October 2012
You yearn for your business to survive and thrive. But what if your small business start-up flops, either early or after the business gets big?
There is a way to get limited liability protection So the creditors cannot go after your house, your car, your savings…
Consider Salomon. You might ask, “how can any salmon, no matter how delicious and packed with omega-3 fatty acids, give me limited liability protection?” Even with lemon butter, or teriyaki sauce, or a maple-soy glaze, it seems like too much to ask. Excuse me, I’m getting hungry —
Crouching Cat Starting To Feast
I’m back. Where was I? Oh yes, Salomon, which actually has nothing to do with salmon despite the similar spelling.
In Salomon v. Salomon & Co. Ltd., [1895-9] All E.R. 33, Britain’s House of Lords saw a corporation created for limited liability. One man owned almost all the shares and ran the business. Even so, the corporation counted as a separate legal entity from him. So it, and not the man, was liable for its debts.
This is still good law today. With a few exceptions, like fraud and some torts, the debts are the corporation’s alone.
Limited liability is not a trick — it is why they invented corporations in the first place.
For limited liability you first have to create a corporation. But just incorporating is not enough for solid protection. You should also organize, maintain, and use your corporation.
Organize
Once you have articles of incorporation you should organize. This includes holding a first directors meeting to make by-laws, appoint officers, and so on. You can ask a lawyer to help you take all the steps — not just those I mentioned.
Maintain
Maintenance includes holding annual shareholders’ meetings, keeping the Minute Book up-to-date, registering changes with the government, and other steps. Again, a lawyer can help.
Use
Use the corporation for your business.
Use its exact legal name on documents. Documents like contracts, purchase orders, invoices, business cards, and letters. If you rarely mention your corporation, creditors will argue that you are personally liable.
Exact Legal Name
When I say “exact legal name”, I mean it. Not a similar name, the exact name.
“Joe’s Fish Emporium” is not the same as “Joe’s Fish Emporium Limited”. The first name does not say there is a corporation. So Joe, or whoever runs the business, might be personally liable. The second name says there is a corporation. Probably there is limited liability.
Do not use “Joe’s Fish Emporium Unlimited” because it sounds cooler than “Joe’s Fish Emporium Limited.” The word “Unlimited” implies that there is no limited liability.
“Joe’s Natural Fish Emporium Limited” or “Joe’s Fish Emporium Ltd. Corp.” also create risks if the exact name is “Joe’s Fish Emporium Limited”.
Surprisingly often I have seen people use different names from the exact name. They run a needless risk.
Make sure you know the exact name. The articles of incorporation will not always tell you, because the name could have changed. The safest way is to search with the government.
If you want to use a different name — even a little different — change the name properly and register the change.
Lending
Buying shares is not the only way to put money into your corporation. You can also lend money to it. You can even take security for the loan.
This opens up interesting possibilities. I wrote about some in The Bottom Line, a magazine for accounting and financial professionals. To see the article go to: Can Your Client Be Saved By A Private Receivership?
With wise use of a corporation you should not face financial ruin even if an unexpected disaster swamps your business. You could keep eating, and plan your business comeback.
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P. S. My thanks to Paul Tobey of http://www.trainingbusinesspros.com/, who made a suggestion that improved this post.
I recently spoke to Allan Fok and his colleagues at Century 21 Times Square Realty Inc. Brokerage in Richmond Hill, Ontario, on the topic of Crooked Real Estate Vendor — A Few Ideas For Real Estate Agents. My fellow lawyer Jeff Jiehui Li also spoke, on tax law issues. After the presentations the group went to the Premiere Ballroom & Convention Centre, where we lunched amid the statues and giant paintings.
Here is an outline of the points I covered:
Beware the crooked real estate vendor. Whether you are acting for the vendor or the purchaser, the crooked vendor is a danger.
- The Crooked Real Estate Vendor can make tremendous trouble. You yourself can be a target of fraud. Also, you can be sued for someone else’s fraud. For example:
a) You can be sued for passing on a misrepresentation to the other side – make sure to be clear in writing that you are passing on what the client says, it is not something you are saying;
b) You can be sued by your own client for negligence or breach of contract;
c) If you pay out based on a bad cheque, you or your firm could be out of pocket.
- Real Estate Frauds Are Often Based On:
a) Vendor is not as represented, e.g. identity theft;
b) Vendor AND purchaser are not as represented, e.g. inflating the value, cheque fraud;
c) Property is not as represented.
- Trust But Verify
4. Vendor. Who are you really dealing with?
a) Get photo ID, preferably 2 pieces of government-issued ID, and copy it yourself or have your own staff copy it;
b) Use http://www.canada411.ca for a reverse lookup on any phone number given to you;
c) Search your and your firm’s records for references to the person;
d) Make it plain in writing to both vendor and purchaser which side you act for, and that you do not act for the other side;
e) If any part of the purchase price flows through you, do not be rushed into sending the funds to the vendor before absolutely sure that the cheque is good. Clever fraudsters can make very plausible cheques that can even fool a bank for a while.
