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Protect Your Business From A Lawsuit

Protect Your Business From A Lawsuit

Unfortunately, just like in personal relationships, the persons who are most likely to sue you are the ones who are closest to you and your business.

There are many steps that you can take to mitigate or prevent the possibility of people suing you.

1) Clarity

The more clarity you have about where you want to go with your business, who will join you on that trip, and what role they will play alongside you, the higher your chances of success. Most significantly, you should avoid tough disputes, events, and prospective litigation. Regrettably, I’m speaking from personal experience; as a corporate lawyer, I’ve seen a lot of shareholder fights.

2) Shareholders’ Agreement

The great majority of them are situations that might have been avoided if there had been better communication between the founders from the start. On a practical level, one of the actions you may do is to create and implement a fully drafted shareholders agreement. So, in a BC private company, or any Canadian private company, a shareholders agreement, also called a universal shareholders agreement in some cases, is a legal document that lays out all of the conceivable outcomes that may occur over the business’s existence.

This will address topics such as death, incapacity, and what happens if a spouse divorces.
– What happens if one of the partners wishes to reduce or expand their involvement in the firm by purchasing some of the other partner’s shares?
– What happens if they wish to bring on another partner and raise more money from outside sources?
– What happens if the company runs out of funds and has to borrow more money from its shareholders?
– What if the bank is unwilling to lend?
– Who makes decisions?
– Who is going to be elected to the Board of Directors?
– Under what circumstances can a director be removed from their role as a director of a company?
– What is the threshold for making substantial decisions such as, changing the direction of the business entering into a new vertical, taking out loans, hiring executives, firing executives?

All of these kinds of situations and circumstances are covered off in a shareholders agreement.

On the surface, we can all see why a shareholders agreement is necessary. However, it is tough to connect with these kind of inquiries. So it’s critical to have fantastic people around you, whether they’re your lawyer, accountant, business coach, or mentor, people who have been there and done that and can help you sift through some of these problems and bring you and your partners across the finish line.

3) Corporate structure

If you are doing business as a sole proprietorship, or in a general partnership with another person or persons, then you are personally liable for all of the business dealings so as a sole proprietor. If you are alleged to have broken that contract, then the other party can sue you and sue you personally and that means that they can come after your personal assets, such as a home, or a car, or any other personal assets that you might have.

While incorporation is not the very first step that a lot of businesspeople take, it should be something that is top of your list. As your business starts to gain momentum, incorporation is can be very beneficial from a tax perspective. But first and foremost, it is a valuable liability shield. As your business can continues to mature after you are incorporated, then your next step is going to be thinking getting a holding company in place.

The holding company subscribes for shares in the operating company, and then you can do a dividend from the operating company to the holding company, and then the holding company can hang on to that cash, and use it, in turn, to invest in other assets, or just simply hold on to that cash until the time that you are willing and able to dividend that out to yourself personally, in consultation with your tax advisor.

4) Insurance

I want to highlight the need of having good commercial general liability insurance, or if you’re a coach or consultant, you might want to consider acquiring errors and omissions insurance. These kinds of insurances are extremely important since, even if you are sued, your insurance may be able to defend you in the case that the conditions of the policy, cover the occurrence.

5) Appropriate Contracts

Finally, you’re also going to really want to think about getting the appropriate contracts in place. So again, a shareholders agreement is a perfect example of the type of agreement that you need to have. And it’s the one that I recommend the most strongly and I recommend it right out the gate for business successful businesses that have a clear path are revenue-generating and have a clear path for more revenue because the more money that is involved in your business, the more complicated things are going to get, unfortunately, particularly when you have multiple shareholders involved, so a shareholders agreement is very important to get.

You also want to make sure that you have very clear agreements with your employees, with your contractors, with your clients, with your suppliers, everybody that is touching your business. If you have some intellectual property or perhaps a product or a service that you are white labeling, then you’re going to want to think about getting the proper licensing agreement in place. Get clear and get it in writing!

The time that you’re gonna be spending on getting that kind of clarity inside of your business is going to be a long-term investment that’s going to serve you very, very well. Not only for the safety of your business, but also the success of your business because the more clarity that you have inside of your business, the more likely you are to succeed because you will know what you’re doing. You will know what you stand for and you will feel the security of having a strong legal foundation.

So if you have any questions about any of the topics that I’ve covered today, please don’t hesitate to reach out at 604 283 8622 or send an email to steve@parrbusinesslaw.com.

 

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