I’ve previously shared a few cautionary tales, or what not to do in starting or running your business from a legal perspective. The response was very positive so I thought I would share a few dangerous assumptions that I have seen many business owners make and how they might be avoided in your business.
1. “I incorporated at a registry, I’m all set.”
Although most Alberta registry agents do provide corporate registry services, including the creation of a new company, registration is only part of the process. Although this will formally create your new entity, and you will have a Certificate of Incorporation to prove it, quite often a minute book is not created. Inside this binder (as it usually is kept) are items like organizing bylaws, election of directors, share subscriptions, share certificates and so on. These seemingly “technical” items can become very important if you plan to sell your company, seek financing, or bring on an investor. You need to properly establish the operating parameters of your company, issue shares to the owners (that likely assume they already have them by virtue of registration), and generally attend to the formal establishment of your company. This is where your lawyer will be able to add value to the process and why you will find the fee to incorporate through a law firm to be higher than those advertised by registries. What you save today will likely cost you more if you have to retroactively create these items down the road.
2. “My staff know what they’re doing, I don’t need to micromanage.”
This one isn’t purely a legal issue, but I have seen instances were overwhelmed entrepreneurs have followed the advice of management experts and delegated tasks to trusted staff, assuming everything is being done properly. I agree, as a business owner you can’t wear all the hats forever and have to have some trust in your team, but be careful. Passing of responsibility without systems, monitors and even written policies can be dangerous. For example, putting your employees in a position of apparent authority in dealing with third parties, whether they have actual authority or not, can result in you being bound to their commitments. Be clear with your staff on what they can and cannot do, be cautious of the titles and appearances you cloak your staff in, and establish the checks you need to ensure procedures and limitations are respected. Without these I have seen otherwise promising companies nearly bankrupt by a well-meaning, but very mistaken employee decisions. The growth of your business will eventually require you to leverage the skills and abilities of your team, but do so cautiously and avoid “delegation by abdication”.
3. “We just need something simple, this isn’t a complicated deal”
Often business people are excited about a new business relationship or source of financing and just want “something simple” in terms of documentation. I am a big believer in not spoiling a promising deal with too much paper, but it is important to adequately document what has been agreed to. You might be surprised just how differently each can view seemingly simple terms. And what happens when things don’t go quite as planned? Does the simple document explain what rights each party has to remedy an issue before legal action occurs? What exactly constitutes a breach anyway? If you borrowed money for your business, sure if you quit making your payments, that’s obvious enough. But what if you sell some of your company assets, or transfer your shares to your spouse. Is that permitted? Or if you are on the other side, what if the management or ownership of the company changes? Is that really who you intended to finance or otherwise work with? The desire for simplicity and speed is understandable but it can be a good idea to talk through the different angles and “what-ifs” with your lawyer.
There is no shortage of lessons we can learn from other’s mistakes, but if you have questions or a situation you would like to see included here please drop me a line at ben@blocklaw.ca.
