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Initial Business Considerations: Some short term pain for long term gain

Date: June 4, 2015
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At MJB Lawyers, we often find ourselves advising clients on how to clean up or solve problems that likely could have been avoided if some proper steps had been taken initially. Understandably so, many individuals, when they initially wish to start a business or buy a business, are very concerned about the initial costs. Unfortunately, we see all too often that if these individuals would have spent a little more time and money up front properly planning and documenting their business plan and assessing risk, this would have saved them a great deal more time and money in now trying to rectify or clarify some of the uncertainties. Often the misconception is that lawyers tend to make things more complicated but our role is the exact opposite: to try to assist you in putting your business plan to paper so as to try to avoid pitfalls in the future.

Initial Considerations
Clients may believe that their business idea or purchase is ‘very simple’ or ‘straightforward’. A lawyer’s role is to create inexpensive ways to help the client identify and limit potential risks and pitfalls. If all parties put their minds to the issues early on, then it is less likely that there will be a dispute about it at a future date. Some initial issues and considerations a lawyer can assist with include:

Initial business creation
  • What are the specific roles and duties of each party? Is it clear what each parties’ contribution is now, as well as into the future? What if the business needs more money going forward and one party has the ability to pay but not another?
  • Who has what authority with respect to the business? Who can enter into contracts on behalf of the business?
  • How does the business deal with the successes or failures of the company? Do all parties agree to continue to fund or work for the company if it continues to lose money? At what point would the parties agree to discontinue the business? Alternatively, if the business is very successful, what mechanisms are there for the sale of the business? What if one person wants to sell the business or his/her share but the other(s) do not?
  • What if one party wishes to buy out the other party? Can he/she force the other to do so? Further, what if one party is at a disadvantage at that time because they have less funds available to them than another party?
  • What is the proper business ‘structure’ for the parties from a tax perspective? There can be significant differences in how individuals are paid by a company or how they receive the benefits of a successful company. A lawyer, along with proper accounting and tax advisers, can assist in the set-up and structure of a business so as to ensure the greatest flexibility for tax benefits now and into the
    future.
Business acquisition
  • Should a person buy the shares or assets of a company? What are the differences and benefits of each?
  • Should a person buy the business as an individual or as a company? What are the benefits and risks of each? Are there tax and liability benefits of each?
  • Are there certain risks relating to the company or assets that a person may not know about when they buy it? If so, what steps can be taken to protect people against some of those risks?

Addressing Disputes
No party wants to go to court or to fight over issues, but when the expectations or understandings of the parties end up being different and unclear, they are often left with no choice. When the two sides are so materially different and the proper documentation is not in place to clarify issues, the parties are forced to go to court or some other form of dispute resolution.

Planning in advance to help avoid disputes
All too often individuals are very confident in the business plan or idea and believe all disputes can easily be worked out between the parties in the future. It is not a question of not trusting another party, but rather trying to prepare as much as possible for the unknown. One of the keys to a successful business is initially working with your lawyer to develop a strategy to identify issues and hopefully save you significantly more time and expense in the future.