Careers in the Cloud - E37: Protect Yourself Legally as a Tech Contractor in Canada (Lawyer Explains)

Are you an IT contractor in Canada, or thinking about becoming one? Wondering whether to operate as a T4 temporary employee, sole proprietor, or incorporated business?  

In this episode of Careers in the Cloud, we’re joined by 'Anti-Lawyer´, Daniel Rizzi, a seasoned Barrister and Solicitor from DiMinno Rizzi In Association, to break down the legal essentials every Canadian tech contractor should understand. 

From liability risks to incorporation benefits, Daniel walks us through: 

• The legal differences between T4, sole proprietorship, and incorporation 
• When and why you should engage a lawyer as a tech contractor 
• What to prepare for your first meeting with a legal advisor 
• Legal pitfalls to avoid when starting a company or bringing on partners 
• How to protect your IP when developing your own software 
• Why getting legal advice early can save you money—and headaches—long term 

Whether you're freelancing in software development, DevOps, data, cloud infrastructure or cybersecurity, this episode gives you practical legal insights to protect your business, your assets, and your future.

Transcript:

Please note, that this transcript is automated and may have errors

[00:00:09,800] Maurizio:

So we've had a couple  of sessions already dedicated to our contractor community in helping them So when I say contractor community, I mean IT professionals who are looking to start a contracting business, provide their labour, we'll say on a time and material basis or perhaps even do fixed priced projects. There's a variety of ways that they do it, but they work as contractors effectively. Right. For their time. One of the episodes we did was primarily focused completely on the accounting side of starting a corporation. The other side, or the other episode we had was predominantly focused on investing. Once you're starting to make money in that corporation, you got a few contracts. You're doing well, what do you do when you have that capital? Today we're here with with Dan Rizzi, and we're going to talk about the legal implications of starting a IT contracting business, even if it's just you yourself who's effectively the owner and employee of that business, which is, I would say, the majority of the contractors that we work with. So, Dan, welcome to the show. Thanks for being here. 

[00:01:10,110] Daniel:

Yeah. Thanks for having me. It's good you talk to the accountants first because a lot of that decision making process, when you're, when you're thinking about incorporating kind of a lot of the times comes down to the tax. It's not the only consideration. But for most people it's probably the biggest. But yeah, we'll talk about we'll talk about all that. And, yeah. Just happy to be here. 

[00:01:29,170] Maurizio:

Yeah. So you're a lawyer obviously, but you're also a programmer I guess on the side. Do you decide to teach yourself? Has tech always been a part of what you've been interested in aside from say from, say, law? How did you get into it? What do you program? What languages. Give us a little bit about about that. 

[00:01:46,110] Daniel:

Yeah, sure. So always as a kid I love tech. I had a really old computer and way beyond its lifespan, I sort of kept it working, even though it was giving me error messages every day and just kind of figuring out these, these weird hacks to do. So I was working at a large firm. I had some time off, I decided to start my own law practice, but I sort of had a gap. So I had some time with Covid and, you know, the world shutting down to learn how to code, which is something I always wanted to do. So I did Harvard's Cs50 course, which is an amazing introduction to coding. It's the same class that the undergrads take at Harvard, and they teach you, c plus, Python, SQL. And they have some modules for, for some other languages for specific things. So I was actually interested in making a mobile phone game. 

[00:02:38,380] Maurizio:

Okay. 

[00:02:38,820] Daniel:

So I worked on that for six months. That's a huge project. So I didn't I unfortunately didn't get that finished. 

[00:02:43,700] Unknown Speaker:

But video game coding is, is sort of some of the most 

[00:02:46,900] Daniel:

complicated but, a little ambitious there. But yeah, I learned how to code. I've used code to automate some things in my legal practice. 

[00:02:54,420] Maurizio:

Cool. 

[00:02:54,940] Unknown Speaker:

And, it's really good because I do a lot of work 

[00:02:58,500] Daniel:

with tech startups, and I speak the code language. So if you're ever selling a tech startup, there's going to be a due diligence process. And a lot of that's going to be relating to the intellectual property and the code, right. So making sure that, hey, that code, is it ours, what's open source, what's copyrighted, what's copyleft? A lot of people haven't heard that term before. And yeah, I can kind of get into the, the details with the CTO and make sure that, you know, the buyer has everything they need. 

[00:03:26,980] Maurizio:

Sure. Dangerous combination. Right. A lawyer that can that can code You describe yourself  as an anti lawyer. I've personally never heard of this. Excuse my ignorance. Uh, what is an anti lawyer? 

[00:03:38,460] Daniel:

Sure. So, you know, I've thought about this a lot, and there's a certain way of running a business where you're maximizing your profit and your revenue over perhaps what's in the best interest for your customers. And we see a lot of big businesses start out very customer focused. And then when they get super huge, they go public. They're cutting costs. They're trying to maximize profits, profit margin. So the way I practice law and the way I sleep well at night is I'm prioritizing the clients first, which means if someone comes in for an incorporation and they don't really know what they need, and I don't think it's time for them, I'm going to tell them, hey, you don't need this yet. You're starting a business. I know it's tough. Money's money. You could probably wait six months or somebody selling a business, and, you know, you could start building them right away. Or you could say, hey, listen, I don't think the business is ready to be sold. Why don't you come back when you find a buyer? Because I don't want you to waste money on legals before you know you have an offer and you make less money like that. But you sleep well at night, and everybody's happy with you, so, that's, that's what an anti lawyer. 

