We frequently take calls from entrepreneurs wondering about the legal expenses they should expect to incur in starting a business. Sometimes the business has been operated as a sole proprietor and the entrepreneur recognizes it is time to incorporate a business and other times the entrepreneur is starting a business fresh. The calls typically follow the same general path: first we are asked about the necessary steps (i.e. incorporation, banking, financing, shareholder agreements, etc…) and second we are asked how much taking those steps to start the business will cost. While every business is unique and the start-up costs vary somewhat from business to business, in this post, we provide some rough guidance regarding what to expect when it comes to business start-up legal expenses.
Incorporation
You should budget $1,200 to $1,500 for incorporating your new business. Legal fees are roughly $900, more or less depending upon complexity of the share structure. Disbursements – i.e. expenses incurred by your lawyer in connection with the incorporation – , including name reservation, incorporation filing fee, name reservation report (if applicable) and minute book binder total $500 more or less. Savings can be had by choosing the following:
- incorporating federally and you will save $100 because the government filing fee is less;
- incorporating using a numbered company (i.e. 1234567 Canada Inc.) and you will save the $56 NUANS name search report fee; and
- tell us you don’t want a fancy minute book binder and you will save approximately $125.
In addition to the saving opportunities listed above, you can avoid the incorporation legal fees altogether by preparing and filing the incorporation yourself, but in our experience often the share structure isn’t set up correctly for the business start-up and articles of amendment need to be filed, which cost approximately the same as hiring us to do the incorporation in the first instance.
The incorporation fees quoted above include the initial set-up of the corporation, including resolutions, share issuances and registrars.
Financing Agreements
The type of financing agreements a start-up will need will of course depend upon how the business will be financed. Financing options generally include shareholder loans, equity or debt investment from angel investors and bank debt. Providing an estimate of the cost of legal fees for financing agreements is not easy because of the diverse range of financing options. In addition to the cost of preparing the financing agreement for the start-up there are typically also legal expenses associated with the financing transaction itself. For example, an equity financing by angel investors (be they accredited investors or friends and family) will involve a subscription agreement, corporate authorizing resolutions and other transaction documents. Moreover, the terms of the financing may be extensively negotiated with the investors or a broker-dealer representing the investors, which will further increase legal costs. By way of rough guidance, budget $3,000 to $7,500 for an equity round of financing or a bank debt financing. If the start-up is financed by shareholder loans, the cost will be much less i.e. $500 to $2,500, depending upon various factors including whether or not the shareholder will take security over the assets of the business.
Shareholder Agreement
If the business we incorporate for you is a professional corporation or a single owner-operator business, you will not need a shareholders agreement. However, if there are multiple arms-length shareholders, we strongly recommend a shareholders agreement. Since shareholders’ agreements are long and tend to be reviewed and revised extensively to suit the business shareholders’ preferences, lawyers typically charge anywhere from $1,500 to $5,000 to prepare a shareholders agreement.
Next Steps
If you are starting a new business, we would be pleased to give you a more precise idea of how much to budget for legal fees. We don’t charge for this valuable service and, best of all, if we give you a quote and you go forward with us, you can rest assured that, barring rare extraordinary situations, your ultimate bill will be the amount we quoted. No unpleasant surprises.
