What’s a cooperative?

There are a lot of different models available to people to set up their businesses, but one of the most underused is the cooperative model. Frankly, I find it odd that so few startups consider using a co-op, given the shift towards people-centric companies, corporate social responsibility, social enterprise, crowdfunding, and the sharing economy. In many ways, co-ops are ideal for these types of ventures, since the primary aim of a cooperative is to benefit its members. It’s up to the members to decide what “benefit” means, so co-ops are often about more than just maximizing profits.

Perhaps unfamiliarity breeds avoidance. The co-operative corporation is an odd beast, and far less common than corporations, partnerships, and proprietorships. A lot of folks don’t even know the co-op exists as an option. Hell, a lot of business lawyers I know have never touched the things, and just gloss it over in the “other” category when talking about business structures. Its weirdness makes it difficult to understand. Co-ops are a mash-up of business and not-for-profit corporations, with partnership-esque decision-making, which are sort of public companies, and report to a separate branch of government than every other business in Ontario.

the-people-dont-know-their-true-power-tc-cartoon-sad-hill-newsIt’s high time we blew the dust off the ol’ girl, and maybe you won’t think co-ops are so weird and scary after all. You might even start to think that your business would do well as a co-op, in which case, we should talk.

There are a LOT of possible variations in co-ops, so I’ll stick to the basics in this article. The goal is to give you an idea of the broad strokes, and I’ll leave the details for later articles. I’m going to talk about:

  • What a co-op is
  • Advantages and disadvantages
  • Types of ownership
  • Types of co-op
  • The basics of financing a co-op, and
  • The basics of decision making

So what is a Co-op Anyway?

Co-operatives are democratically-run businesses governed by those who use their services – their members. Co-ops generally rely on member participation to make the wheels turn. Members pool their money, goods, or services, have a say in decision making, and share in the profits or losses of the co-op’s business. Members can be human people, corporations, and not-for-profits.

cooperative-movementAs we’ll see below, a co-op can be set up with shares, like a business corporation; or without, like a not-for-profit. Co-ops with shares can sell them to members and the general public to raise capital. Co-ops without shares may operate as not-for-profits, and apply for charitable status.

Decision making is one-member, one-vote, so each member has an equal say. Members can be broken down to stakeholder groups, where each group’s votes may be weighted differently, kind of like in a partnership.

Once they reach 35 shareholders or lenders, co-ops become somewhat like a public company, and have to distribute information about the business and its finances to potential investors. The annual financial statements of a co-op must be audited, to ensure that the co-ops accountants are preparing the statements by accounting norms. Ontario co-ops are regulated by the Financial Services Commission of Ontario, rather than the Companies Branch

Advantages

  • Egalitarian – while corporations can allow their stakeholders to participate in ownership through stock option plans and the like, such plans are often carefully controlled to prevent those stakeholders from controlling the company.
  • Democratic – each member has an equal say.
  • Cheaper to set up and run than stock option plans or large partnerships – though the rules governing co-ops can be a bit tedious, many of the rights and responsibilities are written in the law, rather than being custom creations
  • Shared resources – members can get access to more and better equipment or facilities, increased negotiating power when buying/selling, shared marketing costs, etc.
  • Networking and education – members have access to people who face similar challenges, and make contacts up and down the supply chain.
  • Limited liability – a co-op is a “person” in the eyes of the law, which takes on its own liability. Members and shareholders personal assets are protected, and they only stand to lose what they invested.
  • Flexibility – co-ops have a huge array of options on goals, structure, financing, decision-making, and services.
  • Double or triple bottom line – benefits to the members aren’t limited to a share of the profits.

Disadvantages

  • Startup costs – are typically higher than for simple incorporations or partnerships. It takes more legal and accounting work to get ’em off the ground.
  • Offering statements are required to raise money – which takes time and money to prepare, and there are ongoing disclosure requirements.
  • Annual financial statements must be audited – which adds an extra annual operating expense.
  • Decision making can be slow and difficult – especially when there are a lot of members, or stakeholder groups with different interests. Think of how much of a pain in the ass the membership meetings of a condominium can be…
  • Unfamiliarity – because there are relatively few co-ops, compared to other business forms, government and foreign entities may have a hard time wrapping their heads around how to deal with you.