[00:04:49,290] Maurizio:

Is, the way you operate. All right. So Montreal Associates, it's the staffing firm that I work at, right. IT staffing firm. Most of the way that it works. Right. To give you some context, right. If you don't already know we have contractors like I mentioned it professionals are really good at something, right. 

[00:05:06,440] Unknown Speaker:

They,  they go they typically incorporate. 

[00:05:09,120] Maurizio:

They don't have to. But typically that's what they do. And they work on a time and material basis for any of our clients. That could be anywhere, right? Um, it is possible for most of our contractors, I would say, actually, all of them are incorporated, but it is possible for contractors to work as a T4, standard temporary employee, a sole proprietor or as an incorporated entity. 

[00:05:33,800] Unknown Speaker:

What from a liability perspective, what is the difference 

[00:05:37,560] Maurizio:

in contracting those three different ways? 

[00:05:40,920] Daniel:

Um, let's start with incorporation. So incorporation you have a separate entity that's separate from you, which means any debts or liabilities incurred by the corporation. Stay with the corporation. Some limited exceptions. So, when you're doing business with multiple clients, multiple companies, you know, you're responsible for your work, right? Somebody hires you to do something, you got to do it well. And if you charge some and you don't get a workable product, you might have litigation. Or you say, I made this thing. It has all these specifications. It's good. And then they find out six months later it doesn't do something you said it does or, you know, it sort of does it, but it doesn't. And maybe problems come up later. And if you get sued, well, that lawsuit stays with the company. So they can't come after your personal assets. They can't come after your house, your car, whatever else you may have. So if you're working on really big projects, you know, it's that's you probably want to be incorporated, right? Because, you know, it's five grand worth of development. You know, it's not it's not a huge project. You do a few of those, you're probably okay, But, you know, multi-million dollar contracts, multiple contractors, things can get really messy. So that's probably the main reason to incorporate, from the liability perspective. And you guys talked about the tax stuff with the accountant. So normally it's tax first. And then by the time you're doing those big projects you're probably making enough for the tax side anyways. Sole proprietor is kind of a weird category in Ontario. It's a very simple filing with the government, but it's essentially like you're just doing business by yourself. There's no corp. And what happens if there's no corp? Well, all the debts and the liabilities of your business exactly goes with you. So something goes wrong with the project. You're getting sued. Maybe you're hiring subcontractors. Well, all that kind of falls on you personally. And that means if you get sued, you can't pay someone. They can come after you personally. How? Car? Really fancy laptop. They can go get that. You got crypto, they can Come for all those assets. So, there's that and then the T4 Employee sort of similar category of sole prop. You're working as a temporary employee. Likely there's a lot less liability. Um, but you're also not getting the tax benefits of Incorporation and kind of owning your own business. So you're getting less write offs, things like that. So again, there still could be liability, but it's probably less than the sole proprietor. But yeah, generally incorporation is the way to go because you're safe, you're protected. And then once you're super successful, and this is a lot of things we'll talk about here. But if you don't set things up early, it's way more expensive to do them later. So you don't want $2 million in your bank account and investments and assets and all this, and then you're like, oh, now it's time to incorporate because you know, you're going to be paying the lawyers and accountants a lot more money at that point. 

[00:08:50,250] Unknown Speaker:

So, sooner is generally better than later. 

[00:08:53,690] Maurizio:

Okay. And to understand the chain too, when we talk about liability, typically again, there's exceptions where there are some contractors who have their own say direct end client. And for the sake of like understanding for anyone watching or even for yourself. Right. We can say that end client is, I don't know, a big bank, right? for the most part, right. Contractors aren't working directly for, say, an entity like that. There's usually some kind of agency in between that the end client, right, where the contractor is providing the service, is in between. Right? An agency like Montreal Associates, for example, there's tons of staffing agencies when it comes to true liability. I'm sure there's a very gray area here too. Right. We have a contractor who's providing a service through a staffing agency at an end client such as a bank, government ministry or public company? Private company, whatever. Right? That's the chain liability. Does it get passed down from the client to the agency? And then should the agency decide, it gets passed down to the contractor. Like, does that layer in between protect the contractor at all? 

[00:09:58,200] Daniel:

Sure. So things can be different depending on how things are structured. 

[00:10:01,600] Maurizio:

But typically the contract you sign probably. Right. 

[00:10:03,880] Daniel:

Right. So typically the in-between agency or entity has the obligations with the end client. 

[00:10:11,320] Maurizio:

Yeah. 

