Terrance S. Carter, B.A., LL.B.
September 1999
1. Creating And Retaining Business Assets Requires Legal As Well As Business And Tax Planning
protecting assets that are acquired is as important as creating equity to acquire those assets
protection of assets requires an awareness of exposure to legal risks and developing a strategic plan
to avoid to those risks
2. Waiting To React To Legal Risks Is Poor Planning
normally to late
expensive in legal costs to fix after the fact
puts the business on the defensive
3. Need To Become Pro-Active To Avoid Legal Risks
reduces liability exposure
less expensive in legal costs
leaves business in control
4. Developing A Strategic Legal Risk Management Plan
identify business goals
short term and long term goals
local/national/international goals
identify legal risks
legal risks from customers
legal risks from creditors
legal risks from employees
legal risks from third parties
obtain assistance from legal counsel and accountant to reduce risks
consistently implement recommendations to reduce legal risks
monitor and modify recommendations on a regular basis
1. Sole Proprietorship Results In Personal Exposure To Liability
the individual owner and the business are one and the same
no limited liability protection
assets of the sole proprietor are at risk
ongoing long term exposure to risk
2. Partnership Results In Double Exposure To Liability
each partner is jointly and severely liable for debts of the business
each partner is jointly and severely liable for business debts incurred by the other partner
3. Using A Corporation Reduces Liability Exposure
a corporation provides limited liability for shareholders
a corporation allows spouse and family members to be co-owners without liability exposure
4. Proper Use Of A Corporation For A Business Is Essential
must use the corporate name or possibly loss limited liability protection
contracts must be signed using full corporate name
minute book must be kept up to date
roll-over of assets to the corporation must be completed
an operating division of the corporation must correctly use corporate name
register business name under the Business Name Act
show operating name in conjunction with the corporate name
5. Avoid Personal Guarantees Where Possible
avoid personal guarantee with banks
see if corporate assets are sufficient to satisfy the bank
if not, obtain commitment from the bank under what financial circumstances personal
guarantee can be released
avoid personal guarantee on equipment leases
avoid personal guarantee with supplier
1. Identify Personal v. Business Assets
2. Business Owners/Operator Will Be Exposed To Liability Even If Incorporated
3. Reduce The Personal Assets Owned By The Business Owner/Operator
4. Use Spouse As A "Safe Haven" For Family Assets
transfer home to spouse
transfer cottage/recreational property to spouse
transfer investments to spouse
transfers must be done in advance of financial crisis to avoid allegations of fraudulent conveyancing
5. Avoid Exposure Of Liability For Spouse
avoid personal guarantees with banks, suppliers, and leases
avoid spouse being a director or officers of the corporation
avoid statutory liabilities
avoid liability of inducing breach of contract
avoid liability for allegations of negligent misrepresentation
avoid liability for allegations of negligent mismanagement
avoid liability for allegations of breach of trust
1. Separately Incorporate Operating Divisions
contains liability of the operating division within a corporate shell
protects the assets of the main operating company
2. Set Up A Separate Leasing Corporation For Equipment
equipment assets are held in a separate corporation
equipment is leased to a operating company
insurance needs to show both companies as co-insured
3. Consider Utilizing A Holding Corporation
extracts retained earnings out of the operating company
reduces assets exposed to business liability
permits retained earnings to be held at low corporate tax rate
1. From The Context Of Securing An Investment, It Is Better To Invest In A Business Through Debt Rather
Than Equity
2. Equity Characteristics:
equity is investment by contributions to the net worth of the business
business is not obligated to repay equity contribution
equity contribution is only recovered when all debt is repaid
if insufficient assets in the business then equity is lost
3. Debt Characteristics:
debt is the investment by loans to a business
business is obligated to repay loans before equity
investor is entitled to recover loans from assets of business
if insufficient assets then assets will be shared amongst investors
need two legal entities to create a debt
4. A Corporation Is Usually Required To Create A Debtor/Creditor Relationship
corporation is the debtor
shareholder or his or her investment company is the creditor
5. When Can A Debt Relationship Be Established
when monies are needed to start a business
when monies are needed for ongoing business operations
when assets are transferred to the corporation from the owner
when financing is arranged by owner personally the required borrowing monies
when financing is arranged by owner mortgaging his or her residence
when owner loans profits back to the business
6. Why Securing Debt Is Important
without security in place an investor is only an unsecured creditor
an unsecured creditor will not have any specific assets to seize
an unsecured creditor will only share in the remaining assets with other creditors
with a secured loan the investor will have specific assets that can be seized
by registering the security there will be written evidence of debt
7. How To Secure A Debt Investment
general security agreement
it is a chattel mortgage against the movables of the company
registered under the P.P.S.A.