Membership Shares, or Members?

You have two options when incorporating a co-op – ownership through shares, similar to a regular ol’ corporation – or control by members, similar to a not-for-profit corporation. Choosing between the two usually comes down to two things:

  • Whether the co-op’s purpose is to operate like a business and turn a profit, or to provide a service on a break-even or non-profit basis; and
  • How much capital is needed to get started and run the co-op. The greater the need for capital, the more likely it is you’ll lean towards shares.

Consult with your lawyer and accountant before choosing which way you’ll go.

Shares

Shares are just a bunch of rights in the co-op. Most of these rights centre on control (voting), profits (dividends), and ownership (right to a share of the net profit if the business is sold or wound up). Every co-op with share capital must issue at least one type of “membership shares”. Each membership shareholder gets one vote at members’ meetings to do things like electing the directors, setting the rules (bylaws) of the co-op, choosing an auditor, approving annual financial statements, and major business decisions like selling or dissolving the co-op. Different types or membership shares may have slightly different rights.

You also have the option of creating and selling different types of “preference shares” to raise money. Like a regular business corporation, you can get pretty creative with the rights that the preference shareholders have, like priority on dividends, to be bought out or redeemed, to be paid part of the proceeds of liquidation, to receive information, and to receive a portion of the net profits of the co-op each year as a patronage return.

Members

For co-ops without share capital, there are only members, who fill much the same role as membership shareholders, above. The biggest consequence of this type of co-op is that its only financing options are membership fees, loans from members to the co-op, and loans or other debt from outside sources.

Multi-Stakeholder Co-ops

In these bad boys, members are organized into stakeholder groups, depending on what they contribute to the co-op. Each stakeholder group has certain rights as a group, such as appointing directors to the board, or to receive a lower or higher share of the co-op’s profits.

Types

There are four basic types of co-op in Ontario

  • Worker-owned

    Exactly what it sounds like. Only workers can be members of the co-op, and at least 75% of employees of the co-op must be members. An example would be Toronto’s Co-op Cabs, where each taxi license holder is a member of the co-op, and gets a share of the net profits of the company rather than revenues from their specific cab.

  • Consumer

    Businesses, often in retail, which are owned by their customers for their mutual benefit. Resources are pooled to buy in bulk, then the savings are passed on to the members. The most common are credit unions, green energy, insurance, and grocery stores. I’ll lump housing co-ops in here too.

  • Producer

    Producers of a certain product, or a certain category of goods band together to share common expenses like warehousing, equipment, shipping, and marketing. Most people have seen farmers’ co-ops, which often have warehousing and large equipment, as well as buying farm supplies in bulk. Producer co-ops could work for any business from lumber, to crafts, to booze.

  • Multi-stakeholder

    Here, many different groups of interests recognize that they’re all in the same boat, and band together for common gain. These groups could include workers, producers, service providers, consumers, and supporters of a certain cause. Health care and social services are common areas for this form. There’s a big push towards sustainable food co-ops right now, bringing together farmers, land owners, seed banks, grocers, and restauranteurs.

Dolla Dolla Bills Y’all

A co-op model can allow a business to take a fundamentally different path than a regular corporation. The directors of corporations are voted in by shareholders to maximize the value of the shares. Co-ops exist for the benefit of their members, which can far broader than simple monetary gain. That’s not to say that a co-op can’t turn a profit. It’s just up to the members as to how far up the priority list profit falls. The rules on how money comes into and flows out of a co-op are different than regular corporations too.

Money In

Besides profits from the sale of goods, the most common fundraising method is membership fees – an annual fee that members must pay to stay members. In most cases, this isn’t a large sum. Co-ops can also charge fees for use to members or the public – like an hourly rate for use of equipment and facilities, or for sales leads they generate for their members.

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Debt Financing

As with any business, a co-op can borrow money, known as debt financing, from a variety of sources. Co-ops can, and often do, require their members to loan money to the co-op, which is common in agricultural co-ops where production is cyclical. They need the cash up front to float the year’s operations, and the loans are paid back when the harvest comes in. They can force members to re-invest profits earned from the previous year as member loans as well.

