Business Business OrganizationsOrganizations

Types of Business Organization Types of Business Organization

Sole ProprietorshipSole Proprietorship - an individual - an individual carrying on business alonecarrying on business alone

PartnershipPartnership - two or more people - two or more people carrying on business together for the carrying on business together for the purpose of making a profitpurpose of making a profit

CorporationCorporation – an incorporated – an incorporated company that is a legal entity separate company that is a legal entity separate from the people who make it up.from the people who make it up.

Sole Proprietorship Sole Proprietorship

An individual carrying on business An individual carrying on business alonealone

Complete controlComplete control May register trade name, optionalMay register trade name, optional Few regulationsFew regulations

– avoid restricted/illegal activitiesavoid restricted/illegal activities– meet zoning bylawsmeet zoning bylaws– comply with workers’ compensation, comply with workers’ compensation,

employment insurance and income taxemployment insurance and income tax

Sole Proprietorship/2 Sole Proprietorship/2

Unlimited liability for debtsUnlimited liability for debts– No distinction between personal and No distinction between personal and

business assetsbusiness assets

Vicarious liability for torts of Vicarious liability for torts of employeesemployees

Taxed on a personal basisTaxed on a personal basis

Partnership Partnership

Two or more people carrying on Two or more people carrying on business together for the purpose business together for the purpose of making a profitof making a profit

Regulated by Regulated by Partnership ActPartnership Act.. Most not required to registerMost not required to register Sets out circumstances that do not Sets out circumstances that do not

create a partnership such as create a partnership such as – owning property in commonowning property in common

Creation of PartnershipCreation of Partnership

By Inadvertence - implied from By Inadvertence - implied from conductconduct

– Four Factors:Four Factors:

Creation of PartnershipCreation of Partnership

By Agreement - primarily a By Agreement - primarily a contractual relationship - oral or contractual relationship - oral or writtenwritten

– Elements of a contractElements of a contract– Contract out of Act Contract out of Act

Estoppel Estoppel – If I represent to someone that you are If I represent to someone that you are

my partner, I am bound to any my partner, I am bound to any agreements you and that person enteragreements you and that person enter

Partner as Agent Partner as Agent

Partners are each agents of each Partners are each agents of each otherother

– agency law applies to partnersagency law applies to partners– contracts made by a partner are contracts made by a partner are

binding on all the partnersbinding on all the partners Vicarious liability - all partners are Vicarious liability - all partners are

liable for the tortious conduct of a liable for the tortious conduct of a partner or an employeepartner or an employee

Unlimited Liability Unlimited Liability

Partners’ liability is not limited to Partners’ liability is not limited to the assets of the partnershipthe assets of the partnership

– personal assets may be used to satisfy personal assets may be used to satisfy claims against partnership, cannot claims against partnership, cannot contract out of that contract out of that

– third party can collect from any third party can collect from any partnerpartner

– Purchase adequate insurance Purchase adequate insurance

Rights and Obligations Rights and Obligations

Fiduciary Duty - a partner must act Fiduciary Duty - a partner must act in best interest of other partners:in best interest of other partners:

– account for all profits, expensesaccount for all profits, expenses– not use partnership property for not use partnership property for

personal benefitpersonal benefit– ??– ??– ??– ??

Rights and Obligations/2 Rights and Obligations/2

Partnership Act governs partner Partnership Act governs partner relationship:relationship:

– partners share profits equallypartners share profits equally– expenses are reimbursed by expenses are reimbursed by

partnershippartnership– all partners have right to all partners have right to

participate in managementparticipate in management

Rights and Obligations/3 Rights and Obligations/3

no right to salary or wages no right to salary or wages major changes must have major changes must have

unanimous agreementunanimous agreement no right to assign their partnership no right to assign their partnership

status without consent of all status without consent of all partnerspartners

can be modified by partnership can be modified by partnership agreement but only affects partnersagreement but only affects partners

Advantages Advantages

Disadvantages may be reduced by Disadvantages may be reduced by insuranceinsurance

Requirements of unanimous Requirements of unanimous consent protects partnersconsent protects partners

