a) What are the legal forms that can be used for ownership of a business?
b) What are the advantages and disadvantages of a sole proprietorship? Partnership? Corporation? c) What is the incorporation process?
d) What are the rights of a shareholder?
e) What are Common shares vs. Preferred shares?
f) What are unanimous shareholder agreements?
g) What are the different types of liability?
h) What does “corporate veil” refer to?
a) Sole proprietorship, partnerships, or corporations: the 3 legal forms of business
• Sole proprietorship is the simplest form of business. It’s usually only used when necessary. There is one owner who owns 100% of the business, has to be a human being (as opposed to being a legal person). Transfer of ownership is not possible.
- Name: The name of the business is usually named after the business owner (ex. Lawyers) however you can adopt another name to operate.
- Registration: Must register every year with the government in whatever province you operate. - Liability for debts: The sole proprietor is responsible for all debts of the business. This is why sole proprietorship is a high risk business
- Taxes: Sole proprietorship goes on your personal tax forms, which is more convenient for your accountant. There is no distinction between personal assets and professional assets- A creditor can go after personal property such as your house, car, etc. All profit is taxed as personal income.
- Personal income: If you earn more than $60k a year, its better to incorporate for tax purposes. - Termination: The business itself cannot be sold, but the assets can. The business is terminated when owner dies or simply stops operating business. We also discuss several other topics like What is the purpose of self-management and responsibility for an action?
• A Partnership is when 2 or more people agree to carry on an activity including the business operation of an enterprise by sharing skills, knowledge, assets, and/or properties and share the resulting profits. These 2+ people can be corporations (legal persons). Transfer of ownership is possible with limits.
- Name of business: Must choose a name of business that relates to the type of business - Type of business: How long is this business in place for? Is it for an indefinite amount of time or for a fixed amount of time?
- Terms: Every partnership needs a governing document/partnership agreement of some sort to say who gets what and who has which responsibilities. (This is not legally required)
- Share/ Contributions: Who brings what into the partnership- what duties does each partner get. Very important to get in writing BEFORE the business begins.
- Registration: Must file one every year with government. This is called a “Partnership Declaration” and it identifies partners, the location of business and the business type.
- Dissolution/buy out: Must get this in writing (i.e. the governing document mentioned above) before stating business in case of an unhappy partner who wants to leave the business If you want to learn more check out What foods are high in thermic effect?
- Liability for debts: We also discuss several other topics like What determines if you have a boy or a girl?
- Solidary/joint and several liability: All debtors are liable for 100% of debt, every partner can be equally responsible for all debts. Creditors can go after personal assets, and can pick and choose whom they collect it from or how much they collect from whom.
- Limited partnership: Limited partnership can have either general partners or special partners. - General partners: Creditors can come after both partners for debt, regardless of share - Special partners: Has investors with no liability, as a way to protect investors
• Corporations are the lowest risk type of enterprise. This also gives business owners the best tax breaks
- **All law references are from the CBCA (Canadian Business Corporation Act, page 202 of textbook) unless otherwise noted.**
- A corporation must maintain a registered head office within Canada. Within Quebec, it must be registered under the QCBA. Within every head office, important documents such as the articles of incorporation, the Certificate of Incorporation, a unanimous shareholders agreement (if there is one), register of the company shares, minutes of the shareholders meetings, and official company seal must be kept.
- Federal vs. Provincial incorporation:
- It is an important decision whether to incorporate provincially or federally. Generally if a company works only only one province, it only needs to be registered in that province. If this business wants to start selling their goods/services in another province they may do so, but if they want to open a branch in this second province, they then have to register their business there. So why incorporate federally? If a company is big enough to do so. However, they still have to register in every province individually. If you want to learn more check out How does environmental health begin?
- When registered federally, your name will show up in the database all across the country, but if you incorporate a company provincially, another company can do the same thing with their same name in another province. This can be a problem if your business grows, and you may not be able to get a trademark.
- A corporation/company is a legal entity, meaning it is legal person.
- Capacity/powers: Obviously cant die, just can be liquidated. Can’t get married, divorced, etc like a person but can buy shares and is not personally liable like a real human can be - Indoor management rule: operates through agents, mandataries, representatives, directors, officers of the company. Addresses situation of what if CEO wasn't properly elected by senior officers? Indoor management rule stipulates that the actions of this CEO cannot be annulled just because this person was mistakenly doing a job that he/she wasn't supposed to do. - Limitation of shareholder liability: Says that the shareholders are not liable for the debts of the company Don't forget about the age old question of What are the characteristics of addiction?
- Name: If using a name for a brand, it should be registered and trademarked federally so no one can take it. Uses Inc, Ltd, Corp, etc. When thinking of a name for your business, google the name right away, to make sure no one else has already claimed the name. If its free, its best to register it asap as well as buying the domain name. A name must not be deceptive or misleading, or sound similar to another name in such a way that it could cause confusion.
- Transfer of ownership: Transfer of ownership in a corporation is more objective than personal. Evidence of ownership is a share certificate, and is transferred from person to person in exchange for money.
- Pre-incorporation contracts: Cannot represent a company that has not yet been incorporated.
b) What are the advantages and disadvantages to sole proprietorship, partnership, and incorporation?