Co-ops can borrow from banks, government, and other private lenders, same as any other business. They can also apply for government grant funding.

Equity Financing

Co-ops with share capital can raise money by selling preference shares. The magic number is 35, meaning that if there will be 35 or more people who own securities (shares and debt) when the sale is done, the co-op has to file an “offering statement” with the Financial Services Commission. This is similar to, but less demanding than, what a corporation must do before “going public”. The goal of the offering statement is to ensure that the investors know what they’re investing in. The exact requirements vary depending on the co-op, but the result must be a full, true, and plain disclosure which answers any reasonable question an investor may have. There are a few exceptions which mean you don’t have to file one for small numbers of investors, and small amounts raised.

Money Out

Aside from paying operating costs, wages, tax, and debt, there are rules about how the profits of the co-op are paid out. What’s left after operating expenses are paid, but before tax, is called the “surplus”.

A co-op can set aside some or all of its surplus to create a “reserve fund” of retained earnings for its future expenses, and it can pay out the surplus through dividends and patronage returns.

Dividends

Dividends are paid out of a co-op’s after tax income. The member or shareholder is taxed on the dividend (not as regular income), meaning some tax credits are available to them.

The maximum dividend allowed on membership shares is the prime lending rate +2% per year. There’s no cap on dividends to preference shareholders, so the rate of dividend is what’s set out in the Articles of the co-op.

Dividends may be paid in more shares of the co-op as well, which allows the business to reinvest the profits, and increase the equity holdings of the shareholders.

Patronage Return

This posh sounding term is the profit share a member is entitled to based on how much business they’ve done with the co-op. This is the main way in which members receive their profits. Patronage returns are paid out of the pre-tax income of the co-op, and are taxed as income for the member.

Different rules apply to different types of co-op, but the way patronage returns are calculated is set out in the bylaws. Worker co-ops, for example, pay patronage returns based on hours worked, or total compensation paid each year. Producer co-ops may account for the relative profits earned from different products contributed to the co-op (a ton of strawberries may turn a higher profit margin than a ton of potatoes. No offence to potatoes.)

Non-members may also be paid a patronage return, so long as the return for non-members is the same or less than what’s paid to members.

Decision Making

As with a corporation, co-ops have three levels of decision-making – members, directors, and officers.

Members

Each member, or membership shareholder, has one vote at meetings of the members. Members have to attend a meeting in order to vote – they can’t send a proxy to vote in their place.

Most votes are decided by a simple majority of votes, after a resolution has been discussed. The key decision members are called upon to make is to elect the board of directors, or removing them if need be. They also approve audited financial statements, and vote on resolutions proposed by members.

Members have a say in other major decisions, which require a 2/3 majority to pass. These include changing the articles of the co-op, adopting new bylaws, and approving the sale or merger of the co-op.

5% of members can call a meeting, or propose member resolutions. 10% of members can force a directors’ meeting to pass a new bylaw or resolution.

Directors

Elected by the members, the directors have a fiduciary duty to run the co-op in the best interests of the members. All directors must be members of the co-op, and there must be at least three directors on the board. The board is responsible to set the strategic direction of the co-op, and appoint the officers to manage its day-to-day affairs. They vote on things like approving new members, budgets, major contracts, and expansion plans.

Officers

Appointed by the directors, officers oversee operations, and supervise the lower-levels of leadership. Officers are employees of the co-op, and except for the President and chair of the board, they don’t have to be members. The duties of the different offices are listed in the Cooperative Corporations Act. Most co-ops will delegate a certain amount of decision-making power to officers, such as the ability to sign contracts up to a certain amount, to hire and fire employees, and to do the co-op’s banking.

Conclusion

So, there you have it, co-ops in a nutshell. This is by no means a complete guide to co-ops in Ontario, but I hope it proves to be a useful starting point. If you’re looking at starting a business or non-profit, take a good, give co-ops due consideration.

There are a ton of good resources out there for information gathering, including a whole series of guides from the FSCO, and the Ontario Co-operative Association that can help you to get started.

As always, I’m happy to help you birth your cooperative business baby. Reach out.

