Important Considerations When Starting a Business10-Jul-17
By Ian Weiss
So you have a great new business idea, such as opening a hip new restaurant or café. Or maybe you’ve identified an underserved industry or new product to sell. Or maybe you just want to be your own boss and run your own trade business. Whatever the reason for starting a new business, coming up with the idea is only half the battle. It might even be the easy half. Setting up your business properly for long term success requires plenty of other considerations.
The first thing to consider is whether you should register a corporation or partnership or operate as a sole proprietorship. Each form comes with its own pros and cons, including increased costs and administration versus reduced personal liability. For example, if you choose to operate as a sole proprietorship or a partnership, there is little to no legal separation between you and your business. If someone sues your business, they sue you, and you risk losing personal assets, including your home. Tax considerations also factor into this decision, and consulting a tax professional is always advisable before starting your business.
Even if you elect to incorporate, you should be aware that how you operate your business can determine your personal liability. If you sign contracts under your personal name and not on behalf of the corporation, again, you risk personal liability despite the protections provided by being incorporated. Likewise, using corporate property as if it is your own can create significant tax issues down the road.
Other issues to consider regardless of which business structure you choose are questions like:
- Who will control the company and how are decisions going to be made?
- Who and how many people need to sign agreements and cheques?
- How well do I know and trust my business partners?
The answers to these questions will often affect the decision on business structure. These questions often lead to another common question: My business partner is my friend/sibling/spouse, do we need to have a written agreement? Should we have a shareholders agreement for our corporation? What about non-competition and employment agreements? The simple answer to all of the above is yes.
Relationships are always amicable when everyone is excited and optimistic, but when things go sideways, written agreements make resolving disputes much simpler. The best time to spell out terms in writing is when everyone is on the same page. When things start falling apart, resolving disputes becomes much more difficult and costly, in time, energy and money.
A related consideration is how much to invest in legal documents for use in the day-to-day operations of the business. Items such as standard form purchase orders, terms and conditions, or confidentiality agreements. Again, the easy answer is these are all worthwhile investments, where applicable.
Starting a new business is an exciting but costly venture. You may need to buy inventory and equipment, or commit to a lease for office space or vehicles, and often many expenses have to be paid before revenues start flowing. Committing additional limited funds to professional fees can seem unrealistic. However, legal and financial professional fees should be factored in as a necessary startup cost. Spending a little money upfront on these services can save a lot of headache and money down the road.