Setting Up a Resilient Business

Designed for MindFrame Connect by Slingshot, a legal service for founders, start-ups, and emerging companies provided through Gilbert’s LLP

This framework seeks to provide founders and entrepreneurs with some key tools and considerations to create a legally resilient business. Businesses that begin with thoughtful planning can position themselves for growth and protect their assets.

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Think about your legal relationships as they relate to your internal organization and external relationships with customers and third parties:

Types of Organizations

There are 3 types of business forms:  

1. Sole Proprietorship
2. Partnership
3. Corporation

A number of factors should be considered when choosing which type of business best suits your organization. Here are some general considerations:  

Sole Proprietorship

Advantages

Owned by one individual  

Simple and inexpensive to form and to dissolve

Incomes forms part of individual owner’s personal income and is taxed accordingly  

Tax effective methods to roll-over property in a sole proprietorship into a corporation once ready to incorporate

Disadvantages

No separate legal entity  

Unlimited personal liability of individual owner for all debts and liabilities (including lawsuits)  

Challenging to finance business from external sources  

Rollover into a corporation may create valuation issues if new owners want to join at such time

Partnership

Advantages

Owned by two or more partners

Simple and inexpensive to carry on business with multiple people  

Partnership income forms part of individual partners’ personal income in accordance with their partnership interest and is taxed according

Sometimes ability to limit liability of partners through limited partnerships and limited liability partnerships  

Default relationship governed by legislation applicable to partnerships

Disadvantages

Unlimited personal liability of general partners for all debts and liabilities (including lawsuits)

Added cost and complexity if partners choose to contract out of default legislation and set out intentions in a partnership agreement (recommended)  

Limited partners in a limited partnership are effectively silent, passive partners

Corporation

Advantages

Owned by shareholders

Separate legal entity (recommend)

Limited liability as shareholders (owners) cannot be held personally liable for the corporation’s debts and liabilities

Directors and officers are protected from personal liability with exceptions  

Easily transfer ownership  

Favourable tax treatment compared to other business forms

Disadvantages

More expensive and complex to set up and dissolve

Increased government oversight and regulations

Taxed as distinct entities separate from and in addition to any individual personal income

Structuring Your Business
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Ownership Interests

Founders and entrepreneurs should take steps to think about ownership in their business prior to issuing any interests (e.g., shares in a corporation or partnership units). Founders can receive equal portions of the organization or ownership may be allocated on different bases, such as being based on capital infused into the business at the outset by each founder. Partners hold partnership units in a partnership and shareholders hold shares in a corporation.

Number And Classes Of Shares

Before incorporating your business, founders and entrepreneurs should consider their plans for growing and financing the business. Articles of incorporation must lay out the number and classes of shares that a corporation is able to issue.  

A typical share structure may include an unlimited number of voting common shares and non-voting common shares. By creating an unlimited number of each class of shares, corporations avoid costly amendments to their articles at a later date to issue more shares.

Voting shareholders collectively have significant power in a corporation, including, for example, the election of directors. As such, voting common shares are typically issued to founders and investors in the corporation. Non-voting shareholders have a right to participate in the growth of the corporation (as their shares increase in value) but don’t ultimately have control. Non-voting common shares are often issued to employees and consultants through stock option plans as incentives.  

Corporations may create other share classes to provide:  

• Flexibility in issuing dividends
• Investors with preferential treatment

• Specific share attributes to a certain class, such as ‘buyback’ rights
  
  

Directors And Officers

Directors form the board of the corporation and are responsible for governing the corporation. The board of directors is elected by the shareholders. The board governs the corporation, and delegates executive authority to the corporation’s officers by passing resolutions to approve corporate actions.  

Officers are the day-to-day managers of the corporation. They are empowered by director resolutions appointing them and giving them authority to take certain actions.  

It is important to note that it is quite typical in an early-stage companies for an individual founder to be the sole shareholder, sole director and sole officer of a corporation.

Other Considerations

Financing Your Company

Cash is the lifeblood for most businesses. But the way you raise money can have important and long-lasting implications for your business.  

Debt instruments (e.g., loans, lines of credit) let you keep ownership of your company, but can create significant legal risks if you are unable to meet your repayment obligations.

Equity investments (e.g., investments for your corporation’s shares from friends and family, angel investors, venture capitalists or others) are typically less risky (provided you comply with corporate and securities laws), but mean giving up part of your ownership (and sometimes control).

Hybrid instruments (e.g., convertible loans, SAFEs) can provide a middle ground. These can provide the best (or, sometimes, the worst) of both worlds, providing cash now and delaying (or, in some cases, avoiding or reducing) loss of ownership and/or control.

Confidentiality

Many companies rely on confidential information to maintain a competitive advantage. This can take many forms – proprietary technologies, client lists, secret recipes, and even basic know-how.  

Care must be taken to legally protect your confidential information, both internally with your employees and contractors, and externally when dealing with clients and customers.  

Privacy

The majority of businesses collect personal information at some point and in some manner, making them subject to privacy legislation such as PIPEDA (Personal Information Protection and Electronic Documents Act). Canadian privacy laws are trending toward increasing the privacy rights of individuals.  

As such, nearly every business should consider their privacy practices, implement privacy policies, and ensure that they have obtained requisite informed consent to their storage, use, retention and collection of personal information.

Intellectual Property

The majority of the most valuable companies in the world today have valuations based, largely, upon intangible assets. But the development and protection of intangible assets starts from the beginning – a company’s most valuable copyrights, patents, trademarks, trade secrets, industrial designs, and data assets may be created and generated during the early stages of a business.

While an early-stage company may not have the resources to file for intellectual property protections everywhere in the world, on every asset, it may nevertheless leverage ‘free’ forms of intellectual property protection (such as common law trademarks, trade secrets, and copyrights) while wisely deploying capital to file and register where necessary.  

Shareholder Agreement

A shareholders agreement can provide certainty and stability, helping a company more easily carry out many actions, such as raising money, dealing with the loss of key personnel, and even being acquired. In the early stages of a business, there is typically very little conflict. As such, founders may not feel the need for a shareholders agreement right away. However, it is precisely at such a time that a shareholders agreement is easiest to prepare, and such pro-active thinking can avoid major fights and deadlocks in the future.  

Insurance

Being uninsured or underinsured can create significant risks for a company’s directors, officers and shareholders. A corporation should consider the appropriate types of insurance for the business it is conducting, including:

• General liability / contracts insurance;
• Directors and Officers liability insurance;
• Employment liability insurance; and
• Errors and Omissions insurance.

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