Canadian Legal Guide for Small Business

Nishan Swais, LLB

Self-Counsel Press

(a division of)International Self-Counsel Press Ltd.

Canada USA

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Acknowledgements xv

Introduction 1

Part I: Ways of Carrying On a Small Business 9

1 Sole Proprietorship 11a. Setting Up a Sole Proprietorship 11b. Advantages and Disadvantages 12

1. Advantages 122. Disadvantages 13

c. Is a Sole Proprietorship Right for You? 14d. Summary 14

2 Partnership 15a. General Partnership 16

1. Setting Up a General Partnership 162. Advantages and Disadvantages 183. Is a General Partnership Right for You? 20

b. Limited Partnership 201. Setting Up a Limited Partnership 20

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iv Canadian Legal Guide for Small Business

2. Advantages and Disadvantages 213. Is a Limited Partnership Right for You? 22

c. Summary 23

3 Corporation 31a. Setting Up a Corporation 32

1. Incorporation 322. Organization 343. Maintenance 41

b. Advantages and Disadvantages 411. Advantages 412. Disadvantages 42

c. Is Incorporation Right for You? 43d. Summary 44

Part II: Start-Up Issues 51

4 Choosing a Business Name 53a. What Is the Purpose of a Business Name? 53b. The Business Form 54

1. Sole Proprietorship 542. Partnership 553. Corporation 56

c. Changing Your Name 58d. Summary 59

5 Licenses and Permits 61a. Licenses and Permits: What Are They? 61b. What Is the Purpose of a License or Permit? 62c. What Kinds of Licenses and Permits Do You Need? 62d. How Do You Obtain the Necessary Licenses and Permits? 63e. Summary 64

6 Financing Your Small Business 65a. Why Do You Need Financing? 65b. Equity Financing 65

1. Sources of Equity Financing 66

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2. Types of Equity Financing Arrangements Available 673. Securities Legislation 694. Summary 70

c. Debt Financing 711. Sources of Debt Financing 712. Types of Loans Available 723. Loan Security 764. Summary 82

d. Government 82e. What Kind of Financing Is Right for Me? 83

7 Insurance 85a. What Types of Insurance Will You Need? 85b. What Types of Insurance Are Available? 85

1. Property Insurance 862. Business Interruption Insurance 863. General Liability Insurance 864. Key-Person Insurance 865. Directors and Officers Liability Insurance 876. Product Liability Insurance 877. Automobile Liability Insurance 878. Environmental Liability Insurance 879. Credit Insurance 88

c. How Do You Obtain the Insurance You Need? 88d. What Can Nullify My Insurance Coverage? 88e. Statutory Insurance 89f. Summary 89

Part III: Ongoing Operations 91

8 Intellectual Property 93a. Copyright 93

1. What Is a Copyright? 932. What Requirements Must You Meet to Claim Copyright in a Work? 933. What Kind of Works Can You Claim a Copyright In? 94

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4. What Can You Not Claim a Copyright In? 945. How Long Does Copyright in a Work Last? 956. Must You Register Your Copyright? 957. Can You Transfer Your Copyright in a Work to Someone Else? 958. What Does It Mean to Infringe a Copyright? 959. Is There Anything Else You Should Know about Copyright? 96

b. Trademarks 971. What Is a Trademark? 972. What Requirements Must You Meet to Claim a Valid Trademark? 973. What Can You Not Use as a Trademark? 974. Must You Register Your Trademark? 985. How Do You Register Your Trademark? 986. How Long Does Your Trademark Last? 987. Can You Lose the Right to Your Trademark’s Registration? 988. Can You Transfer Your Trademarks to Someone Else? 999. What Does It Mean to Infringe Trademark? 99

10. Is There Anything Else You Should Know About Trademarks? 99c. Patents 99

1. What Is a Patent? 992. What Requirements Must You Meet to Patent Your Invention? 1003. How Do You Obtain a Patent for Your Invention? 1004. How Long Will Your Patent Last? 1015. What Does It Mean to Infringe a Patent? 1016. Can You Transfer Your Patent? 101

d. Other Intellectual Property 1011. Industrial Designs 1022. Integrated Circuit Topographies 1023. New Varieties of Plants 1024. Trade Secrets 102

e. Other Issues 1031. Employees and Your Intellectual Property 1032. Protecting Your Intellectual Property Abroad 103

f. Summary 103

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9 Privacy Obligations 109a. Privacy Legislation in Canada 109

1. Background 1092. The PIPEDA 1103. Provincial and Territorial Legislation 1104. Sanctions 110

b. Your Responsibilities 1111. Accountability 1122. Identifying the Purpose 1133. Consent 1144. Limiting Collection 1145. Limiting Use, Disclosure and Retention 1156. Accuracy 1157. Safeguards 1158. Openness 1169. Individual access 116

