Starting, running and growing a small business involves a lot of “bootstrapping”: digging into your own resources, financial and otherwise, to get things done. But there are legal matters many entrepreneurs either make poor decisions about or avoid altogether.
“If I had one thing that surprises me, it is the avoidance of insurance,” says Valentine Lovekin, a Toronto-based lawyer serving small and medium-sized businesses. “Many people tell me they can’t afford insurance coverage, but if you can’t afford insurance you can’t afford to be in business.”
The right insurance coverage is actually a prudent investment should you need to make a claim. The most commonly avoided insurance?
- Auto: any business use of a vehicle should be carefully scrutinized against the insurance rules in your jurisdiction. Auto insurance is provincially regulated, and as such, exactly how your premiums and policy are affected by how you use your vehicle will differ depending where you live
- Tools: it’s common for tradesmen to accumulate tens of thousands of dollars’ worth of expensive tools. If they aren’t properly insured, the investment isn’t protected. One simple act of theft can put an end to the business.
- Health and ‘key man’ insurance: these policies help protect the business and any partners in the event that key personnel become ill or pass away.
Power of attorney
Power of attorney is not just for the mentally infirm. A general power of attorney (POA) can give your lawyer, for example, authority to manage all or part of your property and finances as long as you are mentally capable of managing your affairs. The general POA terminates if you do become mentally incapacitated. The advantage of this type of arrangement would be realized in the case of a business owner engaged in frequent travel: no need to fly back home to sign important documents before a deadline: your lawyer can do it for you under a general POA.
Partnerships of one form or another are common, including spouses who decide to go into business together. Lovekin’s experience tells him that many consider partnership and shareholder agreements to be a luxury: great if you can afford it, but otherwise an unnecessary expense.
“Without partnership agreements there are often arguments as to how to wind up the business,” Lovekin reveals, “which leads to litigation, especially around how to deal with liabilities that accrued while they were in operation.”
Even in today’s online world, many businesses still require physical space: office space, retail space, storefront or otherwise. If you do not have a lawyer in your back-pocket when you are ready to sign that lease, you may be making one of your most expensive mistakes.
“I understand money may be tight,” Lovekin empathizes. “But for the sake of discussion, let’s say you’re looking at a lease that’s $2,000 a month. Over five years that’s $120,000. Without that up-front legal review of your lease you may not be making a good decision. I have a client who consulted me after having to replace several thousand dollars’ worth of signage because the municipality hadn’t been consulted and didn’t approve.”
Signage clauses are often problem areas, in Lovekin’s experience. Landlords and tenants often disagree about what constitutes ‘appropriate’ signage, and a lawyer-reviewed document before you sign could save bundles down the road.
What about those free templates?
Using free online templates, writing DIY agreements, or skimping on insurance policies may save you a few dollars at the front end. But it could end up costing you dearly when you need help the most.
“It’s like buying a lottery ticket! You just don’t know what you are getting,” cautions Lovekin. “Every business has specific elements and different legal requirements, and template legal documents simply can’t protect you and your business in the event you need to assert your rights in court.”
Being an entrepreneur is all about being innovative and taking risks with an eye on upside market success. Cutting corners on insurance and legal agreements is a risk that could undermine all that potential success in the time it takes to call your lawyer.
Between them, Boni and John Wagner-Stafford have five decades of experience as entrepreneurs and/or providing consulting services to other small businesses across Canada.
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