Dec 18

A Rough Guide to Starting a Business Legal Expenses

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.

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Jul 30

Residency of Directors – Incorporating in Canada

Most provinces and territories of Canada require a certain percentage of the directors of the corporation to be residents of Canada.  However, there are a few exceptions.  Foreign companies and others outside of Canada looking to incorporate in Canada should be aware of these exceptions when determining where in Canada to incorporate.   The following is a summary of the Canadian residency requirements for directors:

  • Federal: at least 25% must be residents of Canada
  • Alberta: at least 25% must be residents of Canada
  • British Columbia: does NOT require that directors be residents of Canada
  • Manitoba: at least 25% must be residents of Canada; if corporation has three or fewer directors, one of them must be a resident of Canada
  • New Brunswick: does NOT require that directors be residents of Canada
  • Newfoundland and Labrador: at least 25% of the directors of a corporation must be residents of Canada; but this doesn’t apply where corporation earns no income in Canada
  • Nova Scotia: does NOT require that directors be residents of Canada
  • Nunavut: does NOT require that directors be residents of Canada
  • Northwest Territory: does NOT require that directors be residents of Canada
  • Ontario: at least 25% must be residents of Canada; where a corporation has less than four directors, at least one director still must be a resident Canadian.
  • Prince Edward Island: does NOT require that directors be residents of Canada
  • Quebec: does NOT require that directors be residents of Canada
  • Saskatchewan: at least 25% must be residents of Canada; where a corporation has less htan four directors, at least one director must be a resident Canadian.
  • Yukon: does NOT require that directors be residents of Canada
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Jul 18

Crowdfunding in Canada

Crowdfunding is a high profile means of raising seed capital for start-ups.   Services such as kickstarter and indiegogo are frequently looked to by Canadian companies as potential funding vehicles.   Unfortunately, raising money by crowdfunding services such as these is not a viable option for most Canadian start-up businesses.   The reason being that the investment model of crowdfunding, sometimes referred to as “equity crowdfunding” – where funders provide money in exchange for equity or debt in the start-up company – violates Canadian securities laws.  On the other hand, the rewards model of crowdfunding, where funders provide seed money in exchange for a non-financial benefit, such as a pre-order of a new product or service like a watch or a phone app., do not generally violate Canadian securities laws.   In a nut shell, crowdfunding is only an option if your start-up business model lends itself to the rewards model of crowdfunding.

Canadian companies raising capital by issuing equity or debt to investors – regardless of whether the funding round is seed financing, angel investment or second round financing – must continue to comply with the capital raising prospectus exemptions available in their jurisdiction and the jurisdictions of their investors.   The most frequently relied upon exemptions being: accredited investor exemption, family, friends and business associates exemption, private issuer exemption and offering memorandum exemption.  These exemptions are available only if the company seeking the investment and the investor fit squarely within the capital raising exemption criteria.

There is reason to be optimistic that some form of equity crowdfunding will eventually be permitted in Ontario.    The Ontario Securities Commission (OSC) is reviewing the rules regulating equity and debt financing in Ontario and this review includes the consideration of the adoption of a prospectus exemption to permit crowdfunding.   Essentially, Ontario is following the Jumpstart Our Business Startups Act (the JOBS Act)  recently enacted by the U.S. Congress in April 2012, which will allow non-accredited or non-sophisticated investors to buy small equity stakes in companies without going through the costly process of preparing and filing a prospectus.   (The JOBS Act is currently waiting on more detailed rulemaking by the SEC).   However, such optimism should be tempered because even if the OSC does eventually adopt an equity crowdfunding prospectus exemption, unless other provinces in Canada adopt a similar exemption, it will only help companies in Ontario raise seed financing from investors in Ontario.

For more information, give us a call or send us an email.

Phone: 613 869 5440
Email: koby@lawyercorporation.ca

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Feb 1

Starting a Franchise System

If you have a successful business and would like to grow it, one option available to you is to franchise your concept and sell franchises to other would-be entrepreneurs.   Franchising potentially allows you to add revenue through moneys paid to you by purchasers of franchises and through royalties received by you from franchisees from their operations.

The franchise model makes sense if you have developed a business formula that you believe is “portable”.   It also makes sense for businesses that are best run by “owner-managers” as opposed to professional managers (i.e. hired help).   For example, a professional services business or a restaurant business are often more successful if run by an owner-manager.    Other examples of such businesses that have been successfully grown through franchising include drivers education, fast-food outlets, coffee shops, computer repair outlets, car repair shops, gyms and training institutes.    The logic goes something like this: A franchise owner will “care” more because they have a vested interest in the success of the business.    Put simply, unlike someone who is hired to work for a business, a franchise owner has real skin in the game – they’ve put some hard-earned money down to purchase the franchise and they’ll want to make sure the business succeeds.

From a franchisee’s perspective, purchasing a franchise is often very appealing than starting a business from scratch.  Statistacally, franchise businesses are more likely to succeed than new businesses.  In addition, many would-be entrepreneurs like the idea of purchasing a “turn-key” business.

Establishing a Franchise System

There are generally four steps to setting up your franchise system:

  1. Organizing Your Business For Franchising
  2. Developing Your Franchise System
  3. Marketing and Selling Franchises
  4. Operating Your Franchise Business

In addition, not only are these four steps applicable when you start your franchise system, but as you operate your franchise system you will likely continually engage and revisit each of these four steps.

Organizing Your Business For Franchising

Your first step is to determine, and then establish, the appropriate structure of your franchise system.  Note, the structure you will want in place for franchising is likely different than the structure you may have in place for your existing business operation.   To determine the best structure for your franchise system, we recommend you consult with your legal and tax/accounting advisors.   The reason being, the best structure for your franchise system will be the one that protects your intellectual property, limits your liability (including shielding your existing successful business from the liability associated with operating a franchise system), complies with all applicable legal and regulatory requirements and, wherever and however possible, minimizes your tax exposure.

Developing Your Franchise System

Once your “house is in order”, your attention will turn to developing your franchise system.   Put simply, this is the package you will be offering to franchisees.  What will they contribute?  What will they receive in return?   What are the rules franchisees must follow?

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