What is a Joint Venture?

Many folks in business bandy about the words “partnership” and “joint venture”, or even a “JVP” (short for joint venture partnership – a made up term like “Leafs playoff tickets” or “government transparency”), without understanding that partnerships and joint ventures are different legal animals. Though the two have much in common, there are a few important differences that, if not understood from the outset, could affect your work together in strange and not-at-all-wonderful ways. If it walks, talks and acts like a partnership it will likely be treated as one, even if the intention was to create a joint venture. Ergo, it’s important to be clear and precise when creating a co-owned business, in order to avoid unexpected complications with tax, ownership of property, or liability.

What’s the diff?

Partnerships and joint ventures are both agreements to do business together between two or more individuals or corporations, with the goal of making a profit. Both are formed and governed by contract between the parties.

Joint ventures usually are usually used for one-off projects. They’re limited in time and scope – you’re not working together on everything, and they’ll often have an expiry date, which allows parties to renew or eject. They’re particularly useful when you’ll all be putting in different skills and assets, in different quantities. Joint ventures don’t create a separate business entity, and generally are not registered with the government. You work together to the extent that’s agreed to in the contract, and that’s it.

Partnerships, which I talked about in this other article, create an ongoing business relationship through a partnership agreement. Partnerships must be registered as a business entity with the government, and are governed by the rules in the Ontario Partnership Act.

Key terms in the contract

Terms common to both joint ventures and partnerships include:

  • Length of the agreement and conditions for renewal
  • What the business will and will not do
  • What money, assets or skills each party is contributing
  • Share of profits and losses, salaries, and expenses
  • Calculation of profits
  • Duties and responsibilities of each venturer
  • Management structure
  • Indemnity between the venturers
  • Dispute resolution

Terms of a joint venture agreement – or JVA – include:

  • Limits on time or scope of work
  • Termination, including how to divide up assets
  • Ownership of co-created assets and intellectual property
  • Assigning liability for actions of the other venturers
  • Accounting between the venturers, record keeping,
  • Bank accounts, and insurance
  • Division of expenses and revenues

Ownership of property

Ownership of property contributed to a joint venture remains the property of each joint venturer. The party who owns the asset may use it for other purposes without the consent of the joint venture unless it’s otherwise agreed.

Assets contributed to a partnership are considered the property of the partnership and not of the individual partners.

Tax consequences

 Your accountant will care a great deal about this stuff, and the tax consequences of the business structure you choose could be substantial. Make sure to ask before you choose one or the other…

Income Tax

The distribution of profits in both is governed by the agreement. Joint venturers assess their taxes based on their own expenses and share of the revenues from the joint venture. Partners in a partnership are taxed based on the net profits of the partnership. The net profits are distributed to the partners according to their share of the partnership, and taxed at the partners’ normal income tax rate.

The choice between partnership or JV makes a big difference if one party is spending more than the others. In a partnership, a party with higher expenditures would not be able to claim that amount individually.

Capital Cost Allowance

Capital cost allowance is a tax deduction that allows a business to account for the depreciation of capital property. Joint venturers may each claim the capital cost allowance individually to maximize their own tax benefits for the depreciation of the assets they put in to the joint venture. In a partnership, the capital cost allowance claimed must be the same for each partner because only the net profit of the partnership is distributed.

Fiscal Year

Joint venturers report their share of income and losses based on each venturer’s tax year. A partnership will have its own fiscal year end.

Corporate partners in a partnership are required to claim income (but not losses) for the period between the end of the partnership’s tax year and the corporation’s tax year.

Liability

Joint venturers are liable for their own debts and obligations, and can limit their liability based on the joint venture agreement. That way a creditor can’t go after one joint venturer for the debts of the other. The venturers can agree to share responsibility for liabilities taken on in the course of the project, or can split them up however they see fit.

Partners in a partnership, on the other hand, are “jointly and severally liable” for the debts, obligations and misconduct of the partnership and the other partners. “Joint and several liability” is a legal term meaning a creditor can go after the other partners to settle one partner’s debt. The liability can be limited by creating a “Limited Partnership” where a “general partner” takes the excess of any liability that the other partners can’t cover. Each other partner is only on the hook for their own debts or misconduct up to a fixed amount. I’ll get into Limited Partnerships in a different article later.

Both joint ventures and partnerships can agree to assume only their own liability, but there is more risk involved in a partnership if the at-fault partner cannot cover the loss.

Summary

Where two or more parties want to join forces together for a one-off project rather than becoming co-owners of a business, a joint venture is typically the way to go. Whichever business structure is chosen, the choice should be clearly set out in the agreement between all parties involved. Though joint ventures and partnerships may have many characteristics in common, the legal differences between the two warrant taking the time to talk to a lawyer and figure out which structure is right for the business at hand.

I’m indebted to my awesome law student intern, Claudia Dzierbicki, for her work in putting together the guts of this article.

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Lawyer Stuff 101 – Contract Negotiations

It’s one thing to have professional advisors – lawyers, accountants, etc. – to point you in the right direction. It’s a whole other thing to know how to use them properly. I’ve found it’s a pretty steep learning curve for most entrepreneurs to figure out how to receive advice from, and give instructions to their lawyer. So, this is the first in a new feature I’m calling “Lawyer Stuff 101” – what a lawyer can do for you in different situations, and how the process should work.

