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Legal Risks for Start Up Co-ops

NOTE: This tool has been created with the help of a presentation provided by Mary Childs of Miller Thomson LLP. But this tool does not replace legal counsel. To better understand the legal risks facing your co-op, consult a lawyer.

Concerned about the legal risks of starting a business? This tool explores some of the most common legal concerns co-ops face and what you’re responsible for as a member or director. 

A co-operative, like other incorporated entities, has many of the same legal rights and capabilities as an individual. Co-ops can take on debt, own property, and they can be held legally responsible for the business they carry on. 

Doing business as a co-op offers some protection for members because their liability is limited to their investment. This means that if the co-op must repay a debt or has to pay a fine or legal settlement, you are not personally liable for those expenses. As with any business, you can lose the money you’ve invested in the co-op if the business becomes insolvent (unable to pay its obligations) or bankrupt (a court order deciding how to deal with unpaid debts).

A co-operative’s board of directors and management take on some additional risk. If the co-op’s board or managers are negligent, they may share the legal responsibility of damages caused by their negligence. Similarly, if directors or managers knowingly commit a crime while carrying out their duties, they may face legal consequences. As long as directors act in good faith and fulfill their obligations to the co-op, these consequences will be avoided. 

The following section outlines the three most common legal risks for co-operatives.

Torts

The most common legal risk for businesses are called torts (sometimes called ‘slip and fall’ law). Torts are a legal obligation resulting when you or your business causes harm to someone. A tort can be unintentional/accidental or intentional; here are some examples of both.

  • Unintentional torts are usually caused by negligence
    • A car accident where you are at fault
    • A customer slips on a wet floor in your store
    • A product you made is faulty and injures the user
  • Intentional torts are less common and may include criminal wrongdoing
    • Assaulting someone during an argument
    • Spreading false information about someone (defamation)
    • Falsifying reports to deceive investors (fraud)

To protect your business against torts, take extra precautions:

  • Ensure the co-op’s volunteers and employees comply with safety standards and safety inspections are prioritized. 
  • Offer co-op members, staff, or volunteers education on negligence, conduct, and criminal wrong doing.
  • Where possible, obtaining waivers from clients can limit your responsibility if the product or service you offer has inherent risks (e.g. contact sports). 
  • Obtain a comprehensive liability insurance package

Regulations

Regulations include all the legal requirements your co-op must comply with. This will include the laws set out in governing legislation like the Cooperatives Act, but also includes regulations and requirements that apply to your specific industry or location. National, provincial, and local governments may have regulations that businesses must comply with and it is your responsibility to ensure you’ve properly complied. Here are some examples of regulations that may be relevant for your co-op:

  • Filing annual reports with the corporate registry
  • Complying with human rights
  • Paying applicable taxes
  • Obtaining business (and other applicable) licenses

Failure to comply with regulations can have a range of legal consequences. For example, failure to submit annual corporate documents can result in the co-op being struck from the registry, making it unable to carry on business. Failing to comply with tax laws or violating humans rights may have more severe consequences such as fines. 

The best way to protect your co-op against violating regulations is to do your research and understand what’s expected of you. Work with a lawyer to get expert insight into what’s applicable and how to best comply.

Contracts

An important legal risk for businesses that interact with other organizations and individuals are contracts. Remember that contracts are not always written agreements. Voluntary arrangements that are agreed to verbally or through conduct can also be legally binding. For example, when a customer purchases bread from a bakery, the exchange of money for a product implies that a contract is created. If a person or business does not hold up their end of the contract, they may have to compensate the other party for the value they lost. Some examples of breaching a contract include:

  • Not performing work that was agreed to
  • Failing to deliver products by an agreed upon date
  • Providing a product that does not meet the agreed upon requirements

There are a number of ways your co-op can protect itself when dealing with contracts. The easiest and most effective precaution is to read agreements thoroughly before signing them. Using written agreements that clearly outline expectations is also preferable to verbal agreements that are open to interpretation. Introducing waivers and exceptions into a contract can protect your business if there is some risk involved in the agreement. If your work requires you to enter contracts related to products or services, consider obtaining professional or product insurance.

Managing Legal Risk

Operating a business will always come with risks. The best way to minimize this risk is to act honestly and in good faith while staying aware of the regulations, commitments, and obligations you’re responsible for. Consult a lawyer to determine how to best protect yourself and your business and purchase a comprehensive insurance package in case things go wrong. Check out our guide to insurance for some tips. 

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