[00:10:11,960] Daniel:

But in that worst case scenario where things go really badly and let's say the bank's mad,  millions of dollars there's a huge privacy breach, something like that. They're going to sue the in-between agency. And then the in-between agency has a decision of, am I going to pursue the contractor that made the mistakes, or did this, malicious or otherwise? Or are we just going to pay it out? So in the very worst case scenario, the agency comes after the contractor for for what happened. There's a lot of factors that would go into that decision. You know, are we going to fight the end client? Like we don't really think anything really went wrong, or we think it's the client's fault because they weren't clear, they didn't communicate something. Or on the opposite extreme of, oh, we think the contractor did something malicious. Um, they put a back door in the code. you know, they just they just didn't do what they were contracted to do. And in that case, it's pretty highly likely that the agency would, would come after the contractor there. 

[00:11:08,630] Maurizio:

So, in the typical setup that we see in a way incorporated contractors are, I don't want to say double protected, but there's a couple of layers between them personally and the end client where they're actually delivering the service. One, their corporation, two the agency. And then finally, right, you're at the level where where you're actually delivering. So that's an interesting point. At what point does it make sense to engage a lawyer if I've decided to begin working as a contractor? 

[00:11:33,170] Daniel:

Yeah, absolutely. So I mean, the ideal scenario is you already have some funds put away and you know you're going to be doing this long term and you just get the corporation set up right away. So in this case, all your bank accounts are under the corporation name. Um, all your contracts with your clients are going to have that corporation name. Um, there's no administrative switching process. Um, if you think about the alternative, which I'll recommend to, to people early on in their career, is you wait a bit because, again, corporation might cost you two grand. Um, the tax filings are now more expensive. You're going to be paying 2 to 3 grand on that per year, and then you have some filing and maintenance stuff to do. 

[00:12:15,510] Unknown Speaker:

So,you know, if you're making 150 to 200, like those costs 

[00:12:19,510] Daniel:

are not a big deal. But, you know, your first six months, maybe you're saying, okay let me delay that cost. And the switching administratively is not a big deal if you wait those six months. But a lot of the time, people wait. You know, at six months, I'll get to it. I'm busy. I'm doing the projects. And then it gets to the point where. Yeah, now you're really busy. You don't have time. You're making money. Your account is telling you to incorporate, and now you need a section 85 rollover. Now you need to switch all your contracts with all the clients. You got to switch your bank accounts over. Maybe you've hired some people and all. That's a bigger pain in the butt to kind of deal with and just kind of doing it up front. So ideally it's it's up front if you have some money, but you probably wait six months and be okay. 

[00:13:03,260] Maurizio:

Okay, that's that's a good frame of reference because usually what will because sometimes when someone's switching into contracting, they obviously haven't really worked contract before. They're probably working in a permanent job. Right. Because if we're telling them that contracts are a good idea, their skills are sought after. You're probably working is what I mean to say. Right? So we usually will recommend that while you're working your permanent job, you don't have to wait until a contract is in front of you to get your stuff set up. It might make sense now that you actually have a salary, right? And you're getting paid to have that conversation with your accountant. Figure out how you're going to be doing that. Speak to the lawyer, right to figure out how you want to actually set the company up. And if there's any stipulations with shares and all that good stuff. Right. And how it ties into the rest of your family, if that's applicable. There's a million different ways or things I'm sure they could ask, but we usually say maybe do that upfront while you're still making money up so you're not just left using your savings for something like this. Would you say that's also probably a good idea? 

[00:13:58,250] Daniel:

Yeah. I mean, your legal fees could be upwards of like $20,000 if you kind of wait too long to. Kind of. Transfer things over. Do a rollover. So, yeah, like if you have the means, definitely do it right away. Um, but you know, I deal with a lot of very early stage tech startups. So sometimes you got to wait, you got to build the product. And you have no. It is what it is. But listen, you have two grand in the bank. Just just get it done and you'll be you'll be, you'll be happy you did it. 

[00:14:27,410] Maurizio:

So what are some questions that within that first say right at the beginning or within the first six months to a year. that when the person who's setting up their say it contracting business, what should they talk about with their lawyer? What are some things that they should bring up and discuss? 

[00:14:42,670] Daniel:

Yeah, absolutely. So, if there's any tax planning considerations. So maybe you have multiple  businesses, maybe you have some losses  from a previous business you want to write off. again, that's sort of an accounting chat, but, you know, an experienced lawyer knows what to do with that stuff. you know, you're married. Something to talk about because, you know, divorces happen to the best of us. 

[00:15:10,880] Unknown Speaker:

And, you never know when that's coming. 

[00:15:13,320] Daniel:

And you want to plan around that. There's a lot of really complicated corporate structures that are used for more complex tax planning. So if you have kids, you might be looking at a trust that owns the shares of the corporation instead of you just owning them directly. So there's a lot of complexity there. I know we're going to talk about this later, but if you plan on building a product in the business, this is really important to know early on because you might even want to do two separate corps because, you know, let's say you're thinking about the venture capital route. You want that billion dollar unicorn business. Well, at some point, if you have consulting revenue in the corp and you're building the product and you want to fundraise, or even if you want to sell, well, then that's going to have to be separated out. And again, that's the complicated lawyer and accounting stuff. So ideally from the beginning it's separated. And you have two separate corp's, you know it can still happen if you've been working for two years and you decide you've been building the product in the corp, but ideally that's kind of split out. 