I’ve been harping a lot on contracts lately – generally, and for record labels – since it’s a big part of my practice, so the process of birthing a contract seems a logical place to start. Signing a contract without a lawyer is like doing your taxes without a calculator – just because you can do it doesn’t mean that you should. Get your lawyer involved early in the process, as our kind know more about the points that should be covered in different kinds of deals. It’s easier to ask for something from the start than to go back to the drawing board when you realize that your deal has gaping holes in it.

Lawyers do three main things with contracts – writing them (drafting), reviewing them, and help in negotiating them. I’ll touch on each in turn.

Writing Contracts

Usually the party that’s offering the goods or services is the one who draws up the contract. The way your company does business will dictate a lot of the terms of the contract – how goods are ordered, packaged, shipped, and paid for, for instance – so it makes sense that you’d spell that out for the other party first.

It may seem odd, but it’s usually cheaper to get your lawyer to write a whole contract for you than to go through and tweak something you’ve written yourself. In order to “tweak” your contract, the lawyer’s got to review it first (see reviewing, below), and then rework it to say what you want it to say.

I usually send my clients a list of the things that they should consider for the type of contract they’re writing up, and ask them for a list of the things that they want in it. This often involves talking to the other party and figuring out the who, what, when, why, where, and how of the deal. Once that’s done, I’ll put together a first draft of the contract and send it to the client to review it.

Once you’ve read the draft, there’s usually a phone call or an in-person meeting to go through it, clause-by-clause, to make sure it says what you want it to say. Sometimes just talking through an issue raises other points that need to be added or changed in the contract. I make the changes and send an updated draft. It may take some back & forth to get it just right.

Once you’ve got a contract, it goes to the other side. Depending on what the contract’s about, there may be some negotiation involved before you can put pen to paper. The end goal is for you to have a contract that everyone understands, and says what it’s supposed to.

Reviewing Contracts

Any time you’re presented with a contract, it’s important that you understand what it says before you sign it. Contracts are binding legal agreements, and there can be major consequences – like lawsuits – for breaking them.

It’s up to you, the client, how thorough of a review you want. The thoroughness of review depends on a bunch of things – your budget, and the size of the deal tend to be the biggest factors. A review and legal opinion will be more expensive and more thorough than a general overview and flagging of key issues. The bigger the commitments being made, the more important the deal, or the more money involved, the more important it is to get it right.

When my clients send me a contract for review, I’ll ask them to tell me in their own words the deal that they think they’ve made – so I know whether or not the contract actually says that. For a thorough review, my work starts with a quick read-through, to get familiar with the structure of the contract, and its general terms. I may ask a few follow-up questions at this point, or for copies of other agreements or documents that are referred to in the contract.

The next step is a thorough read-through – word by word, clause by clause – to understand the finer points of the deal. I’m looking to make sure that the contract doesn’t contradict itself (consistency), that it ties in with other documents or agreements, that it’s fair and matches the deal you think you’ve made, that there’s nothing illegal, and that there are no significant or unusual risks (liability) that you’re taking on.

The last step is to give a written legal opinion on the contract. In the opinion I’ll explain how the deal works as written, and point out differences from the deal you thought you’ve made. I’ll flag unusual or particularly risky clauses, inconsistencies, and illegal clauses. The amount of detail in the opinion depends on the thoroughness of review you’ve asked for. Once I’ve sent you the opinion, and you’ve had a chance to read it through (a couple of times, at least), we’ll set up a call or a meeting to discuss it, which often leads to….

Negotiation

Most business contracts have room for negotiation, as both sides want a fair deal that will grow their business. The negotiation process is where you try to add as many of the things that you want to make the deal better for you, and to get rid of the things that expose you to unnecessary risk. That said, risk is inherent in business, and usually each side will take a share of it. How much risk you’re willing to accept is up to you. My job is to let you know that it’s there, and recommend a course of action – but it’s up to you to make the decision. Once you know the risk’s there, you can take steps to minimize its potential impact.

The first step of contract negotiation, which is usually tied in with the discussion of my legal opinion, is figuring out what you want. What are your must-haves, nice-to-haves, and things you don’t care about one way or the other? Then we try to figure out what the other side wants and why they want it, and brainstorm ways to work through potentially sticky negotiating points.

I usually recommend that the business people talk directly, before getting the lawyers involved in negotiations. It could be a quick phone call or email to discuss the main points, and get an agreement in principle on the proposed changes. This “meeting of the minds” between the business decision makers helps to keep the lawyers on track when sussing out the details.

Whoever is proposing changes will then have their lawyer make the changes they want to the contract, and send you back a clean copy and a “black line” version with the changes highlighted. The other lawyer will review those, advise on any variation from the agreement you made with the other party, and any new risks. The contract may get bounced back and forth like this a few times to hammer out the finer points, and the lawyers may need a phone call or two to finish it off. Any changes from the deal you’ve instructed me to get will have to be approved by you.

Conclusion

Putting together contracts can be a drawn out process, especially for complicated business deals. Most lawyers will use some variation of the above process. Start planning well in advance, and get your lawyer involved at an early stage. When it’s all said and done, you’ve got a contract that you can live with, and rely on in case it goes south.

