Canada: Top 10 Legal Tips For Start-Ups – PART 2 OF 3

Starting Up?

A few weeks ago, we posted the first of a three-part series about what one should consider when starting a new business. There are many big things to consider and business lawyers Emily Savage and Yvan Guy Larocque are ready to give you more need-to-know legal tips.

4. Protect Your IP

Intellectual property ("IP") is an area where there is always a lot of confusion (even for lawyers). Establishing ownership of your IP early can help prevent other persons or companies from "borrowing" or asserting a claim over your business' inventions, designs, or technology. Now these issues don't often come from the outside world, but from insiders. When you incorporate your business (discussed in more detail in Part 1), it's important that the persons working on the business and, in turn, its IP (including contractors, employees and advisors) assign ownership of the IP to the company. Otherwise, there could be issues later, especially if there is a falling out among the founders, or the IP proves to be valuable. The easiest way to do this is to include IP assignment provisions in employment and consulting agreements.

Another area of confusion that we often encounter from our start-up clients is around business names and IP. When you incorporate a company, you'll be asked to reserve a company name (which must include a unique name, a descriptive element such as "Technology", "Consulting", "Astronomers", or something of the like, and a magic legal word such as "Ltd.", "Inc.", "Corp."), unless of course you decide to use a numbered company but what's the fun in that? If your name is approved, no other corporation in the jurisdiction in which you incorporated will be able to incorporate a company with that name (or a similar name in the same industry). Your name is now protected, right? Not so fast! A business name registration is not a trademark! There is nothing stopping another person from using your name or filing a trademark application for it. This is why it is important to consider registering your business trademarks (your company name and logos) as soon as your business gains some traction. Your brand can be one of your best IP assets so don't let it go unprotected!

There are other kinds of IP that you can protect, including patentable works, copyrights, and industrial designs. We're going to touch on them a bit but IP lawyers live and breathe this stuff and can help you navigate the complexities of these areas of law.

Patents

Patents protect new inventions and give you exclusive rights to produce and licence these inventions. Unfortunately, they can be incredibly expensive to obtain, and once again, expensive to enforce. You also need to apply for these bad boys before you disclose your invention (read: apply to patent your product before you start to sell it) and many companies get caught here. Luckily there is a one-year grace period in Canada.

Copyrights

Copyrights arise at common law when a work is created and there's no requirement to file an application to ensure that your works are protected. You can still file copyrights with the Canadian Intellectual Property Office ("CIPO") for additional protection and assurances.

Industrial Designs

Industrial designs are new distinctive-looking product designs (similar to patents in that they provide exclusive rights to produce or licence the designs) and can be can be registered with CIPO as well. Industrial designs can be difficult to enforce given the subjective nature of design. For example, the industrial design issues between Apple and Samsung have been playing out in American courts (which recently settled after seven years of legal battles). If you're interested in design and law, this light legal reading is for you!

TIP: Ensure that any IP developed prior to incorporation is transferred to the company and ensure that agreements with employees and contractors transfer all IP rights they may have in work product developed for the company to the company. Seek out advice regarding registering trademarks and copyrights, and applying for patents and industrial designs (if applicable), and consider whether it's worth pursuing these protections.

5. Understand the Difference between Employees and Contractors

Many start-ups rely on consultants or independent contractors early on. While this may be a good way to save money before bringing on employees (and having to contribute the employer's share of statutory deductions and remittances), you should make sure that you don't treat employees as contractors. If we each had a nickel for every time we've heard an entrepreneur say, "We don't have employees, we only have contractors," we'd be rich (narrator: they had employees, they just didn't know it). Treating employees as contractors can mean that you are violation of the Employment Standards Act and can result in serious penalties against the employer for unpaid income taxes and other statutory deductions and remittances, plus interest (including the amounts that should have been paid by the employee – ouch!).

The CRA provides the following elements as a non-exhaustive guide to help determine whether someone is an employee or contractor:

  • Control – The level of control the company has over the worker's activities (more control the company exerts over the work, the more likely it is that the worker is an employee);
  • Tools + Equipment – Whether or not the worker provides their own tools and equipment (if the worker uses their own tools, like a laptop, and workspace, the more likely that they are a contractor);
  • Ability to Sub-Contract – Whether the worker is free to sub-contract the work or hire assistants (are they running a business, or performing the work typically done by an employee?);
  • Financial Risk – The degree of financial risk taken by the worker (if they are taking risks based on the success of the project, the more likely they will be a contractor);
  • Responsibility – The degree of responsibility for investment and management held by the worker (the more management-like tasks the worker performs, the more likely the worker could be a contractor);
  • Opportunity for Profit – The worker's opportunity for profit (if they are paid based on the success of the project, the more likely they are a contractor); and
  • Additional Factors – Any other relevant factors, including written contracts.

TIP: Carefully consider whether an individual doing work for your company is an employee or contractor. Seek advice from an employment lawyer, like Ryley Mennie, if you're unsure. Invest in agreements for employees and contractors and understand your obligations as an employer (including pay, overtime, statutory deductions and remittances, termination and notice/severance, workers' compensation registration and fees, safety, and statutory policy and training requirements). Avoid treating employees as contractors. Remember, although you may call a worker a contractor, the CRA may disagree ("if it looks like a duck...").

6. Don't Use Contracts You Find on the Internet!

Pulling an agreement from the internet simply isn't a good idea. You don't know who drafted it, whether it was drafted in a different jurisdiction (laws differ across provinces) or whether it contains laws that are out of date (the law changes all the time). To that end, every business and situation is unique, and you may run the risk of adopting an agreement that has been drafted (and negotiated) under different circumstances – potentially missing important considerations that may apply to you. Unless you have reliable business experience or you're a lawyer, you may not know what you're missing and you could put your business at a disadvantage with an internet contract. We have experienced the aftermath of situations in which two parties enter into an agreement that doesn't adequately protect (or even consider) the parties' rights. This can lead to confusion, disagreement and soured relationships, as well as costly litigation.

Think of it this way: Have you ever bought clothes on the internet, say from an unknown seller, perhaps in a far-away land, and when that great outfit arrives in the mail, it just doesn't fit, or it doesn't look anything like the photos on the site, or it's actually just a picture of the items you wanted to buy? Yeah, that's basically what you risk in using a search engine as your legal team. The best approach is to work with a lawyer who understands your needs. If your lawyer doesn't do that, find a better one. Good law firms and lawyers (there are lots of us out there) can help you to prepare agreements that fit your business needs and protects your specific interests, while also managing risks and budget constraints.

TIP: Use the internet to learn and to help you understand some of the risks you're facing (you're already on the right track if you're reading this blog), but don't assume that reading a few blog posts (even awesome ones like ours) will prepare you to be your own legal counsel. Get help when you need it! Be upfront with your potential legal team and explain your concerns and budget to them. The right lawyers will help you navigate legal risks and provide you effective solutions, without breaking the bank. Legal advice is similar to an insurance policy, no one really thinks they need it until they get into some trouble and by that time it's too late (and far more expensive to fix). Don't let a seemingly cheap and easy fix like using an internet contract put your whole business at risk.

Want more?

Click here to read Part 1 of this series and don't forget to check back here for Part 3.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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