[00:16:17,480] Maurizio:

So, those are some of the things. 

[00:16:21,000] Daniel:

And again, you have a big project coming up. It might make sense to talk to a lawyer ASAP because again that liability You don't know what's in that contract. 

[00:16:29,030] Maurizio:

Okay. And where would you say in your experience, where in the incorporation process do most new businesses in tech fail to do their due diligence? 

[00:16:40,000] Daniel:

Yeah, absolutely. So if you're if you're planning to fundraise, there's a particular thing that needs to be in the articles of incorporation, which is not going to be in there by default. So that's the first thing, having multiple people involved in the corp. you got to be clear, right? Like who owns what is it, 50 over 50, is it not? Or some people putting in money, are they not. so sorting those things out and we put all that in what we call a minute book. So a lot of these like free incorporation services online. Well, yeah, they do the filing like the filing isn't the hard part. It's the minute book and writing everything down and making sure everything's organized. So and then if you ever need to fundraise, you're going to need your minute book and you might get audited by the CRA. You need a minute book there as well. So you're not going to get the minute book done if you do it yourself. 

[00:17:27,900] Unknown Speaker:

And, the minute book solves a lot of problems because you actually have 

[00:17:31,860] Daniel:

to think about, okay, to make it. I have to get the information. And sometimes there's a lot of hard conversations about, hey, I'm going to work full time. You're not. Should that be 50 over 50? Okay, I'm going to work 40. You're going to work ten hours. But you're going to put in $50K  does that change what the equity splits going to be? So there's a lot of factors you want to be thinking about. If there's a lot of people involved, if it's just you, it's not the most complex thing in your early in your career. You don't have any tax planning going on yet. But if you do have tax planning, you definitely don't want to just be incorporating and just, you know, doing it yourself. 

[00:18:09,180] Maurizio:

Can we talk about the minute book for a minute, just for people who maybe aren't familiar with that term, can you define exactly what that is, how it works, and how you keep it updated? If I'm saying that correct, sure. 

[00:18:18,500] Daniel:

So the minute book, back in the day before the internet and computers. It used to be a physical book and it would have your articles of incorporation. So that's the document you get from the government that says this corporation is real. It's going to say who owns what shares. It's going to say the share classes. It's going to say, , does the corporation owe any the shareholders debt? It's just an administrative set of docents. And it's kind of like the spine of the corporation, if you will. It's kind of everything you kind of need to know about the corp, or most of it at least, is going to be in the minute book. And normally what you do is every year you go to a lawyer, it's a few hundred bucks, you get them in a book updated, they'll know what to do. Um, if you're paying yourself dividends, that's going in your annual resolution. So that gets put in the minute book. Um, and yeah, generally whenever money is being taken out that's recording that in the minute book. So nowadays I do them all fully online. If your lawyer is doing them physically well, you're paying extra for that in a sense. Um, but yeah, now it's just essentially a bunch of PDFs in a folder somewhere, and you just click it, you open it, you have everything you need. 

[00:19:28,880] Maurizio:

But to wrap up, that first chunk of what we spoke about, right. Most who are unfamiliar with lawyers, they just think lawyers cost a lot of money, going to pay a lot of money. Avoid talking to the lawyer whenever you can, right. But the reality is, from what you're saying, if you don't engage the lawyer at the right time when you're starting a legitimate 

[00:19:46,600] Unknown Speaker:

business, it can be costly, right? 

[00:19:50,000] Maurizio:

So to wrap this up, summarizing it, why is it important to engage a lawyer at the right time, for both the short and long term when incorporating? 

[00:20:01,080] Daniel:

Absolutely. And to kind of address that point, you can definitely engage the wrong lawyer and get charged 5 or 10 grand for this incorporation. Um, so you want to make sure you get an appropriate lawyer or someone who specializes, but also probably a smaller midsize firm. You're not going to the big firms spending a lot of money. 

[00:20:18,360] Unknown Speaker:

But, what a lawyers like to say is pay money now or pay 

[00:20:23,040] Daniel:

a lot more later is the best way to summarize it. And when you're starting out, your time is not as valuable because you're not fully you're not at full capacity. but later on, when you're busy and everything's successful and, you know, clients know you and they're requesting you, you're gonna have less time to switch things over. It's going to cost more money to switch things over again. You're going to pay the lawyers a lot more money to switch things. Things might get complicated in the tax area. You're going to be paying your accountants money as well. So you're going to do it anyways assuming you're going to be successful. So just get it done now, pay less money, have everything set up and you're not kicking yourself later when it's two years later, you didn't get it done, you're getting sued. You have significant assets. Um, your accountant's mad at you because you didn't. You didn't do it. And, yeah, you saved a few thousand bucks, but you might be paying a lot more. Yeah, yeah. 

[00:21:18,830] Maurizio:

Okay, so let's go through a few scenarios then. What legal considerations should I make when starting a company with one partner? 

[00:21:27,550] Daniel:

Yeah. So with one partner. 