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Record Label Contracts

Few artists would want to be considered to be “in business” for doing what they do, but like it or not, as soon as you get paid for it, you’re a sole proprietor. For artist-entrepreneurs, the art lies in the creative process – those endless hours working your fingers to the bone, trying to get that sound out of your head, and into others’ ears. Everything else is business. For a record label, owning the rights to do what you need to make your business viable is the key… and ambiguous contracts will come back to bite you in the long run. In this post, I’m going to talk about one of the first high-stakes legal issues a label and recording artist will face – the record label contract.

Contracts, generally:

A contract is a binding agreement where two parties exchange something of value, called “consideration”. The artist gives up certain rights to their creations, while the label helps you get it to market, and hopefully you both make money. Contracts are rarely an issue when everything goes according to plan… but if things go sour, you can bet your bottom dollar (or, pay it to a litigation lawyer…) that the label will use the contract to get as much for itself as it can. So, it is soooooo frickin’ important to understand what you’re signing, and agree to all of it before you sign it.

Contracts are a two-way street – a business relationship that relies on trust, and common interests to succeed. Therefore, there’s almost always room to negotiate – to remove things that you don’t like, and add in things that you want. You may be really good with keys and chords, but not so slick with the legalese – so it’s a smart idea to get a lawyer to help you interpret and negotiate the contract. The best time to look for a lawyer is at the start of your career, before you go too far down the road on the business side of the game. A little money spent at the outset can save you a ton of heartache, expense, and lost income down the road.

More on contracts in this other blog post…

Record label contracts

Every record label contract is different. Major labels may use a 50-100 page document, while indie labels might be as short as 5 pages. The gist of them is the same – the artist sells rights to exploit their songs for profit to the label, in exchange for a cut of the profits. In return, the label puts its money and influence into recording and promoting the album. Record label contracts typically include:

  • Term & territory
  • Rights & exclusivity
  • Money – royalties & recoupment
  • Cross-collateralization
  • Creative control
  • Rights
  • Release commitment

I’ll explain each of these in turn.

Term

The duration of the contract. It’s usually a fixed term (perhaps one year), during which time the artist must produce a certain number of tracks or albums to a reasonable standard.

Multi-album, multi-year deals are usually not set in stone. Typically the contract will cover the first year and first album, and give the label the option to extend it for successive terms. If the first album does well, the label will likely use its option to extend for another. If it tanks, the label probably won’t extend, and may drop you. Most labels won’t make a firm commitment to release anything beyond the first album.

It’s a good idea to set a “long stop” – or a maximum number of years the contract can run for. This gives a successful artist (as labels will likely only keep successful acts) a chance to negotiate a better deal down the road. Six or seven years is advisable.

Even after the term of the contract ends, the record company must continue to pay royalties for the artist’s work it sells.

Territory

This is the geographic area that the label has the right to exploit the work for profit. Most deals these days are “worldwide” or “universal” thanks to the internet. Smaller labels may buy only North American rights, or for certain countries.

Just because the label has rights worldwide doesn’t mean it has to release the work worldwide. Think practically about the reach of the label, and whether or not it can actually push the work in the whole territory. If not, it may be worth carving some areas out of the territory in favour of a local label or distributor, or having the label give up its rights where, after a period of time, it doesn’t release the work.

Rights & Exclusivity

Rights are what the artist sells – or rents – to the label. These may include:

  • Assignment of copyright
  • Ownership of masters and unreleased tracks/versions
  • Use of name and likeness; merchandise
  • Mechanical rights – who owns the underlying work?
  • Profits from off-stage sales

An exclusive right to the work means the label may exploit any recorded performances during the term of the contract – albums, concert videos, live recordings, etc. The artist (or any member of the group) may not record any material for another record company.

Some acts may sign under a specific stage name, which could leave them free to contract with other labels under a different pseudonym.

If the artist wants to do outside projects, such as making guest appearances with another act, a “sideman” provision should be negotiated.

Show me the money!

For the artist, the financial terms of the contract are some of the most important. They can get pretty complicated, so this is where your lawyer and accountant earn their keep. 80% of acts never sell enough albums to see a cent of artist royalty payments, so understanding the math how much will need to be sold for the artist to earn a profit is ever so important.

At its simplest, the math is:

(Artist Royalties) – (Recoupment) + (Mechanical Royalties)

Royalties

Royalties are the act’s cut of the profits. There are two types:

  • Artist Royalties – money paid to the act for its recorded performances – usually defined as a percentage of the sales price (typically between 9-18% of retail)
  • Mechanical Royalties – paid to the publishers/songwriters for the underlying composition

Royalties for music videos, secondary uses (like commercials or movies), and live performances are sometimes included as well. If you want to be certain who owns them, put it in writing.

Artist Royalties

The money paid to the artist when albums are sold, usually a percentage of the wholesale or retail price. 9-18% of revenue sounds alright… but that’s a gross percentage, not net. The label will deduct every expense that it can – recording costs, reserves against returned albums, free goods, packaging costs, and often pay only reduced royalties for foreign, discounted, and TV sales. The artist is usually expected to pay the producer royalty as well, which is usually around 3% – but shouldn’t be on the hook for income advances paid to the producer.

After all of those deductions, the artist has to pay back the label’s costs out of the artist royalties, known as “recoupment”. Once the label recoups all of its costs, the artist gets paid the excess. I’ll talk recoupment in a bit… but long story short, 80% of acts never see a penny of artist royalties.