 

Mike Hook
Intrepid Lawyer
mike@intrepidlaw.ca
@MikeHookLaw

Beware the Entrepreneurship Industry

This may be a controversial post. You’ve been warned. This post is from my point of view as an advisor to small business. I realize that I occupy a place in the “industry” landscape, and that like the bigger wheels in the machine, I too turn a profit from providing services to small business. As a lawyer, however, I have a duty of loyalty to my clients – called a fiduciary duty. It isn’t optional, it’s the law. This means a bunch of things – to be competent and diligent in my work, to act in my clients’ best interest, honesty, and to keep your information confidential. Most of the other people you’ll come in contact with in the business world don’t have such a duty – and therein lies the risk that we call “doing business.”

I’ll get to the point.

I’ve noticed a trend towards the industrialization of entrepreneurship these days, and the more I think about it, the less comfortable I am with it. When I say “industry”, I’m talking about making labour systematic. The same business model that created the assembly line to make business more “economically efficient” is now being applied to entrepreneurship. There’s big money to be made. Investors and big business have realized that in many cases it’s more economically efficient to buy innovation than to innovate.

But how do you groom small, innovative businesses into ones that will slip neatly into the world of big business, and global financial markets as they grow? The answer is to industrialize entrepreneurship. As this system gains momentum, there’s an explosion of organizations which provide ready-made solutions to most of your small business needs.

Most of these organizations exist to make money….

… off of you…

… and none of them owe you a duty of loyalty.

I’m not saying that these organizations are out to get you. There are plenty of amazing collaborators out there. All I’m saying is that a healthy dose of caution, and an unhealthy dose research before getting into bed with them is in order. Any time you give up equity (shares) in your company it’s like taking on a business partner. They invest time, money, and resources in making your company grow. With the money comes the expectation of profit. You, as the one with the business or idea, will want to be assured that your partners will pull their weight, and that you’ll have a way out if they don’t. In return, there are some pretty thick strings attached to the investment. They’re gamblers in a way. Gamblers with a much bigger stack than you, more experience in these kinds of deals, and an uncanny ability to lawyer plucky little startups into the ground if they feel wronged. Choosing the wrong horse to hitch your wagon to could cost you your business.

In this article, I’ll talk about two of the big growth sectors in the entrepreneurship industry – high risk investors, and growth programs. I’ll deal with high risk investors first – angel investors and venture capital. Then I’ll move on to the growth programs – incubators and accelerators.

High Risk Investors

The starting point to understanding high risk investors is to understand the basic business proposition from the investor’s point of view. Angel investors, and to a greater extent, venture capital, are betting on the success of your business. In return, they demand returns commensurate with that level of risk. Particularly for VC, they may invest in ten companies, and only get a return on one – meaning the one that hits, they’ve got to make all the money back that they invested in all ten, plus a healthy profit margin – otherwise they’ll be out of business. That means they’re going to do almost everything in their power to make sure that they get their money back. This includes attaching strict, investor-friendly terms to the financing. This also includes using their networks and contacts to spur growth. They’re putting a lot of eggs in your basket, and approach the deal accordingly.

Angels

An angel investor is a wealthy person or group of investors who are willing to pony up startup capital for businesses that they think will succeed. Some angels specialize in raw startups, while others are only interested in companies that have already reached a certain critical mass. While the term “angel” might make them seem benevolent, they’re planning on making money off of your work. Their investment buys a part of your company – between 10-50% typically – and often gives the investor a say in how the business is run. They think they can make money on your idea – and if you don’t do it for them, they may take the reins and do it themselves. Angels see the end-game too, where they can realize the return on their investment. Cashing in. This often means selling the business – either to a third party or by taking the company public. If your end game is different, you may have found the wrong angel. If selling isn’t their goal, they might intend to grow your company in a way that benefits their other business interests.

Angel investment is attractive because as soon as they’re on board, it’s in the angel’s interest to use their connections and experience to help the business. A good angel can open up supply or sales channels that were previously out of reach, guide you through tough negotiations, and provide mentorship to help you develop your business skills. On the other hand, an angel whose intentions aren’t so angelic could take control of the business, fire you, and force you to sell them your shares at a discount. If they have a bad reputation in the business community, you could be tainted with that as well. I’ve seen all of these things and more. Do your homework, and get advice before, during, and after negotiations with angel investors.