[00:21:30,950] Maurizio:

Just for context. Sorry. Like from scratch. There's no incorporation yet. Just two people, like, hey, let's do this business together. Let's get started. 

[00:21:38,510] Daniel:

Yeah. For sure. So big focus on that equity distribution. So if we're going to incorporate who owns what. Um, I like to say if you have a lot of hard conversations, you don't need to talk to lawyers very often. Um, a lot of people will avoid these hard conversations. So sometimes it's very awkward to be like, yeah, this guy's a full time job. Um, he's a specialist that we're going to use, but, you know, he might do five hours a week and I'm going to be doing business development. I'm going to be talking with the clients or the agency in between. I'm going to be doing most of the coding, and he just comes in for his specialized role. Um, you might have a 9010 split, right? Like, it doesn't have to be 50 over 50. 

[00:22:21,140] Daniel:

And, a good lawyer who does this a lot can kind of help you, help you think through the equity split, which is very important.  But, it's super important. You just you just do the hard stuff upfront. Um, some people work together three months and they're like, oh, this isn't going to work, right? so you probably want to work together a bit before just to kind of get a sense of things before you kind of spend the money on the costs. But, the biggest thing is the equity split for two people, and just defining what those roles and responsibilities are going to be. What are the expectations? It's okay if it's not equal contributions. And a lot of the times in life like you can never really be 50 over 50, but both people need to understand that going in and write it down. And then five years later it's like, hey, no, no, this was what we agreed to, and we knew we were going to do it like this. 

[00:23:11,140] Maurizio:

And the documentation around that too. I imagine it's what you're putting in the meeting book. As far as the equity split, when there are costs associated to the business based off of the equity that's in there, you should try and follow that to a T to not muddy the waters. And if there's, for whatever reason, a change, that's where as long as it's recorded on the annual conversation with your lawyer, you can perhaps update the split in equity. Or is it not that simple? 

[00:23:35,250] Daniel:

Yeah. So once you split the equity to change it, you're walking to tax territory. So normally there's going to be tax consequences. 

[00:23:44,770] Maurizio:

Okay. 

[00:23:45,370] Daniel:

If you haven't made any money yet it's easy to change. but things change all the time. Right. So it's better to change things earlier rather than later. And on top of the minute book, generally we'll have a shareholders agreement, which the important thing for that is what happens if somebody gets sick, somebody gets divorced, if somebody dies or somebody just wants out for whatever reason, you know, they got an offer for Google and now they're like, listen, I'm making $300/400K now. I can't be doing this anymore. I gotta focus, you know? 

[00:24:17,410] Maurizio:

So the shareholder agreement kind of deals with divorce, 

[00:24:22,850] Daniel:

the splitting up of the partners, and it may deal with equity provisions of, like. Okay, you want to leave? Well, do you just get your 50% or is there some type of penalty for leaving early? So the shareholder agreement, ideally you deal with all that kind of right from the beginning, like what happens if we need to change the equity or things like that? 

[00:24:44,630] Maurizio:

Okay. And then the scenario where you're buying into a business, so there's already someone who's got their, you know, contracting business, they got some clients. They're doing real well. You decide, you know, you get packaged out of your job. This is like a random scenario. This is someone you've known for a little while and you're like, hey, I think I can help you out. We, our skills complement each other. I want to buy into your business for both parties. What are legal implications, if any, different from the previous example. Should they consider and speak to a lawyer about? 

[00:25:13,000] Daniel:

Yeah, so this is way more complicated. And again, a lot more hard conversations, right. So let's say, you know, it's one guy, he's bringing in $300K a year, through contract work or clients. And, you know, he needs some help, right? Okay. So you come in. What are we doing about this? $300K, right? Like, are we saying, okay, he's going to work on those clients, and then I'm going to help when he needs help. Well, does that mean we're splitting that we're splitting the $300K so it's one 150/150 now. And then if we're doing that, like how much money should I pay to buy in. Does it make sense how much money I'm going to put in for that. Or are we saying he's going to keep all those clients? I'm going to help when he's too busy, but then I'm also going to go off on my own, find clients. We're going to have like a unified brand. 

[00:26:04,920] Unknown Speaker:

But, his clients are his clients 

[00:26:07,400] Daniel:

My clients are my clients. 

[00:26:09,500] Maurizio:

We see more, again, it's not like this happens every day in our world, but we do see it more where someone's buying into a business under that same brand, helping to like, grow and fuel the same business in a uniform basis. Right? That's more of what we see. 

[00:26:23,670] Daniel:

Yeah. Yeah, sure. And it's again, just like, what are the expectations if it's $300K revenue, maybe you're saying, let's value the business at two X revenue per year. So $600K and I want half. So I give you $300K upfront. You could do something like that. Or again you're going to help grow the business. But that's almost like a separate division. Like your clients are a separate division. I'm going to kind of have my division. 

[00:26:48,030] Unknown Speaker:

Andfrom there the buy in might look a little different. So, again, it's what do the people want? 

[00:26:55,310] Daniel:

What are their expectations? Because you just want to make sure everybody understands what the deal. 