10. Provide Recourse 117c. Other Considerations 117

1. Employer/Employee Relationships 1172. General Concerns 118

d. Summary 119

10 Contracts 125a. What Is a Contract? 125

1. The Offer 1252. Acceptance 1263. Consideration 127

b. What Does a Contract Do? 1281. Determines Your Rights and Obligations 1282. Allocates Risk 1283. Provides a Legal Basis for Restitution 128

c. Who May Enter into a Contract? 1291. An Individual 1292. A Business Entity 129

d. Whom Does a Contract Bind? 130

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viii Canadian Legal Guide for Small Business

e. When Are You Exempt from Your Contractural Obligations? 1301. Frustration 1302. Agreement/Termination 1313. As a Result of a Breach 131

f. What Remedies Are Available to You If Another Party Breaches Your Contract? 1321. Damages 1322. Specific Performance 133

g. In What Circumstances Might You Not Be Able to Obtain a Remedy for a Breach of Contract? 1341. Misrepresentation 1342. Mistake 1343. Unconscionability 135

h. What Do You Need to Know about Reading a Contract? 136i. What Do You Need to Know about Writing a Contract? 137

1. Date 1372. Parties 1373. Background 1384. Terms 1385. Signature Lines 139

j. Summary 140

11 Dealing with Consumers 157a. What Is a Consumer? 157b. Product Liability 157

1. The Duty to Take Reasonable Care 1582. The Duty to Warn about Dangers 1583. Summary: The Basis of Liability 159

c. Packaging and Labelling 1591. Federal Packaging and Labelling Requirements 1592. Provincial Packaging and Labelling Requirements 1613. Summary 161

d. Advertising 1611. False or Misleading Advertising 1622. Promotional Contests 1633. Advertising Codes 165

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4. Summary 166e. Sale of Goods 166

1. What Is a Sales Contract? 1662. The Obligation to Carry Out the Terms of the Contract 1673. Implied Conditions 1684. Breaching the Contract 1705. Summary 172

f. Business Practices 172g. Summary 173

12 Billing, Payment, and Collection 175a. Billing 175

1. Communicating the Purchase Price 1752. Setting the Payment Terms 1763. Providing Estimates 176

b. Payment 1771. Cash 1772. Cheque 1783. Bank Draft and Money Order 1804. Traveller’s Cheque 1805. Credit Card 1816. Debit Card 1827. Summary 183

c. Collection 1831. Receipts 1832. Collection Problems 184

d. Summary 186

13 Employees 191a. The Employer/Employee Relationship 191

1. What Is an Employee? 1912. Employment Standards and Human Rights Legislation 192

b. Your Rights and Obligations When Hiring an Employee 1931. Advertising for an Employee 1932. The Application and Interview Process 193

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3. Preliminary Considerations in Hiring an Employee 1964. The Offer 196

c. Your Rights and Obligations during Employment 1971. The Employer’s Obligations to its Employees 1972. The Employee’s Obligations to the Employer 201

d. Your Rights and Obligations When Firing Employees 2031. Termination without Cause 2042. Termination for Cause 2063. Wrongful Dismissal 2074. Temporary Layoff 210

e. Independent Contractors 211f. Summary 212

14 Resolving Disputes 225a. What Is a Dispute? 225b. Reducing the Likelihood of Being Involved in a Dispute 226c. How Can You Resolve Your Disputes? 227

1. Resolving a Dispute Yourself 2272. Taking the Dispute to Your Lawyer 2283. Taking the Dispute to Court 229

d. Canada’s Court System 2291. Provincial and Territorial Court Systems 2302. The Supreme Court of Canada 2313. Federal Courts 2324. Tax Court of Canada 232

e. Going to Court 2321. Initiating a Lawsuit 2322. Deciding Whom to Sue 2323. Choosing the Court in Which to Bring Your Lawsuit 2334. Preparing a Statement of Claim 2345. Preparing a Statement of Defence 2356. Pre-Trial Matters 2367. Trial, Appeal, and Resolution 2388. Enforcement of Order 239

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9. Other Types of Hearings 240f. Summary 243

15 Taxes 249a. Our System of Taxation 249b. Tax and the Sole Proprietor 250c. Tax and Partnership 251d. Tax and the Corporation 252

