Seven legal mistakes that sink new Ontario businesses

New businesses rarely get in legal trouble for exotic reasons. The same handful of mistakes shows up in file after file, and almost all of them trace back to the same instinct: the paperwork can wait. It usually can, right up until a partner leaves, a client refuses to pay, or the CRA calls. Here are the seven mistakes we see most, and what each one actually costs.

A verbal agreement is a real contract in Ontario. The problem is proving what it says. When a client disputes the scope, a supplier misses a deadline, or a collaborator remembers the revenue split differently, the fight stops being about the law. It becomes a fight about whose recollection a judge believes, reconstructed from text messages and invoices. A one-page written agreement that states the price, the scope, the timeline, and what happens on cancellation prevents most of these disputes from existing. Businesses that invoice on terms should also know the clock: in Ontario you generally have two years from a missed payment to sue on it.

Two owners at 50/50 with no shareholders' agreement is the most expensive structure in Canadian small business. Nothing forces a deadlock to resolve: no one can outvote anyone, no one has to sell, and no one can make the other leave. The corporation simply seizes up while the business bleeds. A shareholders' agreement settles the hard questions while everyone still likes each other: who decides what, how shares are valued, what happens on death, divorce, disability, or a falling-out, and a mechanism (shotgun clause, put and call options, third-party valuation) that guarantees a deadlock ends. Partnerships need the equivalent partnership agreement for the same reasons.

Incorporating buys you a liability shield, and commingling funds is how owners give it back. Paying personal expenses from the corporate account, skipping documentation on money you take out, running everything through one chequing account: each of these hands the CRA shareholder-benefit arguments in an audit and hands creditors evidence that the corporation is not genuinely separate from you. The fix is boring and cheap. Separate accounts, documented salary or dividends, and a minute book that reflects what actually happened.

Labelling a worker an independent contractor saves payroll costs right up until it does not. Neither the CRA nor Ontario's Employment Standards Act cares what the contract says the relationship is; they look at what it is: who controls the work, who owns the tools, whether the worker can profit or lose, how integrated they are into your business. Get it wrong and the employer wears it. Retroactive CPP and EI with penalties and interest, unpaid vacation pay and overtime under the ESA, and termination pay for a dismissed "contractor" who was an employee all along. Courts are also comfortable finding a middle category, the dependent contractor, who is owed reasonable notice on termination despite the contractor label. If someone works mostly or only for you, on your schedule, with your tools, plan on them being an employee.

Cross $30,000 in taxable revenues over four consecutive calendar quarters and GST/HST registration stops being optional. The trap is that the obligation to charge tax starts when you cross the line, not when you get around to registering. A business that ignores the threshold for two years owes the CRA the HST it never collected, out of its own pocket, plus interest. Watch the number as you grow, and consider registering early: input tax credits on your expenses often make voluntary registration a net win anyway.

A commercial lease is one of the largest obligations a new business takes on, and it is routinely signed unread and unchecked. Two failure modes. First, zoning: if the municipality does not permit your use at that address, you owe rent on premises you cannot legally operate from. Verify with the city before signing, not after. Second, the lease itself: commercial tenants have almost none of the protections residential tenants get, so the personal guarantee, the demolition clause, the repair obligations, and what happens on early termination are all exactly what the document says. The same goes for licensing. A restaurant build-out is a bad time to learn what the health unit requires.

The internet's free contract templates are mostly American, and it shows: references to at-will employment, which does not exist in Canada; non-competes, which Ontario banned in employment contracts in 2021 outside narrow exceptions; governing-law clauses pointing at Delaware. An employment agreement that tries to contract out of ESA minimums is void on that point no matter what it says, and a termination clause that misses Ontario drafting requirements fails entirely, and then you owe common law notice, which is far more. A template is a starting point at best. The clauses that matter are the ones a template cannot know about your business.

Every mistake on this list is cheap to prevent and expensive to litigate. A shareholders' agreement costs a fraction of an oppression application. A contractor review costs a fraction of a CRA reassessment. The businesses that get this right are not the ones that never take risks. They are the ones that put the paper in place while the stakes were still small.

An hour reviewing your setup is cheap insurance. Telesh Law Firm Professional Corp can tell you which gaps matter for your business and which can genuinely wait.

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This article is general information, not legal advice, and does not create a solicitor-client relationship. It is current as at its publication date and is not revised as the law changes. For advice on your specific situation, book a consultation or call 416-639-0887.

Written by

Caleesis Telesh

Founder & Principal Lawyer

LL.B. · B.A., York University · Member, Law Society of Ontario

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