Mechanical Royalties

The record label has to pay the songwriter for the use of their songs. Mechanical royalties are not recouped, and shouldn’t be cross-collateralized either (below). That means the songwriter gets paid on every song or album sold. For most singer-songwriters, this is the only payment they’ll ever see. Outside writers get paid first.

Mechanical royalty clauses usually limit the number of songs mechanical royalties are paid on, and the per-song amount the label will pay.

Recoupment

Record labels often spend a bunch of money to get an album to market, which the artist pays back through its artist royalties. Once all of the costs are paid, the artist royalties start being paid to the artist. These costs include:

  • Advances – money paid by the label to the artist up-front to cover cost of living, management commissions, legal fees, etc.;
  • Recording costs, which are either a budget or a fund to cover studio time, production, mixdown/mastering, etc.:
    • Budget – a guaranteed minimum amount. If it’s not spent, the label keeps the money; or
    • Fund – an amount is set aside for recording, and anything left over is paid to the artist when the album’s done;
  • Tour support – money spent by the label to promote the tour;
  • Video production costs – are typically paid 50% by the label, and 50% recoupable from artist royalties

These costs are “non-returnable” – which means that if the album doesn’t earn enough artist royalties to pay for the costs expended, the label takes a loss. The label’s other costs – manufacturing, advertising, promotion – should be wholly paid by the label. That’s why it gets its 82-91% cut of every album.

Some labels reach outside of industry norms to find creative ways to get the artist to reduce the label’s risk on an album, including:

  • A clause in the contract that makes the money “returnable” – meaning that the artist must reimburse the label for the entire cost, and
  • Recoupment from other sources – such as mechanical royalties or through cross-collateralization (below).

Both of these are exploitative, and certainly not standard industry practice.

Now, musical interlude:

Cross-Collateralization

Cross-collateralization allows the label to use royalties from one contract (such as publishing, production, other mechanical licenses, or a separate album-by-album deal) to recoup its costs from another.

Creative Control

How much can the label tell the artist what to do? Usually singer-songwriters have more creative control, while groups assembled by a label will get less. Creative control could mean the right of approval, the right of consultation, etc. Creative control rights include:

  • Videos – song choice, concept, budget, editing
  • Producers and remixers – who, costs, royalties
  • Song selection – what gets recorded, and what goes on the album
  • Use of the act’s name and likeness
  • Marketing & merchandise
  • Artwork
  • Secondary exploitation – commercials, movies, etc

Unless it’s stated otherwise in the contract, once the contract ends, so to does the artist’s creative control over the rights they’ve given up.

Release Commitment

What’s the use of putting together an album that nobody will ever hear? It’s often worthwhile for the act to get a firm commitment from the label to make a meaningful release of the album in the territory of the contract, including a minimum budget. If not, the artist may buy back the masters.

Conclusion

So, those are the nuts and bolts of record label contracts. Often there’s a lot more to them, and there’s a ton of little things that can come back to bite you – whether you’re a label or an artist. As with any contract, it’s a smart idea to get a lawyer to help you write or review it, and most importantly to understand what it is that you’re signing. I happen to know a guy… 😉

Rock on.

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

The Basics of Contracts

One of the fundamental skills for a business owner is the ability to deal with contracts. Every day in Ontario, thousands of contracts are entered into for thousands of different reasons…. Quite often by people who don’t really understand what they’re agreeing to, and the consequences of not living up to their end of the bargain.

A contract is a binding agreement to exchange value between two or more entities, called “parties”. A contract can be either written or oral, so long as it has all of the essential parts discussed below. Oral agreements are more likely to end up in a he-said she-said if there’s ever a dispute. Most commercial contracts will be in writing so that there is a clear record of what was agreed upon. If there’s a dispute later on, the parties can look at the contract to see exactly what was meant. Certain types of contracts, such as those for the sale of land, are required by law to be in writing.

It’s good business practice to have your key agreements – with suppliers, distributors, franchisees, employees, contractors, and creditors – in writing. It’s also smart to let your lawyer do the writing, or at least review and edit what you wrote to make sure it’s sound. The more money or business risk that’s involved if the contract is broken, the more important it is to have a legally sound agreement from the start. The legal fees up front are far cheaper than a damages award. I’ve seen companies fail because they didn’t get legal help with their major contracts, and when push came to shove, their agreements weren’t binding, and didn’t say what they thought they did.

The essential parts of a contract

  1. Offer and acceptance. To form a contract, one party must make an offer to enter into a legal relationship, which at least one other party must accept. Both parties must willingly enter into the contract, and have the mental capacity to enter into and understand the terms of the agreement. The subject matter of the contract must also not violate any laws… so don’t come to me if you haven’t been paid for your work as an assassin…
  2. Consideration. Each party to the contract must gain value from it. In business this often boils down to the exchange of money for goods or services. The need for consideration is what separates bargains from gifts, which are when one party gives value and gets nothing in return. Gifts and contracts have different legal rules around them.
  3. Meeting of the minds. Both parties must intend to make a contract in the first place, and have a “reasonable” common understanding of what they’re actually agreeing to. This way, misunderstandings or vagueness can be cleared up by interpreting what a reasonable person in the situation would have thought they agreed to.