Less expensive to set up than Less expensive to set up than incorporationincorporation

Some tax advantages availableSome tax advantages available

Limited Partnerships Limited Partnerships

Limited partners are liable only to Limited partners are liable only to the extent of their investment if the extent of their investment if follow provisions in Actfollow provisions in Act

should register as limited partnershould register as limited partner at least one general partnerat least one general partner refrain from participating in decision-refrain from participating in decision-

makingmaking name must not be usedname must not be used

LLP Partnerships LLP Partnerships

Not all provinces allowNot all provinces allow Available only for lawyers and Available only for lawyers and

accountants in BCaccountants in BC A partner is not personally liable for A partner is not personally liable for

conduct of other employees or conduct of other employees or partners, unless supervisingpartners, unless supervising

Must be registered and include LLP Must be registered and include LLP namename

DissolutionDissolution

Notice of intention to dissolve can Notice of intention to dissolve can bring partnerships to an end. Or by:bring partnerships to an end. Or by:

– The death of a partner if only twoThe death of a partner if only two– AgreementAgreement– Bankruptcy of one partner if just twoBankruptcy of one partner if just two– The court of business is deemed illegal, The court of business is deemed illegal,

etc.etc.– Court orderCourt order

Dissolution/2 Dissolution/2

Public notice must be given Public notice must be given of dissolution to escape of dissolution to escape further liabilityfurther liability

CorporationsCorporations

The Process of IncorporationThe Process of Incorporation

Articles of Incorporation - Articles of Incorporation - adapted from USadapted from US

filing of articles and granting of filing of articles and granting of certificatecertificate

used in rest of Canada and used in rest of Canada and federallyfederally

Articles of Incorporation Articles of Incorporation

Procedure -Procedure -– has features of both registration and has features of both registration and

letters patent systemsletters patent systems– Notice of Articles registeredNotice of Articles registered– articles of incorporation (not articles of incorporation (not

registered) contain constitution, registered) contain constitution, purpose, bylaws controlling day-to-day purpose, bylaws controlling day-to-day operationoperation

– government body has no discretiongovernment body has no discretion

Separate Legal Entity Separate Legal Entity

Incorporation creates a distinct Incorporation creates a distinct legal entity separate from the legal entity separate from the people who make it up.people who make it up.

– Isolates shareholders from business Isolates shareholders from business activityactivity

– Limits liability of shareholders and Limits liability of shareholders and directors – only company assets riskeddirectors – only company assets risked

– Courts may “lift corporate veil” to get Courts may “lift corporate veil” to get at insiders who use company to at insiders who use company to commit crimes or avoid regulationscommit crimes or avoid regulations

Capacity Capacity

All methods of incorporation now All methods of incorporation now provide for corporations to have all provide for corporations to have all the capacity of a natural person.the capacity of a natural person.

Power to contract may be limited in Power to contract may be limited in certain situations specified in the certain situations specified in the legislationlegislation

Role of Agents Role of Agents

All activities of a corporation are All activities of a corporation are carried out by agentscarried out by agents

– actual or apparent authority must be actual or apparent authority must be establishedestablished

– employees may be able to bind the employees may be able to bind the corporationcorporation

– all agents have fiduciary duty to the all agents have fiduciary duty to the corporationcorporation

Funding the Corporation Funding the Corporation

Shares - means of providing capital Shares - means of providing capital from a large number of sourcesfrom a large number of sources

– par value - company places a par value - company places a monetary value on the share at issue - monetary value on the share at issue - may not reflect actual value on the may not reflect actual value on the marketmarket

– no par value - value of share is no par value - value of share is determined by the marketdetermined by the market

Special Rights and Restrictions Special Rights and Restrictions

Different classes of shares affect Different classes of shares affect rights of shareholdersrights of shareholders

Common shareCommon share– Voting rights, but no preferenceVoting rights, but no preference

Preferred share Preferred share – - shareholder gets preference when - shareholder gets preference when

dividends are declared but no votedividends are declared but no vote– if dividends are not paid - preferred if dividends are not paid - preferred

shares convert to voting sharesshares convert to voting shares

Shareholders AgreementShareholders Agreement

Shareholders agreement can set out rights Shareholders agreement can set out rights of shareholders in a contract with all of shareholders in a contract with all shareholdersshareholders

restriction on the transfer and sale of restriction on the transfer and sale of shares often imposed where the company shares often imposed where the company is closely heldis closely held

