Running a successful business is a bit like solving a puzzle, and understanding business law is a big piece of that puzzle. However, there are some myths floating around that can lead entrepreneurs down the wrong path. Let's unravel the truth behind five common business law misconceptions under
MYTH 1: Once a Business Name is Registered, it's Protected Nationwide
Many entrepreneurs believe that once they've registered their business name, no one else in Canada can use it. This is not entirely true. Registering a business name at the provincial level, for instance, in Ontario, only protects the name in that province. To protect a business name nationwide, one needs to opt for federal incorporation or, for maximum protection, register a trademark.
Picture this--Sophia registers her business name "S. Accounting Success Strategies" in Ontario. She later discovers another business with the same name in Alberta. Sophia learns that provincial registration only protects her business name in Ontario. For nationwide protection, she needs to pursue federal incorporation or a trademark.
MYTH 2: Incorporation is the Best Structure for All Businesses
Incorporation can be a great choice with benefits like limited liability and tax perks. But it's not a universal solution for every business. Sometimes, being a sole proprietor or forming a partnership can be more advantageous, especially for small businesses. It's all about your business's specific needs and long-term plans.
Sophia incorporated her business from the get-go. After a year, she notes that her business expenses exceeded your business income by $20,000 during that tax year. Sophia learned that if she had structured her business as a sole proprietorship or partnership, she could have deducted the business loss from her personal income from other sources, potentially saving a significant amount in taxes.
MYTH 3: Incorporation Shields Personal Assets Unconditionally
Incorporation can indeed act as a shield for your personal assets against business debts or liabilities. But remember, this shield isn't invincible. In situations where personal guarantees for business loans are involved or in cases of director's liability, your personal assets might still be vulnerable.
Sophia, for instance, safeguards her $500,000 house by incorporating. Yet, a business loan requires her signature, holding her personally accountable. Defaulting on the loan endangers her home. Why? Because signing a personal guarantee takes personal responsibility for a corporate debt. Default, and creditors chase personal assets.
MYTH 4: Verbal Contracts Aren’t Legally Binding
Contrary to popular belief, in Canada, a handshake or a verbal agreement can be legally binding, provided it has the basic elements of a contract: offer, acceptance, consideration, and the intention to create legal relations. But remember, proving them can be as tricky as nailing jelly to a wall, so written contracts are always recommended.
Imagine Sophia agrees verbally with a venue to host a seminar for $2,000. But the venue double-books and cancels her event. She loses potential earnings of $10,000 from ticket sales. Sophia learns the hard way that while verbal contracts can hold up legally, proving them can be a real challenge.
MYTH 5: Businesses Can't Be Sued Once They've Ceased Operations
It's a common misconception that businesses become bulletproof against lawsuits once they've closed their doors. That's not the case. Under Canadian law, businesses and their directors can still be held liable for issues that cropped up while the business was running. Carefully wrapping up the business, fulfilling obligations, and addressing any potential legal issues before closing can help lessen the risk of post-closure liability.
Sophia decides to close her business and liquidate all assets. She uses the proceeds to pay off creditors and herself. But one creditor sues, claiming Sophia still owes money. Sophia learns that even though her business is no longer operational, she can still be held liable for debts incurred while it was running.
These are just a few of the many myths clouding the understanding of business law in Canada. As an entrepreneur, knowing your legal rights and obligations is as important as knowing your customers. And when in doubt, it's always a good idea to chat with a legal professional to ensure you're making informed decisions for your business.
Maryam is the Founder and Principal Lawyer of Venture House Legal. She understands that legal services are like oxygen for any business. That is why she established Venture House Legal, which offers a range of affordable legal solutions including flat fee services, bundled services, and a fractional lawyer retainer program known as Start to 7. With these services, startups, small businesses and entrepreneurs can receive high-quality legal support without having to sacrifice affordability or quality.
For more information, follow her on Instagram @venturehouselegal or schedule a free discovery call on https://www.venturehouselegal.ca/
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