Advantages and disadvantages of sole proprietorship,
partnership, and corporation
- Simple registration
- Inexpensive to start
- All profits go to the owner
- Simple to dissolve, or ends when owner dies
- All decisions go to owner
- Owner personally liable for all debts
- Depends on skills of owner only - Difficult to obtain funding
- No legal distinction btwn owner and business
- All profits are considered
personal income to owner so is taxed at full personal income rates
- Simple registration
- Inexpensive to start
- Profits shared btwn partners - Easy to dissolve
- Partners pool talents and help each other
- Allows some limitation of liability
- Potential for conflict btwn
- Lack of continuity
- Difficult to transfer ownership - It may be difficult to recover initial investment
- Each partner’s share of profits are taxed as personal income - Partners are personally liable for all debts including each others
- Corporations are a legal entity - Cannot be taxed as personal income
- Easier to attract managers - Easy to transfer ownership - No personal liability for the owners
- May be incorporated under provincial or federal law
- Much more complex form of business
- Expensive to start
- Usually requires lawyers or other professional services
- Double taxation
- Hard to keep operations a secret - Must observe government requirements
- Lack of shareholder interest/ participation in day-to-day
Don't forget about the age old question of How are committee assignments made?
c) What is the incorporation process? - Incorporators: Who can do it? Anyone- a lawyer, an accountant, etc. The incorporator must be 18 or older, of sound mind and is not bankrupt.
- Articles of incorporation: General operating rules of the company. Must include: a) Name of the corporation
b) The province where the registered office is to be situated
c) The classes and maximum number of shares that the corporation can issue, whether there will be two or more classes of shares and what their rights are
d) If the transfer of ownership is to be restricted, a statement as to the nature of the restrictions
e) the number of directors
f) Any other restrictions the corporation may carry on
- Certificate of incorporation: Your incorporation is always given a number, no matter what. You can pay extra to give your company a name as well, but you still have the number. - Appendix 6-H
- Date of incorporation: The date that the company was incorporated
- Registered office: You have a registered office in whatever province you do business. Your incorporation is always given a number, no matter what. You can pay extra to give your company a name as well, but you still have the number.
d) What are the rights of the shareholder? - When a corporation has only one class of shares, the 3 rights of shareholders are: 1. To vote at any meeting of shareholders of the corporation
2. To receive any dividend declared by the corporation
3. To receive the remaining property of the corporation on dissolution
- Note that shareholders are obligated to attend a shareholders meeting once every 15 months
e) What are “Common” vs “Preferred Shares”?
- Common shares: Focus on the long term value. The law requires that there is at least one “class” of shares, and there may be a few classes of “preferred” shares. Common shares (also known as Class A shares) have the following three rights:
- Vote: for the board of directors
- Dividend: received whenever available
- Residual property: received if company is liquidated.
Preferred shares: These shares are the second class of shares. Used when you want to borrow money and not dilute the voting rights. So as a preferred shareholder you may or may not have the right to vote.
- Vote/no vote: Generally not except when the company has been doing poorly for quite some time and needs an overhaul, or a similar situation.
- Dividend: dividend is almost guaranteed yearly, usually a fixed amount.
- Cumulative vs. non-cumulative: For every year a dividend isn't issued, the next year it will be doubled.
- Participating vs. non-participating: One thousand common and one thousand preferred.
f) What is an unanimous shareholder agreement?
- A unanimous shareholder agreement enables shareholders to restrict the power of directors. This law allows shareholders to take amore active role in the company, and brings investment into the company. However, should the shareholders take over certain aspects of management of the company, they are as held responsible to the same legal standard as a director.
g) What are the different types of liability?
1. Joint and several liability: If there are 2 or more directors, each can be sued for 100% of the debt- Creditors can collect as much or as little from whichever director they please.
2. Issue of shares: Share being sold for less than market value is illegal and the director(s) are liable for making up the difference
3. Directors who consent to a payment of a dividend are liable to restore to the corporation any amounts not recovered by the corporation
Directors liability for wages
1. Six months wages: directors are liable to pay not more than 6 months wages to employees of the corporation
- However, the director is not liable unless the corporation has been sued for debt w/in 6 months after it has become due OR if the corporation has started liquidation/been dissolved and a claim for debt has been proved within six months after the earlier date of the date of the liquidation proceedings OR if the company has claimed bankruptcy within the first six months
2. A director who has been in this job position for less than 2 years in not liable under this section
Directors and officers liability
1. Duty of care: Every director and officer of a corporation have to act in good faith with heir interests in the corporation, and to exercise care, diligence and skill in their job.
2. Duty to comply: Every director and officer has to comply with this Act and any regulation, by-laws, or unanimous shareholder agreements.
h) What does the corporate veil refer to?
The “Corporate Veil” refers to someone using their company to hide behind in a legal issue. Case 6.1 in the textbook tells of a man(Mr.Bates) who leased a property under the name of his company, Network Transport Ltd. When he failed to continue to pay rent, the owner took him to court. Mr.Bates argued that it was the blame of Network Transport Ltd, not his personal self. Mr. Bates did not have any employees working for Network Transport Ltd, and it was found that he was not operating any business activities within Quebec, nor was he profitable at the time of the leasing. The court found Network Transport Ltd guilty against the defendant of not paying rent and owing them the sum of $238,398.25 plus taxes and interest.
(For more information see case 6.1 on page 209 of the textbook)