- Purchaser
a) If you act for the purchaser follow the same steps as shown above in the “Vendor” area. It would be prudent to check out both the vendor and the purchaser;
b) To protect a purchaser you can also try one or more of
i. Clauses in the Agreement;
ii. Vendor take-back mortgage (better for normal breaches than for fraud);
iii. Personal guarantee (again, better for normal breaches than for fraud);
iv. Searches on anything searchable, such as rent review status;
v. Property inspection; and
vi. Title insurance (making sure to comply with all insurer requirements).
- Property Misrepresentation
a) Legal status of the property, e.g. “legal and unregistered” rents;
b) Physical condition of the property. Get an inspection, and consider seasonal factors;
c) Beware of misrepresentation by silence.
- The Power of the Pen
Documentation is key. “Well I told him that” might sound lame at trial if there is no documentation of it. So:
a) Keep copies of documents;
b) Verify discussions and events by e-mail and keep a copy of the e-mail;
c) As things do not always happen while you are at your computer typing e-mails, take handwritten notes of discussions and other events as they progress, preferably in a hardbound notebook. Do not rip any sheets out of the notebook.
For more detail you can ask me, or have me speak to your group.
On October 15, 2012 I went to Championing Equality — Progress or Peril?, hosted by the Metro Toronto Chinese & Southeast Asian Legal Clinic and the Law Society of Upper Canada. It was held at Osgoode Hall — not the law school but rather the beautiful building at Queen Street West and Nathan Phillips Square in Toronto.
Much of the discussion was as to legal and political steps that have been taken, or should be taken, to help immigrants and racial and ethnic minorities escape poverty. The emphasis was on a reasonable equality of opportunity, not an artificial equality of outcome.
The styles have changed but immigrants
are still coming to North America
The reaction of some people might be, why should taxpayers’ money be used to help immigrants and minorities compete with us? This reminds me of two classic contradictory complaints about immigrants that if combined could read: those leeches won’t work and they’re taking all our jobs.
The discomfort — to the extent it is not simple prejudice — is based on a fallacy sometimes called the Lump of Wealth. That is the idea that there is just so much wealth to go around so if someone gets more then someone else must get less. It is a zero sum concept of economics. As the famous economist Thomas Sowell says, many economic errors are based on zero sum thinking.
What is overlooked is that productive people contribute to our prosperity generally. They produce valuable goods and services and are also themselves buyers — that is, customers for others’ businesses.
As long as immigrants and minorities rise from poverty by competing and producing rather than by a racial or ethnic spoils system, their rise helps not just them but also those of us who are already free of poverty.
Speaking powerfully, whether in a formal public speech, in court, in small groups or even one-to-one, depends on two apparently conflicting attitudes. First, an attitude of confidence. Second, an attitude of wanting to impress the audience; if you do not care, why should they?
The second attitude can easily lead to self-consciousness and nervousness. This makes it hard to have the first attitude and speak with confidence.
How can you care, but not care too much? Is it even possible? I say that even trying to find such a happy medium is the wrong approach.
My daughter Emma is too young to face these problems. Emma has always expressed herself with confidence:
Baby Emma Laying Down the Law
Emma has always been clear and persuasive to get what she wants. Why has she never been self-conscious or nervous in these efforts?
Partly no doubt because she is too young to have learned that there is anything to be self-conscious or nervous about. That does not help us much — as adults we already have our history of being criticized, scolded, or even scorned when we speak.
But there is something else going on that I think can help.
Emma is not thinking about whether the audience likes her, how she is dressed, how good her language is, her gestures, her eye contact, or any of the other usual “speaking skills” issues. She cares only about communicating what she wants and, if that in itself is not enough, why she should get it.
She is content-conscious, not self-conscious.
As adults we can do the same. We should put the mental focus not on what the audience thinks about us but on making sure that we have good content and the audience understands it.
Suppose while speaking you trip on your tongue, drop your papers, or do something else that makes you look less than smooth. If your focus in on yourself you think “oh no, this makes me look bad” and it throws you off. The audience might even realize that you are upset, which is also bad.
But if your focus is on the content, such things are just trivial delays in getting your point across. You say, “what I meant to say is…” or “oops, now as I was saying…” or something similar. You carry on, and the audience will probably agree with you that what just happened is trivial and the important thing is your message.
The content orientation has helped me in court. When preparing for court I think about whether I have the evidence to support the facts my side alleges. I think about whether I have the facts to fit the law I want to use. I think about whether the law, looked at rightly, is helpful given the facts I actually have.
On the other hand I spend little or no time thinking about whether the judge likes me, or whether when I speak I seem smooth. I mainly want the judge to see that I have reasonable content, and if the judge does see that then I am happy.
Of course there is room for speaking skills. It is worthwhile to think about them and to practice them. But when actually presenting they should not be the focus.
Put your focus on the content, and self-consciousness will not drain your speaking power.
Welcome to Albert Frank On Law & Life.
In this blog I plan to talk law, business, strategy, and some philosophy and politics. At some point I might also touch on personal interests and hobbies.
Given that I have been a lawyer for a little over half of my life — from the summer of 1984 — even the non-law topics are likely to be influenced by my legal experience and perspective.
At www.FrankLaw.ca you can find more information about me.
All the best,
Albert S. Frank
Albert S. Frank - Lawyer
Ontario – Alberta – Nunavut
393 University AveSuite 2000
Toronto, ON M5G 1E6
Ph. 416-929-7202
Fax. 647-439-1324
© Albert S. Frank