What does a contract look like?

You’ll usually find the following things in most written contracts:

  1. Identifying the parties to the agreement. Full legal names of who is entering into the contract.
  2. Definitions of important or frequently used terms. This keeps everyone on the same page about what’s being talked about in the contract, makes it shorter, and easier to read.
  3. Intentions or reasons for entering into the agreement. Though it’s usually not a binding part of the contract, it becomes a “guiding light” for anyone reading or interpreting the contract. It shows a meeting of the minds. If there’s a dispute, a judge will resolve vague terms, or unexpected problems with the parties’ intentions in mind.
  4. Representations and Warranties. A representation is a statement of an existing fact that makes the other party to want to contract with you – such as, that you actually own the thing you’re selling.A warranty is a guarantee that you’ll do certain things if things don’t work out as you’ve planned – such as, if the part you sell breaks in the first year, you’ll replace it at no charge.
  5. Terms of the deal. The responsibilities of each party, details about the money to be paid for a good or service, quality expected, delivery schedule, etc.
  6. General terms.  The legal framework of the contract itself – how to end it, what law governs it, dispute resolution, how to give written notice, indemnity, and so forth.
  7. Signatures of both of the parties. Evidence that both parties agree to what’s written in the contract.

What if the contract is broken?

A breach of a contract occurs when one of the parties fails to perform one or more of the responsibilities agreed to in the contract. In situations such as these, the other party will want to be compensated for the losses suffered.  Some remedies include:

  1. Damages. This is the usual solution to a broken contract – called a breach of contract. If the other party breaches a contract, you’re entitled to be put in the position you would have been in had lived up to their end of the deal. This usually means an award of expectation damages – monetary payment to make up for the losses directly resulting from the breach – or sometimes an order for the other party to do what they promised to – specific performance, discussed below.Consequential damages may also be awarded where your losses are not a direct result of the breach, but could have been reasonably foreseen by the party that broke the contract – such as business profits that you didn’t make because they didn’t send you the parts as promised.Punitive damages are additional compensation to punish the breaching party for being really really naughty. They’re rare, and only awarded in cases where a party, such as an insurance company, breaches a duty of “good faith” or acts unethically towards the other party.
  2. Reliance interest.  In cases where the expectation damages are difficult to calculate, the court may award the expenses spent in reliance on the contract going through as promised instead. You can’t have both, as then you’d have been compensated for both lost profits and expenses.
  3. Specific performance. A court order to do what was promised under the contract. It can occur where goods or services are unique, not readily available from other sources, or where money isn’t enough to compensate for your losses.
  4. Rescission. If representations (above) turn out to be false, and the whole contract can be set aside, and the parties will be returned to the position they were before they struck the deal. As in, “I never would’ve signed the contract if I’d known that…”

That’s the quick & dirty on the basics of contracts. I’m indebted to my student intern, Claudia Dzierbicki, for her work in putting together the guts of this article. I’ll get in the process of how to use a lawyer to help you draft and negotiate contracts in another article soon.

 

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

New Anti-Spam Law and your Small Business

For almost every small business, Canada’s new anti-spam law will be a game changer. Unfortunately the changed game will be tedious and more expensive for most of you. It started out as a law to stop people and companies from spamming Canadians with unwanted messages. The way the law turned out, however, is using a hand grenade to get a squirrel out of your bird feeder. It will have a huge impact on the way your company can do its business online.

ImageThe law covers almost any electronic messages you send for business purposes – including email, text messages, and direct messages on social media, but not phone or fax. The basic premise of the law is that businesses must get the recipient’s consent before sending business messages to them. Simple enough, right?

The rest of the law is a rats-nest of exceptions, conditions, and legal grey areas. This blog will map out said rats-nest, without taking too much of the magic out of what I do. Practically speaking, your two main concerns are getting consent to send messages to the recipient, and having the right content in the message itself. That’s what this blog will focus on.

The penalties for businesses that ignore or break this law can reach up to $10,000,000, so it’s kind of a big deal. It’s also an offence to aid someone in breaking this law – so social media marketers, IT, and CRM dudes, beware!

The law will come into effect in three phases:

  • Most parts of the law will be in force on July 1, 2014
  • Parts dealing with the unsolicited installation of computer programs – January 15, 2015
  • Right for individuals to sue for damages caused by spammers – July 1, 2017

In this blog, I’m only going to talk about the parts of the law that come into force this year.

 

 1. Consent

The recipient must actively and voluntarily give consent to you sending them business messages. This consent can be express or implied – which I’ll tackle below. You don’t need consent:

  • from friends and family
  • from employees, representatives, consultants or franchisees of your organization
  • from foreign recipients – though your message must comply with that jurisdiction’s anti-spam laws
  • if you’re
    • answering an inquiry, request, or complaint
    • giving notice of a legal right or obligation
    • giving them factual information about an ongoing relationship like a subscription, membership, or loan
    • providing information about an employment relationship or benefit plan that they’re in
    • delivering updates or upgrades
    • a charity or political party
  • if the message is solely an inquiry about the products or services the recipient provides

 Express Consent

This is when the recipient takes a positive action to approve of you sending them business messages. Once given, express consent remains valid until withdrawn. More on withdrawal below. The guts of express consent are:

