PowerPoint Presentations for Small Business Management: Launching and Growing New Ventures, Fifth Canadian Edition Adapted by Cheryl Dowell Algonquin College

CHAPTER 10 Form of Organization and Legal Issues 10-2

LOOKING 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 Copyright © 2013 by Nelson Education Limited 10-3

FORMS OF LEGAL ORGANIZATION Copyright © 2013 by Nelson Education Limited 10-4 LO 1

a business owned and operated by one person sole proprietorship liability on the part of an owner that extends beyond the owner’s investment in the business unlimited liability a legal entity based on the voluntary association of two or more persons to carry on, as co-owners, a business for profit partnership Copyright © 2013 by Nelson Education Limited FORMS OF LEGAL ORGANIZATION 10-5 LO 1

PARTNERSHIP Clarify the following expectations before a partnership agreement: 1.What is our business concept? 2.How are we going to structure ownership? 3.Why do we need each other? 4.How do our lifestyles differ? A strong partnership requires partners who are honest, healthy, capable, and compatible. Copyright © 2013 by Nelson Education Limited 10-6 LO 1

RIGHTS AND DUTIES OF PARTNERS Copyright © 2013 by Nelson Education Limited 10-7 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 LO 1

CORPORATION exists as a legal entity and provides limited liability to its owners Canada Business Corporations Act corporation recognized by law as having a separate legal existence can sue and be sued, hold and sell property, engage in business operations that are stipulated in the articles of association, and pay taxes separately from corporation’s owners legal entity Copyright © 2013 by Nelson Education Limited 10-8 LO 1

ARTICLES OF ASSOCIATION Copyright © 2013 by Nelson Education Limited 10-9 Name of company Restrictions, on business Location of principal office Classes, voting privileges and, maximum number of shares the corporation is allowed to issue Restrictions on share transfers Names and addresses of incorporator and first year’s directors LO 1

RIGHTS AND STATUS OF SHAREHOLDERS Copyright © 2013 by Nelson Education Limited Share Certificate – document specifying number of shares owned by a shareholder Pre-emptive Right – right of shareholders to buy new shares before they are offered to the public Legal Status – Ownership: provides control over the firm limits liability to investment in the firm can be transferred without affecting the firm’s operations LO 1

LIMITED LIABILITY OF SHAREHOLDERS Copyright © 2013 by Nelson Education Limited for most shareholders, limited liability is a major advantage of the corporate form of organization financial liability is limited to the amount of money invested in the business LO 1

DEATH OR WITHDRAWAL SHAREHOLDERS Copyright © 2013 by Nelson Education Limited 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 LO 1

CHOOSING AN ORGANIZATIONAL FORM Copyright © 2013 by Nelson Education Limited LO 2

THE BOARD OF DIRECTORS AND DUTIES Copyright © 2013 by Nelson Education Limited Board of Directors – governing body of a corporation – elected by the shareholders – Inside directors Board members who work for firm – Outside directors Board members who do not work for firm LO 3

THE BOARD OF DIRECTORS AND DUTIES Copyright © 2013 by Nelson Education Limited Duties – Elect the firm’s officers (top management) – Approve management’s plans and policies – Review performance and declare dividends LO 3

THE BOARD OF DIRECTORS AND ADVISORY COUNCILS Copyright © 2013 by Nelson Education Limited 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 fiduciary responsibility for direction of firm LO 3

FEDERAL INCOME TAX Copyright © 2013 by Nelson Education Limited Sole Proprietorship – self-employed persons are taxed on their business incomes at tax rates set for individual Partnership – does not pay taxes – allocated shares of income from partnership are taxed as personal income for each partner Corporation – separate legal entity – reports income and pays any taxes related to these profits LO 4

HOW BUSINESSES ARE TAXED Copyright © 2013 by Nelson Education Limited Canada Revenue Agency LO 4

LAWS AND REGULATIONS REGULATING COMPETITION Copyright © 2013 by Nelson Education Limited Competition Act (Federal) – Designed to maintain a competitive economy – Prohibits: Discounts not offered to all customers Tied selling Refusal to deal Exclusive dealing LO 4

LAWS AND REGULATIONS PROTECTING 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 PIPEDA Copyright © 2013 by Nelson Education Limited LO 5

LAWS AND REGULATIONS Copyright © 2013 by Nelson Education Limited Protecting Investors – Securities Act Promoting Public Welfare – Ontario Environmental Protection Act – Municipal health bylaws – Canadian Human Rights Act Protecting Employee Rights – Occupational health and safety acts – Employment standards codes – Workers’ compensation acts LO 5

LAWS AND REGULATIONS Copyright © 2013 by Nelson Education Limited 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 LO 5

BUSINESS AGREEMENTS AND THE LAW Copyright © 2013 by Nelson Education Limited LO 5

Legally-binding agreements with employees, customers, suppliers and others – Offer – Voluntary agreement – Competent contracting parties – Legal act – Consideration – Form consistent with content Copyright © 2013 by Nelson Education Limited CONTRACTS LO 5

NEGOTIABLE INSTRUMENTS There must be a written, signed, unconditional promise or order to pay The amount to be paid in money must be specified The instrument must provide for payment on demand at a definite time or at a determinable time The instrument must be payable to the bearer or to the order of someone Copyright © 2013 by Nelson Education Limited LO 5