[00:26:58,990] Maurizio:

That's where a lawyer helps though to kind of clarify the valuation is one part, I guess that is less. Less legal implications. Technically, it's more around the rules of engagement. When the two parties come together and work together at responsibilities. Like you said, equity. That's where there has to be very strict legal definitions upfront. Before you start, let's just jump in to business together kind of thing, right? 

[00:27:24,180] Daniel:

Yeah. Yeah. Well, I'd say I'd say step one is with a lot of my clients is the clients don't know really what they want. Right. They go, okay, I want to work with this guy. He has a successful business I want to buy in. Right. So then my conversation with them is going to be okay. What's your expectation for what that would look like. And then okay, if that's your expectation I would probably do it like this. And this is a fair deal okay. You want you want half the revenue okay. Let's value it. You pay them an amount. Oh you don't want the revenue. You just want to use the brand to kind of bring in clients. And then maybe you guys collaborate on certain clients, right? 

[00:28:04,650] Maurizio:

Gotcha. 

[00:28:05,050] Daniel:

That's going to be a different kind of buying situation. And then from there, once I kind of get them clear on their expectations and what it would look like, then they go back to the other person and say, okay, this is what we've been thinking about. 

[00:28:16,210] Maurizio:

Assuming they agree, then, you know, you do the paperwork. 

[00:28:19,130] Daniel:

You kind of write it all down, but a lot of the time and again, this is the anti-lawyer thing. It's not okay. You're doing a buy in. Let's just get the paperwork out. Done. No. It's like, okay, let's actually figure out what we're doing. And then we only do it once. 

[00:28:33,730] Maurizio:

And through these conversations  do shares and share classes. Is that an important topic to speak about and what do those mean for someone who's Not so savvy in that area. 

[00:28:43,290] Daniel:

So shares are ownership units of the company. So if you own all the shares you own the entire company. You own half the shares, you own 50% And you could get more complicated with shares and share classes. So you can give certain shares different rights. So you can have non-voting shares so they get the economic interest in the business, but they can't make decisions and it can get more complicated. So normally the lawyers are going to help you figure that out. We don't have to go into too much detail, but a big part of this as well is the accountants do very complicated share classes. and there's a lot of accountants who do their own incorporations for clients, which, I won't speak on that practice, but they, they like to make a very long list of share classes, which a lot of people don't know what they're for or what they do. And a lot of the times they don't get used until way later. so a lot of the share classes are tax driven. But as a lawyer, I have to make sure, okay, we have these share classes from the accountant, but who owns which shares and does it make sense? And you know, if it's 50/50 partnership, both people should have voting rights. So we have to make sure things like that are in there. So again it's more just making sure what's written down actually reflects what's going on in the real world. 

[00:29:56,410] Maurizio:

Right. And that's a part of when you're registering the corporation. There's a part where you can define those share classes. You probably shouldn't write those yourself. That's where you speak to a lawyer, I imagine. 

[00:30:05,800] Daniel:

Yeah. Yeah, exactly. 

[00:30:07,000] Maurizio:

Writing those in a way that is legally sound. 

[00:30:10,540] Daniel:

I mean, there's nothing that's going to come out of your brain naturally that's really going to work. 

[00:30:15,360] Maurizio:

Right? 

[00:30:15,800] Daniel:

unless you do a ton of research and you're still going to get something wrong. So, Yeah, like, that's not a DIY thing. 

[00:30:23,320] Maurizio:

Okay. Good to know. Um, so what about if the company is also going to be starting their own product. So not just time and material IT services. They're starting their own product. You mentioned before, sometimes it makes sense to have, say two separate companies with respect to the IP and future, if you're going to be going for funding and all that good stuff, can you walk us through some of the legal implications there and what maybe you should consider or ask a lawyer about, if that's what you're planning to do? 

[00:30:44,560] Daniel:

Sure. So to take it from the employer or the client perspective, if I'm having someone make code for me, I want to own the code, right? I'm not I'm not paying you money to make the code, and then you let me borrow it, and then you have all the IP rights. So, so that typical arrangement, what it's going to look like is the client owns all the code. And obviously you have a copy, but you know, you're not really allowed to use it. So now in my mind, if what I'm thinking is I'm going to I'm going to write all this code for clients, and then I'm going to take it and build my own product, and it's going to be different. But obviously like there's a lot of influence from the projects I've been doing with clients. Um, you can run into a lot of intellectual property issues, right? 

[00:31:30,510] Unknown Speaker:

Because, you know, I build something for BMO. 

[00:31:35,510] Daniel:

I go, BMO really loves it. I could probably make it and sell it to other banks. Well, BMO says, hey, I paid, you know, $200K for this. Don't just go to RBC and, like, you know, charge RBC five grand a month. If you have two separate corporations and you're being very clear in your in your contracts with clients what the carve outs are. Right. A lot of people get into trouble because they just write the code and then they say, okay, I want to make this product now, and they make the product, and then they get some customers and revenue. But then eventually that original client goes, hey, wait a minute, this looks pretty, pretty similar. So making sure that your corporation's contracts with either the agency or the direct client, deals with IP and you're saying, hey, like I'm going to build a separate product or I might. So I have all the rights I need to do that. Um, and then from a future looking perspective of having two core, I know all the IP for the product is in corp number two. And, you know, you might have situations where you have a 50/50 split in Corp one, but one guy doesn't want to make a product and you're doing all the work to build the product or you know, Guy one only does X amount of work on the product, and he does most of his time doing the contracting work. So it's not a fair distribution of work on the product. And then the product, of course, needs marketing and sales and all this stuff. Right. Which is separate from the consulting business. 