  • The message or form asking for consent must:
    • explain why you’re asking for consent
    • give the name of the organization or person seeking consent (or identify who you’re getting consent for, if it’s not you)
    • give valid contact information – including at least one non-electronic means
    • let them know they can unsubscribe at any time
  • If consent was expressly given before this new law, you don’t have to go back and re-confirm
  • The recipient must “opt in” (as in, checking a box), rather than opt out (unchecking a box), or the consent isn’t valid
  • Keep a record of who consented, when, and how – as it’s up to you to show that you got it, not the other way around

 Implied Consent

This is a little trickier, as most types of implied consent have an expiry date. Express consent is more practical for you to get, because it doesn’t expire, and is easier for you to keep track of. That said, if your contacts aren’t big on clicking through links in email, implied consent may still cover you. Implied consent can be found:

  • in an existing business relationship, meaning that you and the recipient have
    • in the past two years,
      • bought, sold, or leased goods, services or land from each other
      • were bound by a written contract with each other
      • bartered goods, services or land with each other, or
    • in the past six months, made an inquiry about doing any of the above
  • an existing non-business relationship
  • if the recipient has published or disclosed their email address, they have not stated that they don’t wish to receive unsolicited messages, and the message is relevant to their business or role

 

2. Content

So once you’ve got consent from all of your adoring fans, and you’re dutifully keeping accurate records of who has consented, your work is still not done. From July 1, 2014 onwards, every business message you send must have certain content, except messages

  • to recipients you have a personal or family relationship with, or
  • which are an inquiry about the business products or services the recipient provides

All of your business messages must contain information that:

  • identifies the sender, or on whose behalf it’s sent
  • sets out contact information for the sender, including at least one non-electronic means
  • has a way to unsubscribe or withdraw consent

The unsubscribe mechanism must:

  • operate at no cost to the recipient
  • allow the recipient to unsubscribe by the same means the message was sent, or give another electronic means to unsubscribe
  • give a link to a webpage that allows them to unsubscribe

Once they unsubscribe, you’ve got 10 business days to take their name off the list, or else.

 

3. Conclusion

Like I said, game changer… though how it changes the game will differ from business to business. There are a few best practices that I’d recommend you start implementing now:

  • Vet your contact lists now to determine who you will need consent from
  • Before July 1, 2014, send a message to your existing mailing lists asking them to opt in, and create a new mailing list of those who do
  • After July 1, 2014, you’ll have to get consent the old fashioned way – by mail, phone, or other non-electronic means
  • Keep records of information showing consent
  • Put together a new email signature that meets the content requirements
  • Build an “unsubscribe” link into your website, and make sure the unsubscribe mechanism works

Most IT service providers should be CASL-compliant by now, and companies like my friends at Response Magic have developed simple and thorough systems to help you colour within the lines. Of course, every business and every situation is different, and applying a general rule is no substitution for consultation with an intrepid lawyer. You know where to reach me if you’ve got questions.

There. I just saved you $10,000,000. You can thank me later.

 

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Crowdfunding in Ontario

On May 8, 2014, I presented a webinar for http://www.SmallBusinessSolver.com on the legal ins and outs of crowdfunding in Ontario.

Crowdfunding is a game changer for small business finance. Between $3-5 billion has been raised in crowdfunding efforts worldwide, through over 300 portals. 45 of those portals are available to Canadians. Traditional crowdfunding works by donation or reward.

The latest and greatest is that crowdfunding will soon be available in Ontario to sell equity to the general public. This is going to make selling equity less expensive and simpler to do.

Enjoy!

Outlook for Canadian Small Business

The Bank of Canada released the results its 2014 “Small Business Outlook” survey on Monday. I’ve plowed through that report and some other market research on the small business climate in Ontario, and found a couple common themes that may affect your business:

Export market strong, domestic market weak

A weaker Canadian dollar ups the profit margin for exports. This is a big help for manufacturing businesses in particular. Manufacturing, agricultural, and construction businesses are having trouble meeting production demands as it is. Savvy manufacturers are eyeing the increased profits as an opportunity to buy more machinery and equipment to increase production. It’s a particularly well-timed strategy, as most major banks and investors have eased their lending criteria. Overall, this means there’s more cheap money available to finance expansion.

The weaker dollar can hurt businesses that rely on domestic sales to drive them. This is amplified for companies that import a lot of goods – it costs more and more to buy the same ingredients or components. Hospitality and professional services businesses are often the canary in the coalmine for economic slowdowns – with less cash flow, businesses spend less on services. Small business owners are feeling the crunch, and worry that any more price increases will hurt their business. Many are considering absorbing the loss, rather than passing the added expense on to consumers. This is particularly so in Ontario, where a crowded marketplace is putting more pressure on businesses to keep prices down.

Business is good enough to hire

A majority of businesses are hoping to hire new employees in the coming year – many on a full-time basis. While most small businesses report no shortage of workers, many are finding it tough to find suitable new hires, particularly in niche businesses. This may be due in part to the continuing trend of baby boomers retiring, and not enough young workers to replace them. Therefore, employers are competing for talent. A more competitive hiring market can drive up wage and benefits demands – leaving many small businesses unable to compete. Good for talented young workers, not so good for business owners.

On the up-side, small businesses have a great deal more flexibility in tailoring employment to suit the employee – flexible working hours, work from home, opportunity for growth, employee stock options, etc. Well worth it, if you land the right employee!

