Avoid these common missteps, and you’ll get your venture off on the right track

Entrepreneurship helps drive the economy. That’s why it’s crucial for entrepreneurs to create enough new ventures every year to encourage investment and generate employment. However, it isn’t always easy to start a business or expand an existing one. Based on our experience working with entrepreneurial clients, here are some common mistakes to avoid.

Failing to incorporate early
Incorporating your business creates a separate legal entity for the purposes of operating your business. Failure to incorporate means you’ll likely operate your business as a sole proprietorship or a partnership. Sole proprietorships and partnerships aren’t separate legal entities, which means there’s no distinction between the business and personal assets. That means your business’s creditors could look to your personal assets to satisfy your business debts.

By choosing a corporate structure early, you’re putting the mechanisms in place to allow your businesses to grow effectively while keeping your personal assets out of reach. However, signing contracts personally, and personally guaranteeing business loans, will also put your own savings and assets at risk. Avoid doing so if possible.

Once you’ve decided to incorporate, draft your incorporating documents carefully to allow your business to grow, secure future funding, and take advantage of future business opportunities.

Not controlling your intellectual property
Most businesses have some form of intellectual property, or IP, to protect, including business or product names, product designs, manufacturing processes, coding—even recipes.

A company’s IP can be its most valuable asset. If you have your own IP, make sure you own and protect it. It’s important to note that simply paying for the creation of IP doesn’t mean you have sole rights to it.

You must properly document the relationship and the creation of the IP in order to properly own it, including with your employees and consultants. If you’re licensing IP, you must ensure your license agreement is favourable and allows you to do what you want to do with the IP. If you’re granting a license in your IP, ensure that you don’t inadvertently grant the licensee of your IP any more rights than necessary.

Failing to put agreements in writing
Properly documenting agreements is the key to settling disputes effectively and avoiding litigation. At the time of formation, formal agreements may seem unnecessary, but relationships and situations can change quickly and formal agreements can protect your interests; a well-drafted agreement will not only reflect the business points of particular transactions but also provide a framework of how to deal with issues in the future that might not have been top of mind when negotiating the transaction. Key agreements that should be properly documented for all entrepreneurs include shareholders and employment agreements, and service and supply contracts.

Failing to get your own representation
Many transactions happen quickly, especially financing. Investors want their ownership stake secured and documented as fast as possible. It’s easy to get caught up in the excitement and fail to consult your legal counsel, opting to either use the investors’ counsel or go without. Entrepreneurs must understand that counsel for an opposing party has a duty to protect their client’s interests when negotiating an agreement; therefore, you should retain independent counsel.

Soliciting investment from the wrong sources
Canadian securities laws require that all companies issuing securities to investors do so via a registered dealer and file prospectus documents as well as continuous disclosure documentation with the regulator, all of which is an expensive and time-consuming undertaking. However, in certain circumstances, the securities regulations provide for exemptions to the general requirements in order to allow companies to raise capital in a more streamlined and simple manner. Proper advice from a corporate or securities lawyer will help a company structure its capital-raising efforts in order to ensure that they’re done as efficiently as possible without violating securities regulations.

Hiring the wrong employees
The search for employees can be expensive, and leaving key positions within a company vacant for a long period of time can be damaging to your operation. All entrepreneurs should conduct their own due diligence on potential employees by calling references and doing background checks.

When hiring, entrepreneurs must also be mindful of pre-existing employment agreements that prospective employees may be subject to, including certain non-competition provisions. Entrepreneurs should be careful not to oversell the company’s current operations to a potential employee lest they become disappointed when they realize they’re joining a start-up. It’s also important to consider how hiring will appear to potential investors. As an entrepreneur, you want to make your company as attractive as possible to future investors, and hiring the right employees can help you achieve that goal.

Failing to properly plan for taxes
Since many entrepreneurs have been company employees for their entire careers, they may not understand how to structure a company in a tax-efficient manner and may fail to properly take into account the taxes they’ll have to remit at the end of their fiscal year after they have incorporated. It’s important to discuss these matters with legal and tax advisers when starting a company. Entrepreneurs should also consult legal and tax advisors to ensure that they’re withdrawing money from their company in the most tax-efficient way possible.  

Rob Cowan is a Lawyer with McInnes Cooper’s entrepreneurial services team, who advise start-ups, entrepreneurs and mature businesses on business and corporate finance matters. This is the first article in an ongoing series authored by McInnes Cooper corporate specialists. This column is prepared for information only and is not intended to be either a complete description of any issue or the opinion of our firm. McInnes Cooper should be consulted regarding any situation to which any topic discussed herein might apply.