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10-1Chapter 10 Copyright © 2010 by Nelson Education Limited.
Form of Form of Organization and Organization and Legal IssuesLegal Issues
Form of Form of Organization and Organization and Legal IssuesLegal Issues
1010
PowerPoint Presentation by PowerPoint Presentation by
Ian Anderson, Algonquin CollegeIan Anderson, Algonquin College
10-2Chapter 10 Copyright © 2010 by Nelson Education Limited.
Looking AheadLooking Ahead
After studying this chapter, you should be able to:
1. Identify the common legal forms of organization used by small businesses and describe the characteristics of each.
2. Identify factors to consider in choosing among the primary legal forms of organization.
3. Describe the effective use of boards of directors and advisory councils.
4. Explain how different forms of organization are taxed by the federal government.
5. Understanding the major legal and regulatory issues businesses face
10-3Chapter 10 Copyright © 2010 by Nelson Education Limited.
Legal Forms of OrganizationLegal Forms of Organization
• In launching a new business, an entrepreneur must choose a form of legal organization. The most common options are:– Sole proprietorship– Partnership– Corporation
10-4Chapter 10 Copyright © 2010 by Nelson Education Limited.
Legal Forms of OrganizationLegal Forms of Organization
Exhibit 10-1
10-5Chapter 10 Copyright © 2010 by Nelson Education Limited.
The Sole Proprietorship OptionThe Sole Proprietorship Option
• Sole Proprietorship–A business owned and operated by one person–Disadvantages
• Unlimited personal liability• No tax free benefits• Death/incapacity of owner terminates business
–Advantages• Ownership of the company name and assets may be
transferred.• There is generally no registration or filing fee.• Freedom from interference
10-6Chapter 10 Copyright © 2010 by Nelson Education Limited.
The Partnership OptionThe Partnership Option
• Partnership– A legal entity formed by two or more co-owners to carry on a
business for profit.
• Partner Qualifications– Required: of legal age to contract– Desired: Honest, healthy, capable, and compatible
• Questions about Partnership Formation– What is our business concept?– How are we going to structure ownership?– Why do we need each other?– How do our lifestyles differ?
10-7Chapter 10 Copyright © 2010 by Nelson Education Limited.
The Limited PartnershipThe Limited Partnership
• Limited Partnership– This form of ownership consists of at least one general
partner and one or more limited partners
– General partner
• a partner in a limited partnership who has unlimited personal liability
– Limited partner
• a partner in a limited partnership who is not active in its management and has limited personal liability
10-8Chapter 10 Copyright © 2010 by Nelson Education Limited.
Sharing Workload
Sharing FinancialBurden
Sharing EmotionalBurden
Procuring ExecutiveTalent
Companionship
InterpersonalConflicts
Dilution of Equity
Dissatisfactionwith Partner
Absence of OneClear Leader
Frustration of NotCalling Own Shots
Advantages DisadvantagesThe Advantages and Disadvantages
of Partnerships
The Advantages and Disadvantages
of Partnerships
10-9Chapter 10 Copyright © 2010 by Nelson Education Limited.
Partnership TermsPartnership Terms
• Articles of Partnership–A document that states explicitly
the rights and duties of partners.
• Agency Power–The ability of any one partner
to legally bind (e.g., borrow money) the other partners.
10-10Chapter 10 Copyright © 2010 by Nelson Education Limited.
Rights and Duties of Partners in a Partnership Agreement
Rights and Duties of Partners in a Partnership Agreement
• Date and formation of partnership• Names and addresses of partners• Statement of fact of partnership
• Statement of business purpose(s)• Duration of the business• Name and location of the business• Amount invested by each partner
• Sharing ratio for profits & losses• Partner’s right if any re: withdrawal
of funds for personal use• Provision for accounting records
and their accessibility to partners
• Specific duties of each partner
• Provision for dissolution and sharing of the net assets
• Restraint on partner's assumption of special obligations, such as endorsing a note of another
• Provision for protection of surviving partners decedent’s estate, and so forth in the even of a partner’s death
10-11Chapter 10 Copyright © 2010 by Nelson Education Limited.
The Corporation OptionThe Corporation Option
• Corporation– A business organization that exists as a legal
entity and provides limited liability for its owners.
• Legal Entity– A business organization that is recognized by
the law as having a separate legal existence
10-12Chapter 10 Copyright © 2010 by Nelson Education Limited.
Articles of AssociationArticles of Association
• Restrictions if any on share transfers
• Names and addresses of incorporator and first year’s directors
• Name of company• Restrictions, if any, on
business the corporation may carry on
• Location of principal office
• Classes, voting privileges and, maximum number of shares the corporation is allowed to issue
10-13Chapter 10 Copyright © 2010 by Nelson Education Limited.
• Share Certificate
–A document specifying the number of shares owned by a shareholder
• Pre-emptive Right
–The right of shareholders to buy new shares before they are offered to the public.
• Legal Status
–Ownership provides control over the firm.
–Ownership limits liability to investment in the firm.
–Ownership can be transferred without affecting the firm’s operations
Rights and Status of ShareholdersRights and Status of Shareholders
10-14Chapter 10 Copyright © 2010 by Nelson Education Limited.
Limited Liability of ShareholdersLimited Liability of Shareholders
• For most shareholders, their limited liability is a major advantage of the corporate form of organization. Their financial liability is limited to the amount of money they invest in the business.
10-15Chapter 10 Copyright © 2010 by Nelson Education Limited.
Death or Withdrawal of ShareholdersDeath or Withdrawal of Shareholders
• Unlike a partnership interest, ownership in a corporation is readily transferable.
• Exchange of shares is sufficient to convey an ownership interest to a different individual.