[00:33:09,700] Unknown Speaker:

So, two corp's great if you know you're going to do it right away, 

[00:33:14,220] Daniel:

it's probably better to do that. We can make it happen later. It's just going to be expensive. And if you don't own the IP, you don't own the IP. So, the client might be reasonable and say, hey, feel free to take the IP back. But, a lot of times it doesn't work out like that. And there's going to be some royalties or, or they're just going to say no. 

[00:33:35,140] Maurizio:

What about if someone has managed this is not necessarily, the initial demographic, I guess we spoke about at the beginning of the podcast. But let's fast forward a bit and let's say they manage to scale their contracting business to a point where they've got employees, they got partners, right? They're doing real well. And they're thinking about, okay, now I'm talking. I'm thinking about exiting this business. Uh, what are some topics? If they haven't spoken to a lawyer yet that they should be speaking about right now? 

[00:34:01,570] Daniel:

Yeah. For sure. So a lot of people think about stock option plans. So someone's working for me for a while. They do a really good job. They're really important to the business. I want to give them some equity. I want to get them a piece of the pie. So then they're committed to stay. The harder they work, the more that their piece of the pie is worth. and it makes people feel really valued, which is useful for growing and scaling a business. So stock option plan definitely can't do that by yourself. So you need a lawyer for that. You want to make sure that again you have a minute book. There's some people who, you know, they scale that business and there's been no minute book. And the reason why that's a problem is if you're trying to exit and I'm a buyer, I'm going to buy your business from you. Well, number one thing, do you own the business? Do you own 100%? I don't want to buy the business from you. Then a year later, some guy shows up. He goes, oh, actually, no, I own 25% of that business. You didn't pay me any money. I'm like, who are you? You weren't in the minute book. There was no minute book. They said they owned the entire business. So a buyer in their due diligence process is going to make sure all the legals are sorted out. And there's going to be a very motivated lawyer who bills by the hour, who wants to go through every little detail, who's going to be on the other side demanding that all these things are produced and you're going to have to get them drafted? So you need your records in order. There's no chance you're selling this company if your financials aren't ready to go. So the accounting and the legal you both want sorted ideally a year before you sell the business. There's also some tax stuff involved with selling a business up to two years in advance. So you want to make sure you get your capital gains exemption, which saves you a lot of money in tax. And if you have investments in the business, you may not be eligible. So, you know, like investing in stocks or things like that. So you might actually need two years in advance get those things out of the corp. So selling the business you want to be thinking about well in advance. And there's a lot of other things. 

[00:36:06,630] Unknown Speaker:

But, you know, a buyer might look at your business and say 

[00:36:11,310] Daniel:

25% of your revenues from one client and you have a really bad contract with them. I love the business otherwise, but unless you can get this contract 

[00:36:20,590] Unknown Speaker:

changed, the revenue is not safe. 

[00:36:24,310] Daniel:

Like they could terminate at any time and boom, the business worthless. Yeah. 

[00:36:28,750] Unknown Speaker:

So, a review of all those contracts. 

[00:36:31,990] Daniel:

Really important. Employees. Right? Maybe everybody is also an independent contractor. Maybe people are employees. But definitely having that sorted out and in that vein as well, the contract with the independent contractor or employee isn't definitive, right? So you might have some independent contractors that work for you 40 hours a week. They don't do anything else. They don't have any other clients. You give them a laptop, you set everything up for them. The courts may actually say this person's an employee. Why that's important is if I'm a buyer and I want to terminate this guy. Well, now I have to pay him. If he's been working a while, maybe two months notice to terminate this guy. And then also, all the tax that should have been withheld also needs to be paid, which could be a lot if they've been working for you for a while. 

[00:37:23,780] Maurizio:

Yeah. Wow. 

[00:37:24,540] Daniel:

So that's a big one, people. 

[00:37:26,780] Maurizio:

A contractor worker classification is very important from the beginning. And being able to differentiate who's a contractor and who's not Are businesses that typically have more permanent employees valued more, 

[00:37:37,980] Unknown Speaker:

assuming both would be profitable. 

[00:37:39,740] Maurizio:

One has all contractors, one has all employees. 

[00:37:42,380] Daniel:

I mean, not necessarily If I buy a business, I literally want nothing to change in the first six months. I want to buy it. I want it to run. So if I have a bunch of people who are kind of attached to the business, that's nice. But if you've had an independent contractor that's worked for eight years and they consistently show up and they do the work, I'm probably not worried about that. I'd be more worried about what are the obligations I have to employees that we haven't been doing. And, you know, if you have 40 people that are quote on quote independent contractors and they're actually employees 

[00:38:16,660] Maurizio:

They're classified as employees based off of how you've been treating them and whatnot, right? 

