You’ve come up with the fantastic idea, done the valuable market research, and crafted the perfect business plan. Everything is set to launch you into success. Or is it? If you’re like most start-ups, you’re probably uncertain (or even unaware) about some of the legal decisions you’ll be confronted with. Here’s a list of legal tips to help guide you through some of those decisions.
1. Business structure – finding the right fit
One of the first and most important decisions you will need to consider is the best business structure for you. The most common business forms are the sole proprietorship, the partnership, and the corporation.
A single individual starting a business may find that a sole proprietorship best fits their needs. The sole proprietorship is not a legal structure. It is owned and operated by one individual, who uses their own name to operate, to contract, to incur debt and other liabilities. This means that the sole proprietor bears personal liability for business debts, but also that they receive personal tax benefits. Frequently, an individual will start their business as a sole proprietorship and incorporate once profitable to take advantage of lower corporate tax rates. This choice means less governmental regulation, although applicable permits and licenses must still be obtained.
Two or more individuals starting a business together may opt for a partnership. Like the sole proprietorship, the partnership is not a legal entity so each partner has personal liability for business debts. Business property is held by all partners in the name of the partnership. A Partnership Agreement, signed by each partner is used to identify and document the rights and obligations of the partners. This structure is generally the best choice for professionals who are self-regulated and deal with the public, such as lawyers, accountants and consultants.
A corporation is a separate legal person created under provincial or federal legislation. Business is carried out in the name of the corporation, not in the name of the individuals. The corporation has tax obligations, including filing income tax returns and paying taxes on incomes derived from its business. The choice of whether or not to incorporate should be carefully considered. Incorporation has many benefits: limited liability status, the possibility of running expenses through the corporation while paying yourself a salary and giving yourself benefits, and greater ease of raising capital, attracting investment, and borrowing money. However, there are drawbacks. Incorporation is more expensive than other business structures, has more government regulation including corporate governance requirements, and has additional record-keeping and reporting requirements. There is also an obligation to use corporate assets appropriately – it is difficult to take money out of a corporation, and lenders sometimes require personal guarantees from the owners.
2. Understand your obligations as an employer
If you intend to have employees, you should be aware of your obligations as an employer. Some of the most important obligations include registering with the Workplace Health, Safety and Compensation Commission, understanding basic human resources issues and responsibilities, including labour laws, and understanding your tax obligations including payroll remittances to the Canada Revenue Agency.
3. “Tax basics” aren’t always so basic
The two main taxes that businesses collect are the Goods and Service Tax (GST) and the Retail or Provincial Sales Tax (PST), which are combined in Newfoundland and Labrador into a single tax known as the Harmonized Sales Tax (HST). For tax purposes, it is important to keep all records for multiple years after the end of the tax year to which they relate (the exact duration depends on your specific situation). Depending on the type of business you operate, you may also have to consider other provincial taxes such as Corporate Income Tax, Health and Post-Secondary Education Tax (Payroll Tax), Mining and Mineral Rights Tax or Sales Tax on Insurance Premiums.
4. Do I need insurance?
All businesses need insurance. Talking to an insurance professional is a wise move when starting a new business. You should insure your property and business assets, and you may also want to look into specialized protections like Liability and Business Interruption insurance. Ask your lawyer to refer you to an insurance professional. We work closely with insurance providers and can put you in touch with someone who has the experience you need.
Have questions? Your lawyer has the answers.
Some of these options may seem overwhelming but the right business lawyer will guide you through your decisions, ensure you have all your bases covered, and put your business on the path to success.
This Cox & Palmer article is intended to provide information of a general nature only and not legal advice. Individuals are advised to obtain legal advice when it comes to their specific circumstances.
Anna M. Cook is a partner in the St. John’s office of Cox & Palmer. Anna’s practice encompasses three main areas of law: Corporate & Commercial, Labour & Employment, and Privacy & Access to Information. In addition to her successful practice, Anna is proud to support the entrepreneurial spirit. Through her active involvement with SIFE Memorial and the Newfoundland and Labrador Organization of Women Entrepreneurs (NLOWE) Anna contributes a valuable voice that helps build the leaders of tomorrow.