• Shares of large corporations are exchanged constantly without noticeable effect on the operation of the business.
• For a small firm, a change of owners can involve numerous complications
10-16Chapter 10 Copyright © 2010 by Nelson Education Limited.
Issues in Choosing an Organizational Form
Issues in Choosing an Organizational Form
• Factors that affect the choice of the firm’s structure:–Initial organizational costs and requirements–Limited versus unlimited liability for the owners–Continuity of business–Transferability of ownership–Management control–Attractiveness for raising equity capital–Income taxes
10-17Chapter 10 Copyright © 2010 by Nelson Education Limited.
Comparison of Legal Forms of Organization
Comparison of Legal Forms of Organization
Sole proprietorship
General partnership
Corporation
Form oforganizationpreferred
Minimum requirements;generally no registrationor filing fee
Minimum requirements; generally no registration orfiling fee; written partnershipagreement not legally required but strongly suggested
Most expensive and greatestrequirements; filing fees; compliance with provincial regulations for corporations
Proprietorship orgeneral partnership
Unlimited liability
Unlimited liability
Liability limited to investmentin company
Corporation
Limited to proprietor’spersonal capital
Limited to partner’sability and desire tocontribute capital
Usually the most attractive form forraising capital
Corporation
Form ofOrganization
Initial OrganizationalRequirements and Costs
Liability ofOwners
Attractiveness forRaising Capital
Exhibit 10-2
10-18Chapter 10 Copyright © 2010 by Nelson Education Limited.
The Board of Directors and DutiesThe Board of Directors and Duties
• Board of Directors–The governing body of a corporation, elected by the
shareholders–Inside directors
• Board members who work for the firm–Outside director
• Board members who do not work for the firm
• Duties–Elect the firm’s officers (top management)–Approve management’s plans and policies–Review performance and declare dividends
10-19Chapter 10 Copyright © 2010 by Nelson Education Limited.
The Board of Directors and Advisory Councils
The Board of Directors and Advisory Councils
• Contributions of Board of Directors–Bring knowledge and experience
• Review policy decisions• Provide general direction• Monitor the firm’s ethical behaviour• Mediate and resolve disputes among top management
• Alternative: Advisory Council–Provides advice but does not have the fiduciary
responsibility for the direction of the firm.
10-20Chapter 10 Copyright © 2010 by Nelson Education Limited.
Federal Income TaxesFederal Income Taxes
• Sole Proprietorship– Self-employed persons are taxed on their business incomes at tax
rates set for individuals.
• Partnership– The partnership does not pay taxes; allocated shares of income
from partnership are taxed as personal income for each of the partners.
• Corporation– As a separate legal entity, it reports its income and pays any taxes
related to these profits.
10-21Chapter 10 Copyright © 2010 by Nelson Education Limited.
Federal Income Taxes and Sole Proprietorship
Federal Income Taxes and Sole Proprietorship
Sole ProprietorshipExample of taxes due from a married couple with $150,000 in income from the business that they operate as self-employed persons
Range of Taxable Income Tax Rate
$0 to $37,885 15%
$37,886 to $75,769 22%
$75,770 to $123,184 26%
$123,185 and over 29%
Income x Tax Rate= TaxesFirst $37,885 15% $5,682.75Next $37,884 22% $8,334.48Next $47,415 26% $12,327.90Remaining $26,816 29% $ 7,776.64Total $150,000 $34,121.77
10-22Chapter 10 Copyright © 2010 by Nelson Education Limited.
Federal Income Taxes and CorporationsFederal Income Taxes and Corporations
CorporationsTaxable income under $400,000 is taxed at the federal corporate tax rate of 12%. Provincial tax rates vary.
Any profits of the corporation that are distributed to the shareholders (dividends) are taxed again as personal income.
INCOME TAX
Small business income up to $400,000 11.0%
Investment income 34.7%
10-23Chapter 10 Copyright © 2010 by Nelson Education Limited.
Laws and RegulationsRegulating Competition
Laws and RegulationsRegulating Competition
• Competition Act (Federal)– Designed to maintain a competitive economy– Prohibits:
• Discounts not offered to all customers
• Tied selling
• Refusal to deal
• Exclusive dealing
10-24Chapter 10 Copyright © 2010 by Nelson Education Limited.
Laws and RegulationsProtecting Consumers
Laws and RegulationsProtecting Consumers
• Ontario Business Practices Act
• Canadian Consumer Packaging and Labelling Act
• Textile Labelling Act
• Food and Drug Act
• Hazardous Products Act
• Motor Vehicle Safety Act
10-25Chapter 10 Copyright © 2010 by Nelson Education Limited.
Laws and RegulationsProtecting Investors & Public Welfare
Laws and RegulationsProtecting Investors & Public Welfare
• Protecting Investors– Securities Act
• Promoting Public Welfare– Ontario Environmental Protection Act– Municipal health bylaws– Canadian Human Rights Act
10-26Chapter 10 Copyright © 2010 by Nelson Education Limited.
Laws and Regulations Protecting Employee Rights
Laws and Regulations Protecting Employee Rights
• Occupational health and safety acts
• Employment standards codes
• Workers’ compensation acts
10-27Chapter 10 Copyright © 2010 by Nelson Education Limited.
Laws and RegulationsProtecting Intangible Assets
Laws and RegulationsProtecting Intangible Assets
• Trademarks, e.g., Sony, Acura
• Patents, e.g., Post-It notes
• Copyrights, e.g., songs, books
• Industrial Design
• Integrated Circuit Topography
• Plant Breeders’ Rights
10-28Chapter 10 Copyright © 2010 by Nelson Education Limited.
Business AgreementsBusiness Agreements
Exhibit 10-5