Venture Capital

Venture capital is a different beast altogether. VC is usually a fund where many professional investors, serial entrepreneurs, large companies with innovation budgets pool their money together. The fund is managed by specialists who look for high-growth, high-potential businesses to invest in. Usually they’re looking for an “adolescent” business, rather than a raw startup, will invest for several years, and expect a return of around 10 times what they invested over that time. VC will usually get paid out first – often within 1-2 years – and take a percentage of ownership of the company. Venture capital is usually a one-way ticket to an initial public offering, and your investors will do what they must to ensure they get a return. They’ll appoint board members to shepherd their investment, and often have a good deal of say in hiring for key positions. They may replace you as the CEO if they have someone who’ll do better. The investment will usually be a high-interest loan, and secured with shares in the company which will pay the VC back first if the company goes belly-up. The exit plan almost always involves taking the company public. VC is more complex than that – but the important take-away here is that it’s very, very pricey money.

VC is attractive because, if it works, you get rich when the company is sold or taken public. VCs will lend based on their valuation of the idea, rather than their ability to secure their investment on the assets of the company, like a bank would. The downside is, once the VC comes on board, the business ceases to be your baby. Your interests aren’t aligned – the VC is looking out for their investment, not for the best interests of you, the company, or the employees. Most venture capital funds focus on building up the pool of money they manage, rather than mentoring and guiding the business – they’ll often appoint outside board members to represent their interests. The strings attached are large, and tied tightly.

Dealing with High Risk Investors

High risk investors can take your business to the next level in a hurry, and are sometimes the only viable option to fund your research and development. This is especially true for businesses built on ideas, rather than physical assets. Be very, very careful about who you’re dealing with, and understand the deal that you’re making before you sign on the dotted line. Do your research. Get legal and accounting advice. Shop around, and keep these in mind when you’re exploring your options:

  • First, foremost, and always remember – if they’re willing to fund you, then you have something they want. You have leverage in negotiations, and should only take a deal that works for your company.
  • What’s the business/industry background of the people you’re dealing with? What other companies have they worked with, and what results did they get? Talk to those companies, and get a no-bullshit assessment.
  • Who will be appointed to your board? How many other boards do they serve on?
  • Who are their advisors – accounting, legal, etc – and do they come as a package deal? Are they encouraging you to get independent advice before signing?
  • What’s their exit plan? Does it mesh with your vision for the business?

If the investor can’t give you a good answer to those questions, or stands in the way of you finding the answers on your own, run away as fast as you can.

Predatory investors can be hard to spot… until it’s too late. I’ve got a bunch of horror stories from people in my network who jumped at what looked like a good deal… and when they landed, the investor owned the company, and the founder ended up with only a fraction of the value they’d built. They’re smart people who make their living by getting other people to do the grunt work for them… and unscrupulous investors know how to cover their bases. Be cautious, and put in the time and effort to understand them, their goals, and what they expect of you before committing.

Growth Programs

Incubators & Accelerators

These two get lumped together because they fulfill roughly the same role at different stages of a company’s growth. They are, at their core, great business models, and can do a whole lot to nurture the development of your company, and your business skills as a founder. The basic premise is that they’re in the business of investing in startups. An established business person, or group of ‘em, will bring in a company, or group of ‘em, and invest in the company in hopes that it will grow. Most will invest a combination of money, marketing, office space, production and design support, mentorship, and access to their personal networks. They’ll set a pretty rigorous training schedule in business skills, which members are required to go through. In return, they take a piece of your company.

Incubators are typically a long-term involvement, around 2-3 years’ worth, with no set schedule for growth. Most will bring in companies of a similar type into a common working space in hopes that ideas will flourish. Often, incubators will put their own management teams in place – directors and officers – once the grunt work to bring the idea to fruition is complete. Incubators typically take up to 20% of your company for the role they play in incubating your idea.

Accelerators are usually a set business development program to spur rapid growth – hence the name. The program takes place over 3-6 months, and is aimed at companies that have reached a certain stage of development. That program typically involves a couple of “funding rounds” from VC, and may also involve tacking directors and officers of their choosing on to your management team, or full-on replacing the founders in those roles. Accelerators usually take less than 10% of your company for their services.