[00:38:20,860] Daniel:

Yeah, like that could be a large sum of money, and you could randomly get audited by the Ontario government that kind of deals with that stuff. And then, there's personal liability if that stuff hasn't been paid. 

[00:38:31,740] Unknown Speaker:

So, that can be really messy when selling the business. 

[00:38:35,820] Daniel:

So employees, contractors, big deal. Making sure you own the business. Legal due diligence. Any weirdness with debts Stuff in the share classes you know, creditors, all that stuff. A lawyer happy to walk you through everything, but, selling businesses is a big deal. So there's a lot of work there. 

[00:38:58,650] Maurizio:

Yeah. Years of planning. It sounds like. Okay. 

[00:39:00,610] Daniel:

Yeah. 

[00:39:01,050] Maurizio:

Last question for you. Are there dangers in using AI for legal advice, for example, to create service contracts? It's one of the many examples I'm sure people are doing today. You know more than me. 

[00:39:15,690] Daniel:

Yeah, sure. So I've used a lot of cursor AI and cursor AI blew my mind for code. and it's amazing. And basically like the low level coding, the junior stuff, it does really well. So two things to think about AI And I've seen this both with the code and with legal work is, the better coder you are, the better prompts you can give. Okay. So if you say build me an app that will track my spending, right? That's a bad prompt. And you're not going to get the app you had in your mind. But if you go super granular and you say, you know, write me a for loop that does x, y, and z, you're going to get a for loop that does x, y, and z. And the more granular you can go, the easier it is for the AI to spit out what you want. So it's the same thing in legal, right? Like you can say write me a service contract for an IT professional that protects me. But that's a bad prompt, right? Because you don't specifically know what it needs to spit out. So AI is at a point now where it could probably spit out a contract that's 80% correct. You know, and like, you might be fine, but if you're doing really big projects, like, is 80% fine? Probably not. And the other thing just to keep in mind as well is if another lawyer reviews your AI contract, they know, they can tell. So, you know, if you're trying to impress this. 

[00:40:44,950] Maurizio:

They're gonna find that 80% or 20%. Sorry. 

[00:40:47,790] Daniel:

Yeah, yeah. And if you're trying to impress a really big client, you know, look bigger than you are, like, yeah, yeah, we can do this. Million dollars worth of work. Yeah, yeah, we can do it. We're big. We're established. And then the lawyer sees the contract like, this isn't a contract, right? Like, why can't you just afford, like, two grand to get the contract done, you know? 

[00:41:04,070] Maurizio:

Yeah. 

[00:41:04,390] Daniel:

So, it can get you in trouble. It's probably 80%, 90% of the way there. But then you have that big question mark of, like, what's not in there? Like what's left out. And you'll find out eventually. And it might be a surprise. It might not be a big deal. But, at the end of the day, there's a certain point of success where you're actually holding yourself back if you're not spending. Right, like if you're not delegating things to people, if you're not, if you're just trying to do everything yourself, well, you're not an expert in everything. Like you're an expert in code. Code. Make money and then spend some of that money on the other things. But, it's you can fill a short gap with it for a while, but, people think they can do that with their shareholder agreements, try to do the minute book like that, and you can really get in trouble when it's just not what was supposed to be in there. And then you're trying to sell your business and they go, hey, like this, this says X, Y, and Z, and you're like, oh, no, no, it wasn't like that. Well, I'm going to believe what was written down. 

[00:42:04,980] Maurizio:

it's fantastic. It's a lot for our contractor community to think about. A lot of the time. I said this in a previous episode where we'll always tell them, like I said, even before in this episode, when you have the time and you're working and you're thinking about contracting, this is a fantastic opportunity where in your evenings and weekends get in touch with the right people such as your lawyer, your accountant, your financial planner, to figure out how you're going to make this work for the long term. Do it right the first time so you don't have to pick up the pieces and pay a lot later. And when you're under the least pressure to do it, because I see it in our industry all the time where, you know, a staffing agent that maybe isn't so experienced and is just getting a lot of pressure to get someone in the door for a given client, they haven't even asked the person if they're incorporated or not, and then they have the offer in hand and they're like, okay, send your articles of incorporation. It's like, well, what are those? Now you're in big trouble, right? It's Wednesday. The person is supposed to start on Monday, right? And they don't even know what it means to be to be incorporated. Right. So I think this is going to be super valuable for everyone in our community to see the importance of speaking to a lawyer upfront. Give yourself time. Don't put that kind of pressure on yourself and do it right the first time. So thank you Dan. Appreciate you coming out. 

[00:43:10,500] Daniel:

Yeah. Thank you. And as a business owner Delegate as much as you can because honestly like you're just making less money pulling your hair out trying to do contracts, trying to do bookkeeping, trying to do HR, just get people who know how to do it and just get it done. And then you can focus on what you do well, and everybody else can focus on what they do well and everybody's happy. 

[00:43:29,100] Maurizio:

Beautiful. Thank you 

[00:43:30,390] Daniel:

Thank you.