Labour of love…and law
February 5, 2016
By Shane Murphy
Opening a bakery is an exciting time, but neglecting to care for the inevitable legalities can turn your new venture into a legal adventure best avoided.
When entrepreneurs embark on a new venture, legal issues are rarely top of mind. Business plans, bank loans, and logos all take precedence over regulations, licences, and liabilities. Caught up in the excitement of opening a new bakery, bakers are as guilty as any entrepreneurs of neglecting legal details until the last possible minute.
Like so many things in life, it’s best to address legal issues before they turn into problems. But the legal industry doesn’t make this easy: lawyers can be expensive and hard to find, which leaves less incentive to hire a lawyer until you urgently need one.
Garner Beggs, co-owner of Duchess Bake Shop in Edmonton, is familiar with both the excitement of opening a bakery and the challenges in finding good legal assistance at an early stage. “When we first opened, we wanted to do everything for ourselves,” Beggs explains. “We thought that only large businesses really needed a lawyer.” While Beggs is now happy with the way things have worked out with Duchess, he says, “If we initially had access to reliable legal services, we would have saved a significant amount of money and been better suited to deal with the success that we’ve enjoyed.”
Here are some legal tips to help you open a new bakery (along with some reminders for those who have.)
Just because you’re starting small doesn’t mean you can’t benefit from incorporating. Family bakeries and small shops sometimes wait for increased revenue before taking steps to incorporate. This is a mistake. Usually, it’s better to incorporate earlier than later, even if you haven’t opened your doors to customers yet.
Incorporation limits your personal liability. No one opens a bakery because it’s a guaranteed success. Baking is a labour of love, but as a business it involves a great deal of risk, which incorporating will help you limit.
Incorporation reduces your tax burden. When operating on thin margins, the difference between paying corporate and personal taxes can make a massive difference. The cost of incorporating is modest compared to these benefits. Several online services are available to help you incorporate. For additional fees, a lawyer will ensure that the incorporation documents are set up properly to maximize the benefits.
Shareholder agreements Incorporating a company is a bit like a marriage, and a shareholder agreement the prenuptial agreement. It’s not a romantic document, but it’s a necessity when things go bad. It’s best for shareholders to agree on their long-term goals when they’re just starting out.
The specific contents of a shareholder agreement in the bakery industry will depend on the partners in the business, their goals, their concerns, and their relationship to each other. Here are some of the most important items to include:
- Who are the decision makers? Some shareholders want to be involved in every decision. Others only want to be involved in major decisions, and some don’t want any decision-making power at all. A shareholder agreement will set out a clear decision-making procedure.
- How will disputes be resolved? Recognizing that disputes are inevitable, a shareholder agreement will include a procedure for resolution. Commonly, some form of private mediation that will not affect the value or reputation of the business will resolve major disputes.
- How can shareholders sell their shares? Whether it’s due to a dispute, retirement, or new opportunities, there will come a time when one shareholder wants to leave the company before the other partners are ready to take that step. A shareholder agreement will often give other shareholders the first opportunity to buy those shares instead of allowing someone else to join the company.
When opening a bakery, there is no single financial commitment as large or complex as entering into a multi-year commercial lease. Not only is a lease a long-term commitment, it is often guaranteed by personal assets. When presented with a lease, the first thing to remember is that this document is routinely negotiated before either party signs. If a landlord claims the lease is a “take it or leave it” offer, you are almost certainly better off by leaving it.
Some common points to negotiate before signing off on a lease include the following:
- Personal guarantees: Try to limit them for a short period of time.
- Your neighbours: If you’re located in a strip mall or shopping centre, make sure no other bakeries can move into the same complex.
- Termination provisions: If the landlord fails to hold up its responsibilities (for repairs, etc.), ensure that you have the right to terminate the lease.
There is no way to easily anticipate all legal issues that a bakery will encounter. But there are a few legal issues that will almost certainly arise within the first few years.
Shane Murphy is a Toronto-based lawyer and a founder of Law Scout (www.lawscout.ca), an online platform that helps small businesses and entrepreneurs connect with lawyers for upfront, fixed fees. Through Law Scout, Shane specializes in helping early-stage businesses get quality legal advice.
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