Eight 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 Canada Revenue Agency (CRA) calls. Here are the eight 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 when you knew, or should have known, that a payment was missed to sue on it (Limitations Act, 2002).

That page needs five things:

• Price and payment terms: What you charge, when it is due, and what late payment costs.
• Scope: What is included, what is extra, and who approves changes.
• Timeline: Delivery dates and what happens when either side misses one.
• Ownership: Who owns the work product and the client's materials when the engagement ends.
• Exit: Cancellation rights and any notice period.

Two owners at 50/50 with no shareholders' agreement is a risky structure. Nothing in the corporation's own rules forces a resolution of a deadlock: neither owner can outvote the other, and neither has to sell or leave. A court can step in through an oppression or winding-up application, which is slow and costly, and the business can stall while it waits. 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) designed to end a deadlock. Partnerships need the equivalent partnership agreement for the same reasons. Our guide to Ontario business structures covers how ownership and liability differ across the options.

Incorporating gives 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. Keep separate accounts, document salary or dividends, and keep a minute book that reflects what actually happened. When you lend the corporation money, sign a shareholder loan note and record it, so that repayment later is a repayment and not an unexplained withdrawal. Our post on ongoing compliance for an Ontario corporation lists the records a corporation has to keep.

Labelling a worker an independent contractor saves payroll costs until the CRA or the Ministry of Labour reviews the arrangement. Neither the CRA nor Ontario's Employment Standards Act, 2000 (ESA) 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 carries the cost: retroactive Canada Pension Plan (CPP) and Employment Insurance (EI) contributions 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, expect the CRA to treat them as an employee, or at least a dependent contractor.

Ask the question before the first payment, not after the first dispute. Note who sets the hours, who supplies the equipment, whether the person can send a substitute, and whether they work for anyone else. If the answers point to employment, put the person on payroll and use a written employment agreement. Our guide to hiring your first employee in Ontario covers the setup.

Under the CRA's small supplier rules↗ (the CRA also has a plain-language page on when to register and charge↗), you lose small supplier status when your worldwide taxable revenues pass $30,000 in a single calendar quarter or over four consecutive calendar quarters, and from then on you owe harmonized sales tax (HST) whether or not you have registered. A business that ignores the threshold for two years owes the CRA the 13% it never collected, plus interest, and usually cannot practically recover it from customers who paid the old price, depending on your contract terms. Watch the number as you grow, consider registering early because input tax credits on your expenses can offset the cost, and use the registration steps in our Ontario startup legal checklist.

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.

Licensing sits behind the same door. There is no single Ontario business licence, and BizPaL↗ will list the municipal, provincial and federal permits for your business type and location in a few minutes. A restaurant build-out is a bad time to learn what the health unit requires.

Permits, inspections, deposits and a landlord's first and last month all cost money before the first sale, and founders who spent everything on fit-out have nothing left when an approval takes another six weeks. A thinly funded corporation with a personal guarantee on the lease can make you personally liable for the lease. Price the whole opening, not just the equipment, and keep a cash reserve for the delay.

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 can owe common law notice, which can be much more. A template is a starting point at best. The clauses that matter are the ones a template cannot know about your business. Having a lawyer adapt one set of client and employment templates to Ontario is a one-time job, and you can reuse the result for years.

Founders register the corporation, register the business name, buy the domain, and consider the brand handled. None of those is a trademark filing. In Canada the first filer usually holds the stronger position, though a prior user may be able to oppose or challenge the filing, so a competitor who files for your name after you have spent three years building it can leave you fighting to keep it. A lost fight means a rebrand or a settlement on their terms, and signage, packaging, the website and years of customer recognition go with it. The government fee to file online is $491.06 for the first class in 2026, and the Canadian Intellectual Property Office (CIPO) forecasts about eight months before an examiner first looks at a September 2026 filing, which is why the filing belongs in the launch month and not the third year. Start with what registration gets you in Canada, then follow the steps in how to register a trademark in Canada.

Preventing these problems is usually less costly than litigating them. The businesses that get this right take risks like everyone else, and they put the paper in place while the stakes were still small. If you cannot fix all eight at once, rank them by what you would lose if the problem surfaced next month. An unwritten deal with your biggest client or an absent shareholders' agreement usually sits at the top, and the brand filing moves up the list every month the name gains value.

A 30-minute consultation can tell you which gaps matter for your business and which can wait. If you want that review, book a 30-minute consultation, and our corporate law practice handles the fixes.

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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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