chapter 8 case study 2 questions to learn: What are the three legal forms of protection? Which form of intellectual property would you advise

George Lopez to use? How would you patent a new product or service?


CaseStudy

Documents

Prepared by Ron Knowles Algonquin College & Jennifer Rouse Barbeau Canadore College Legal Concerns Anticipate Potential Surprises 8-1Copyright © 2011 Nelson