subject to prior registrations
must renew registration
better to go with 15 year term
real property mortgage
it is a mortgage against the lands and buildings of the company
registered on title
subject to existing mortgages
does not require renewal of registration
1. Maintain Historical Record of Insurance Coverage
type of insurance coverage, i.e., occurrence basis v. claims made
need for historical records of insurance policy occurs where policy is on occurrence basis
maintain historical list of insurance companies
maintain historical list of names of insurance brokers
2. Annual Report On Existing Coverage And Recommendations From Insurance Broker
insurance broker as professional advisor
need to obtain and carefully review annual report from insurance broker to determine coverage
provided, coverage excluded and recommendations for additional coverage
3. Review And Upgrade Property Insurance
Does policy cover protection for replacement cost?
Is the amount of property coverage adequate?
review and upgrade policy endorsements as necessary
review and eliminate exclusions in policy as necessary or as possible
4. Review And Enhance General Liability Coverage
Is the amount of general liability coverage adequate to cover future claims?
need to provide written disclosure of all changes in material risks to insurance broker annually
liability insurance provides coverage for negligent actions but does not generally provide coverage for:
intentional acts
criminal acts
fines and penalties
punitive and exemplary damages
wrongful acts of directors and officer, i.e., discriminatory practices and breach of fiduciary duty
pollution and contamination
contract liability
possible problems in general liability policy
sexual abuse or harassment exclusion
molestation of children exclusion
mental anguish and distress exclusion
directors
officers
spouses
employees
limitations on geographic area covered
non-owned automobile liability rider
professional liability coverage for specialized services
Are legal defense costs a part of or in addition to coverage limit?
5. Securing Directors And Officers Liability Coverage
Is Director and Officer coverage for wrongful acts a justifiable expenditure of charitable monies?
Is amount of Director and Officer coverage adequate?
general exclusions in coverage for:
criminal acts
fines and penalties
libel and slander
wrongful dismissal
personal injury including mental anguish and distress
pollution and contamination
Is coverage for Directors and Officers or for corporate indemnification?
What geographic area is covered and can it be extended?
Are legal defense costs a part of or in addition to the coverage limit?
possibly use separate insurance company depending upon financial capability
possibly obtain Director and Officer endorsement on homeowner coverage
1. Business Contracts Need To Include
correct corporate name
proper description of services and exclusions of services
limitations on warranties
obtain releases as necessary
obtain indemnification as necessary
2. Shareholders Agreements Need To Include
terms of operating the business
minority shareholders veto powers, if any
buy-sell mechanism
mandatory buy-out on death
mandatory buy-out on bankruptcy at a pre-determined price
3. Leasing As Landlord Requires
personal guarantees of tenant
obtain warranty and indemnity on environmental contamination
obtain adequate insurance with coverage for sexual abuse if appropriate
include a prohibition on registration of lease on title
4. Leasing As A Tenant Requires
avoiding personal guarantees, if possible
do not sign offer to lease that requires tenant to then execute a Landlord's "standard form" lease
need to limit operating expenses under the definition of "Additional Rent"
need to define "Proportionate Share" of operating expenses
ensure that lease includes reasonable terms on right of renewal
5. Employment Contracts
reduces incidents of wrongful dismissal action
include a non-disclosure provision by employees
include a non-competition provision by employees, if applicable
6. Trade-mark Licence Agreement
controls the use of a business trade-mark
avoids loss of trade-mark rights
7. Patent Issues
invention or new process of doing something need to be patented
public disclosure of invention may eliminate patent rights
DISCLAIMER: This summary of Strategic Legal Risk Management Advice for Business is distributed with the understanding that it does
not constitute legal advice or establishing the solicitor/client relationship by way of any information contained herein. The contents are intended for
general information purposes only and under no circumstances can be relied upon for legal decision making without first consulting with a lawyer and
obtaining a written opinion concerning the specifics of your particular situation.
tsc\legalupd\strategi.hd