1. Corporation 2522. Shareholders 254

e. GST 2551. Register Your Business 2562. Keep Records 2563. Collect the GST 2564. Calculate the GST You Owe (or Your Refund) 2575. File Your GST Return 257

f. Retail Sales Tax 257g. Summary 258

16 Professional Advisors 259a. General Selection Criteria 2591. Interest 2592. Personality 2603. Experience 261

b. Your Banker 261c. Your Accountant 262d. Your Lawyer 263

1. What Can a Lawyer Do for You? 2632. When Should You Seek the Advice of a Lawyer? 2643. What Should You Look for in Selecting a Lawyer? 2644. What Should You Ask Your Lawyer? 2665. Ethical and Professional Standards Governing Lawyers 2676. What Should I Expect from a Lawyer? 268

e. Summary 268

Afterword: The Road to Success 271

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Checklists

1 Shareholders agreement checklist 382 Privacy legislation checklist 1203 Privacy compliance checklist 1214 Ten guidelines for drafting the perfect contract 1535 Your day in court: Ten rules to follow in small claims court 2466 Your lawyer... 269

Case Studies

1 Share structure 452 Share structure 48

Samples

1 Partnership agreement 242 Limited partnership structure 303 Promissory note 754 Assignment of copyright and waiver 1045 Secrecy agreement 1056 Privacy Policy 1227 Amending agreement 1458 Termination agreement in letter form 1479 Contract 149

10 Bill of sale 18711 Receipt 18812 Demand letter 18913 Application for employment 21414 Interview questions/interview summary 21615 Letter confirming employment 22016 Dismissal letter 22117 Independent contractor agreement 22218 Statement of claim 24419 Statement of defence 245

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There are three ways for you to carry on a small business inCanada. You can operate as a sole proprietor. You can carry on business in partnership with another person (or persons). Or you can incorporate a company.

Each of these ways of doing business has advantages and disadvantages. The purpose of Part I is to help you determinewhich business form is best suited to meet your particularneeds and expectations.

Part IWays of Carrying On

a Small Business

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The simplest and least expensive way to carry on asmall business in Canada is the sole proprietorship.

As its name implies, a sole proprietorshipmeans one person in business for himself or her-self. As a way of carrying on a small business,sole proprietorship has proven especially popularwith students, homemakers, and people who arejust starting up a business or are alreadyemployed full time in some other enterprise.

Typical examples of businesses that are some-times conducted as sole proprietorships are —

� a student mowing lawns in his or herneighbourhood;

� an employed person who supplements hisor her income by spending weekendsmaking pizzas at home, freezing them,and then selling them to neighbourhoodrestaurants; and

� a house painter who does not necessarilyrequire much equipment or overhead

and, for the most part, can do the jobalone or with minimal help from others.

These examples share an important similari-ty, one that defines the very essence of a sole pro-prietorship; namely, as a sole proprietor, you arethe business.

a. Setting Up a Sole ProprietorshipBecause, as a sole proprietor, you are the busi-ness, no special legal steps are needed to set upa sole proprietorship. As soon as you do businessfor yourself — that is to say, as soon as youengage in some sort of commercial activity —you are doing business as a sole proprietor. Thus,the term “sole proprietorship” does not refer toany formal legal structure; it merely designatesthat you are involved in a commercial activity.

It is worth noting that you are nonethelessrequired to obtain licenses or permits to engagein certain types of commercial activity. Forexample, you may operate a plumbing business

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12 Canadian Legal Guide for Small Business

(a) You can start doing business right away. Youdon’t need to do anything to set up asole proprietorship. Your sole proprietor-ship is established when you beginwhatever business activity you plan tocarry on.

(b) It is inexpensive compared to other ways ofcarrying on a small business. This is becauseno special legal steps need to be taken toconduct business as a sole proprietorship.

(c) Though most sole proprietors carry on businessalone, a sole proprietorship can have employees.Being able to hire employees means youcan spread the workload among severalpeople. This is useful if the job you dorequires you to be in several places atonce or for work that can’t be done byone person alone, such as moving furni-ture. An employee is also capable of fill-ing in for you when you are sick orotherwise unable to work. (See Chapter13, Employees, for a further discussionof employment matters.)

(d) All the benefits of the business belong to youpersonally. That means the assets andincome of the business are yours to dowith as you please. For example, if youcarry on business fixing small appliancesin your basement on weekends, the toolsyou buy all belong to you personally. Ifyou decide to stop doing business, thetools remain yours. As you will see, thisis not necessarily the case with otherbusiness forms. In addition, any moneyyou earn in your business becomes partof your personal income: your businessprofits are your profits.

as a sole proprietor; however, to do so legally,you must be licensed by the municipality inwhich you plan to carry on that business. (SeeChapter 5, Licenses and Permits, for a furtherdiscussion of license and permit requirementsrelevant to your small business.)

As a sole proprietor, you may carry on busi-ness under a name other than your own. Forexample, a house painter by the name of FredGreen can, if he wishes, carry on business underthe name “The Happy House Painter.” Thatmeans he can advertise to the public under thatname, list his business in the telephone bookunder that name, enter into contracts as “TheHappy House Painter,” and do anything else inconnection with his business under that namethat he can legally do under the name FredGreen.