Who Sails the Ship?

The most value in a growth program is the network that comes along with it. When done right, incubators and accelerators can provide value that’s almost unparalleled. You can get specialized advice and training that will help you to understand and speak the language of business, interpret financial statements, and refine your pitch. Most valuable is the access you get to their well-established business network of advisors, mentors, financiers, and other graduates of their program. That cuts both ways, however. When you climb aboard that train, you’re committing to doing business the way they teach you to do business. While some incubators and accelerators have altruistic intentions, many more are an elaborately constructed way to make money off of your efforts, or to cherry-pick talented business people for their own organizations. It’s a business farm, and you’re the cash crop.

For example, law and accounting firms view successful incubators and accelerators as a way to get new clients. I’m one of them, as an advisor at Ryerson’s DMZ, and a mentor at HumberLaunch. I’ve met several clients that way. Strangely, in the cash strapped world of startups, my competition is largely huge national law firms. These firms will offer cut-rate startup packages, as a loss-leader.  They take a hit on their fees in the short term, in hopes that you’ll grow enough by the time the discount period runs out that you’ll have enough in the bank to pay their rates. That business development strategy means that they’re looking to minimize their short term losses incurred by giving away their services. This can mean standard-form business agreements that aren’t customized to your situation and business. The work is pushed to junior lawyers, law students, and clerks to “cut their teeth” on. A free client’s phone calls are returned after the paying clients’ work is done. That said, big firms have specialized skills, particularly to grow startups into publicly-traded companies, that sole practitioners like me just don’t have. Do your homework.

Dealing with Growth Programs

Moral of the story is, as it was for investors, to know who you’re getting into bed with before signing on the dotted line. Any time you give up equity in your company, you’re taking on a business partner. Like any other partner, you want to make sure that they’ll pull their weight, and know what’s involved in getting yourself out of the deal if need be. The excitement of winning a business plan or pitch competition, or beating out hundreds of other applicants for one of a few positions shouldn’t stop you from doing your due diligence. Here’s some questions to know the answers to before you commit:

  • Who owns the incubator or accelerator?
  • How much of your company do they take, and what conditions are attached?
  • Who are their lawyers, accountants, marketers, and preferred investors? Are you free to choose your own, or do you run with theirs? What’s their interest and relationship?
  • What expectations are there of you?
  • What’s the exit plan? Are they building your company to sell, or take public?
  • Do they have your interests at heart, or do their loyalties lie with the person they have a pre-existing relationship with? What’s the advisor’s interest?
  • Who else have they launched? Did they deliver what was promised? Did their goals shift under the influence of the advisor network? Talk to their “graduates” and grill them on their experience.

Conclusion

Angel investors, venture capital, incubators and accelerators are all tools that are available to help you build your business. As with building anything, it’s important to use the right tool for the job. The right deal is a solid foundation from which to launch your company – you’ll get the mentorship, support, and training to bring your idea to market, build lasting business relationships, and make a bunch of money in the progress. The wrong deal can cram your square peg of a business into the round hole of their interests, and drag you down the long, unpleasant road to failure.

Be strategic. Think about what the end-state will be, when all is said and done. If you’re 100% owner now, and an incubator takes 20%, accelerator takes 10%, and venture capital takes 30%, what does that leave you with? Remember, you’ll be the last to get paid. What if the on-paper value can’t be pulled out for a certain number of years? Is 40% of a $10 million company more valuable to you than 80% of a smaller one? Is your product a flash-in-the-pan, or is it something that will still be relevant when you can cash out? Are you comfortable working with, and being beholden to the people you’re doing business with for that amount of time?

There’s no such thing as certainty in business. That’s what makes it simultaneously frustrating and fun. Do your research, and I strongly strongly strongly recommend getting experience, professional help to review, understand, and negotiate the deal before you sign over part of your company. At the very least, legal, accounting, and ideally an impartial business advisor/investment banker with experience in the types of deals you’re looking at.

After all, “All things will be clear and distinct to the man who does not hurry; haste is blind and improvident.”
– Livy, Ad Urbe Condita Libri, 9 BC

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

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

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!