Here’s the link to the full Bank of Canada report.

Hopefully this article gives you a little perspective on the environment you’re running your business in!

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Selling Shares through Crowdfunding

One of the most important recent developments in financing for small businesses has been the rise of crowdfunding. Crowdfunding is when a bunch of people make small investments in a company through a crowdfunding portal (such as Kickstarter or Indiegogo), in exchange for some sort of reward, like an amount of the product the company makes. The pooled money is used to grow the business. Unfortunately, selling shares – aka “equity” or stock – through crowdfunding has been, and still is mostly illegal in Ontario.

Most small companies are “private issuers”, and “non-reporting companies” – which means that they can’t sell shares to the general public – including crowdfunding. To sell equity to the general public, the corporation has to jump through a whole bunch of regulatory hoops, and make detailed disclosure documents available to investors. Disclosure typically includes an offering memorandum or prospectus, and audited financial statements – which are time consuming and expensive to prepare. There are strict rules about the type and size of offering, what kinds of disclosure must be prepared for prospective shareholders, and who can participate in the offering. All of that, however, is about to change.

The Ontario Securities Commission (“OSC”), the watchdog that regulates the public trade of shares of companies, has just released its proposed rules for a “Crowdfunding Exemption”. They hope to allow small companies to raise capital through crowdfunding without saddling small businesses with expensive disclosure and reporting requirements. The tough part is how to protect investors, and make sure they get enough information to make an informed decision on whether or not to invest.

The Crowdfunding Exemption tries to strike this balance by requiring some limited disclosure from the issuing companies issuing the shares, placing strict regulations on crowdfunding portals, and limiting how much individual investors can contribute. A few of the highlights:

Requirements of Issuing Companies

  • May only raise $1.5 million through crowdsourcing in a calendar year
  • Must be a Canadian company, with its head office in Canada, and a majority of its directors must be resident Canadians
  • May be a public or private company
  • Must disclose the minimum offering amount, and whether or not there is a maximum
  • Offerings must be completed within 90 days
  • Must meet the minimum offering amount, and have the resources to execute its business plan in order to be successful
  • Equity may only be issued in the form of common shares, non-convertible preferred shares, non-convertible debt securities linked only to fixed or floating interest rates, securities convertible into common shares, units of a limited partnership, and flow-through shares under the Income Tax Act
  • May only advertise through a crowdfunding portal, its own website and social media , or with limited marketing materials.

Investor Protection

  • Maximum of $2,500 per investment, and $10,000 per calendar year, per investor
  • At the time of investment, the company must provide an outline of basic information about the company, the fundraising platform, and one year of financial statements
  • Investors must sign an acknowledgement of risk, confirming investment eligibility, and consenting to the possibility that they may lose the entire investment
  • Investors have a two day “cooling off period” to cancel the investment, in case of buyer’s remorse
  • Issuing company must continuously disclose its cash and annual financial statements, and maintain accurate records of the use of crowdfunded money
  • Four month ban on re-selling the shares of a public company, and an indefinite freeze on resale of shares of non-reporting issuers

Crowdfunding Portals

  • Must be registered with the OSC as a restricted dealer, similar to registering as a securities dealer
  • Must do background checks on issuing companies, and their directors, officers, promoters, and control persons
  • Must understand the general structure, features, and risks of securities offered, review and vet information to ensure compliance with the OSC rules, prevent fraud, and provide investor education materials
  • Can’t provide any investment recommendations or endorsements, solicit purchases or sales of securities on behalf of a client of their platform, or invest in or underwrite any issuing company

The OSC proposed rules are open for comment from investors, issuers, and portals until June 18, 2014. It’s expected that the comments will be considered, the rules tweaked, and the Crowdfunding Exemption will come into force shortly afterwards. The most vocal feedback so far has been that the limits on individual investors are too low, and the startup costs for portals to register are too high, and will make it more expensive for their clients. Regardless of the tweaks, equity crowdfunding will be a revolution in small business financing that will make big money available to companies that never would’ve been able to afford to access it before.

If you’re having trouble sleeping at night, you can find a full version of the OSC’s proposed changes as part of the jauntily titled “Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distribution in Ontario” – at Appendix D – Pages 131-224. It’ll put you right out, I promise.

 

Incorporating an Existing Business

I’ve talked about the pros and cons of different business structures in an earlier article, but what happens when you start out as a sole proprietor or in a partnership, and later want to incorporate? The transition needs to be seamless, so that the corporation can step right in to your shoes and carry on business.

This is something I deal with regularly, and unfortunately it’s not a simple process. It’s difficult for a layman to do without some professional advice from your lawyer, and accountant or tax nerd. The details count here – to the point that writing this blog post took about 8 hours of work. Doing it the wrong way could lead to paying unexpected taxes, interest and penalties, muddy the water about who owns business assets, and stick you with personal liability for things that you thought were pushed over to the corporation. Fear not, intrepid entrepreneur – there’s a way through the maze

OK, what’s so friggin’ complicated?

There are three steps to incorporating an existing business:

  1. Incorporation and organization of a new company;
  2. Sale of the business or partnership to the corporation; and
  3. Joint election to defer the paying of capital gains tax.