Note, however, that anyone who carries onbusiness under a name other than his or her ownname is required to register that name with therelevant government authority. This is necessaryto ensure that both the government and thepublic can determine who, in a given instance, iscarrying on business under a particular businessname. (See Chapter 4, Choosing a BusinessName, for a further discussion of business nameregistration requirements.)

b. Advantages and DisadvantagesTo determine whether you should operate yoursmall business as a sole proprietorship, considersome of this structure’s advantages and disad-vantages.

1. AdvantagesThere are several advantages to operating yoursmall business as a sole proprietorship:

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Sole Proprietorship 13

(e) Business losses may reduce your personal incometax. Because any income your businessearns becomes part of your personalincome, it is added to any other incomeyou earn (for example, as an employee ofanother business) and taxed at the indi-vidual rate set under the federal IncomeTax Act. Depending on your financialcircumstances, this may not be anadvantage. However, if your businesscreates losses — that is, if the costs youincur in your business exceed its revenue— those losses may be used to reduceyour personal income tax and possiblyplace you in a lower tax bracket. (SeeChapter 15, Taxes, for a further discus-sion of tax matters.)

(f) Because there is nothing involved in settingup a sole proprietorship, there is nothinginvolved in winding one down. Your soleproprietorship ends when you stop doingwhatever work you were performing as asole proprietor.

2. DisadvantagesAs you might expect, there are disadvantages tosole proprietorships:

(a) Just as the benefits of the business belong toyou personally, so too do the obligations. If, as“The Happy House Painter,” you have atelephone line installed in your base-ment, the cost of installation and anytelephone bills become your personalobligations. That is because you are thebusiness. Any debts or liabilities youincur in conducting your business areyour debts and liabilities. As you cansee, the knife cuts both ways.

(b) Your liability for things you do in the courseof operating your business is unlimited. Inother words, not only are the obligationsof the business your obligations, butthere is also no limit on the amount forwhich you may be obligated. Moreover,your business obligations can be satisfiedby recourse to your personal assets. Ifyou agree to paint someone’s living roomand, while doing so, accidentally splashpaint on their Renoir painting, not onlyare you obligated to repair or replacethat Renoir but you may also be requiredto use your personal assets (e.g., dip intoyour savings account) to satisfy thatobligation.

The risk associated with unlimitedliability is the single biggest deterrent tocarrying on business in the form of a soleproprietorship. To avoid that risk, youmust either incorporate a company anddo business that way (see Chapter 3, Cor-poration) or procure adequate insuranceagainst any possible mishaps. In somecases, your insurance coverage may beall that stands between you and person-al bankruptcy (See Chapter 7, Insurance,for a further discussion of insurance mat-ters affecting your small business.)

(c) Though you can employ others, you cannotemploy yourself. While employing oneselfmight seem a little strange, being ableto employ oneself — as is possible whenyou carry on business in the form of acorporation — may result in tax savings.

(d) In Canada (to the chagrin of many), indi-viduals are taxed at progressively higher rates

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c. Is a Sole Proprietorship Right for You?

The ideal candidates for carrying on a small busi-ness in the form of a sole proprietorship will havea special skill or talent that they wish to use inearning income. They will also be capable of run-ning the business substantially on their own.

C h e c k l i s tIf sole proprietorship seems right for you, beforestarting business, remember to do the following:

� Register any names under which you planto carry on business.

� Obtain the necessary licenses and permitsto legally allow you to do what you do.

� Obtain appropriate insurance coverage.

d. SummaryMany successful small businesses are run as soleproprietorships. In addition, many large busi-nesses started out as sole proprietorships andwere incorporated only after the business itselfbecame too much for one person to handle. Inshort, sole proprietorship remains the basis ofmany a great entrepreneurial beginning.

than corporations. A sole proprietor cannottake advantage of the more favourabletax treatment afforded incorporatedbusinesses.

(e) The federal government and certain provin-cial governments have established grant andloan programs as well as other small-businessassistance measures that often apply only to incorporated businesses. Therefore, theseprograms are not available to sole pro-prietorships.

(f) Certain types of business arrangements willnot allow you to carry on your small businessas a sole proprietorship. For example, ifyou want to carry on business as a fran-chisee of a pizza chain, it is likely thatthe franchisor will require you to incor-porate a company in order to operatethat franchise.

(g) There is a (misguided) perception that a soleproprietor may not be as serious about his orher business as is someone who does business inthe form of a corporation. This can raiseproblems where you require a loan froma bank or credit from a supplier.

(h) When you stop doing business, the sole propri-etorship ceases. It does not continue with-out you. The business cannot be passedon after you die, if that is your intention.That is not to say you cannot pass on theassets that make up the business, but itmeans that the person to whom thebusiness is passed will have to start his orher own business with those assets ormake them part of a business that he orshe already operates.

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