Shotgun buyouts when shareholders fall Shotgun buyouts when shareholders fall outout

Types of Corporations Types of Corporations

Closely held corporation - few Closely held corporation - few shareholdersshareholders

– shares not sold openly on stock marketshares not sold openly on stock market– private corporation (non-reporting)private corporation (non-reporting)

Broadly held corporation - public Broadly held corporation - public share offeringshare offering

– more highly structured and regulated more highly structured and regulated (reporting)(reporting)

Corporate Officers Corporate Officers

DirectorsDirectors

– directors elected - accountable to directors elected - accountable to shareholdersshareholders

– owe a duty to the company to be owe a duty to the company to be careful careful

– fiduciary duty to the corporation - not fiduciary duty to the corporation - not the shareholdersthe shareholders

External Obligations External Obligations

Duties imposed by statute:Duties imposed by statute:

– Directors may be personally liable for:Directors may be personally liable for: unpaid wages unpaid wages unpaid taxesunpaid taxes damage to the environmentdamage to the environment Employment Standards Act breachesEmployment Standards Act breaches

Officers and Senior Executives Officers and Senior Executives

Responsible for day-to-day Responsible for day-to-day management, hired by directorsmanagement, hired by directors

Fiduciary dutyFiduciary duty Duties of care and competenceDuties of care and competence Statutorily imposed duties similar to Statutorily imposed duties similar to

those of directors those of directors

Shareholders Shareholders

Few obligations unless they hold Few obligations unless they hold enough shares to be classified as enough shares to be classified as ‘insiders’‘insiders’

Owe no duty to corporationOwe no duty to corporation

Shareholders RightsShareholders Rights

– access to the records and financial access to the records and financial reports of the corporationreports of the corporation

– receive notice of annual general receive notice of annual general meetingsmeetings

– right to vote on major changesright to vote on major changes– Right to vote for directorsRight to vote for directors– first offer of new sharesfirst offer of new shares

Minority Shareholder’s Remedies Minority Shareholder’s Remedies

Derivative (representative) Derivative (representative) actionaction

Oppression actionOppression action

Dissent actionDissent action

Advantages of Incorporation Advantages of Incorporation

Limited LiabilityLimited Liability– unless directors/officers give personal unless directors/officers give personal

guarantees for loansguarantees for loans– or courts “lift corporate veil” and hold or courts “lift corporate veil” and hold

principals liable for company’s principals liable for company’s obligationsobligations

– shareholders protected from claims shareholders protected from claims against the corporationagainst the corporation

Advantages/2 Advantages/2

Tax advantages may be gained Tax advantages may be gained through incorporationthrough incorporation

Succession and TransferabilitySuccession and Transferability– continues to exist after death of a continues to exist after death of a

shareholdershareholder– shares can be transferred at willshares can be transferred at will

Advantages/3 Advantages/3

Shareholders owe no duty to the Shareholders owe no duty to the companycompany

Shareholders elect directors who Shareholders elect directors who appoint managers so are removed appoint managers so are removed from day-to-day operation of from day-to-day operation of companycompany

Disadvantages Disadvantages

Major changes in company Major changes in company structure must be reflected in structure must be reflected in incorporation documentsincorporation documents

Position of minority shareholder is Position of minority shareholder is weakweak

Most expensive way to operate a Most expensive way to operate a business, especially if publicly business, especially if publicly tradedtraded

Termination of CorporationTermination of Corporation

Dissolution of a company can take Dissolution of a company can take place in a number of ways.place in a number of ways.

– Winding up provisions in incorporation Winding up provisions in incorporation documentsdocuments

– Voluntarily by the directorsVoluntarily by the directors– Involuntarily by a creditor (bankruptcy Involuntarily by a creditor (bankruptcy

or receivership)or receivership)– Failure to file annual report for three Failure to file annual report for three

yearsyears