Each step has its quirks, which I’ll explain below. There are a bunch of other business steps that you should take to make the transition seamless – this handy dandy checklist should help. Every case will be different – but at least you can get an idea of the key tasks. The rest of the article deals with the process on the legal side. Let’s git ‘r done:

1. Incorporation

Take the usual steps to incorporate your company –name search, and filing of the articles of incorporation with the fee payable to the Ministry. If you’ve registered your existing business’ name, and want to use a similar name for the new corporation, you’ll have to file a signed letter, or completed consent form with the articles of incorporation. You may want to include a share price adjustment clause in the articles of incorporation, in case the Canada Revenue Agency (CRA) puts a different value on the sale than you did.

The value of the shares that you’ll own will depend on the sale price. It’s important that the numbers add up, and are consistent between the sale agreement, the documents in the corporation’s minute book, and the election to defer the capital gains tax that you file.

2. Selling the Business:  Tax Rollover

Once your corporation is all set up, it is a “person” (and a taxpayer) in the eyes of the law. It can own property, enter into contracts, and do all that other fun stuff that you do for work. The problem is that the corporation doesn’t actually own anything yet, or have a right to take over your business. You own the corporation, and you also own the assets of the existing business, but they’re different people entirely. In order to merge the two, you’ve got to sell your sole proprietorship to your corporation.

The CRA will want you to pay capital gains tax on the sale. When you started your business, it was worthless. Through your hard work, it has grown in value – accumulating cash, equipment, inventory, contracts, real estate, etc. – which is a capital gain. When you sell the business, the capital gain is realized, and 50% of that amount will be added to your personal income as capital gains tax.

As pleasant as that sounds, you’re allowed to put off payment of the capital gains tax. Since you’re actually only selling the business back to yourself – you’re still are the beneficial owner of the business through your shares of the corporation – you’re not actually realizing the capital gain. You still have to pay it when you actually sell the business to someone else – but you can avoid it for now. This is known as a “tax rollover”. Lawyers, accountants, and various other nerds call this “deferring the realization of a capital gain”. Bottom line is you’ll have more money left to keep your business afloat.

To defer the capital gain, you must sell the business to the corporation at fair market value, in exchange for shares of the corporation. This is done with a “Section 85(1) Rollover Agreement”, which is a contract of sale between you and the corporation. You keep a copy, and a copy goes in the corporation’s minute book. Having a clear agreement on file is very important – the CRA likes to scrutinize these types of sales closely in order to head off tax evasion.

There are two main parts to the rollover agreement – the sale contract, and the financial terms – mostly the value of the assets, and the shares they’re being exchanged for. The sale contract should cover the following points:

  • Agreement to buy and sell
  • Shares and other compensation issued in return
  • Agreement to make a joint election to defer the capital gain under Section 85 of the Income Tax Act
  • Price adjustment clause – in case the CRA decides that the value of the assets is different than you say it is
  • Representations and warranties – that you and the corporation have the legal capacity to buy and sell the assets
  • General provisions – about how the contract is to be interpreted, and so forth

You can find examples on the interweb – Appendix A or B of this article here is a good starting point – though I don’t recommend trying to do this without legal and tax advice. The consequences of screwing it up could cripple your business if you don’t have the cash to pay the tax bill.

The financial terms – usually laid out in a table as an attachment to the contract – can get tricky. The CRA deems the assets of the business to be sold at fair market value. Some assets – especially goodwill – are hard to value. Others have depreciated or grown in value since you got them. Other assets might have a constant value, or cost nothing to acquire, but still generate income. The same goes for liabilities – though typically you don’t transfer many, if any, liabilities in these sales. You should get your accountant to value the assets, and determine the sale price of each class – or the “Elected Amount”. In the contract, you can set a price for each “class of assets” as a group, rather than breaking it down for each item. Still, your accountant should keep the working papers used to determine the amounts declared, in case the CRA asks for justification.

Typically, the following classes of assets will be sold:

  • Non-Depreciable Capital property
    • Some securities or investments
    • Some real estate
    • Trademarks
    • Some patents
  • Depreciable property – property with a definite useful life
    • Furniture, equipment, electronics, tools, spare parts
    • Vehicles and accessories
    • Buildings and the systems in them (HVAC, plumbing, electrical, etc)
    • Fixtures
  • Eligible capital property
    • Goodwill – reputation, customer lists, business name
    • Some securities or investments
    • Incorporation costs
    • Some patents
    • Non-real estate inventory

 3. Joint Election

No, I don’t mean the big issue in the next Federal campaign. It’s actually just more paperwork. Once the rollover agreement is all done and signed, the final step to deferring the capital gain is to file an “Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation.”

This riveting document is the CRA’s Form T2057. It uses much of the same information from the rollover agreement. It’s best to get your accountant to help you fill it out. The CRA will scrutinize the rollover closely. If you screw it up, you can amend the election form, but you can’t revoke an election once it’s filed.

Conclusion

That’s a lot of stuff to deal with for what seems like it should be a simple process. I strongly recommend that you don’t try this at home. It’s a tax-driven transaction – which means that your accountant should be calling the shots on the financial terms, and your lawyer should be papering the details. It’s usually a modest legal and accounting bill, which can protect you from an ugly capital gains tax bill, and the interest and penalties that come with it. Lawyer up!

Good luck out there!

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw