Business Organizations

Types of Business Organization  Sole Proprietorship - an individual carrying on business alone  Partnership - two or more people carrying on business together for the purpose of making a profit  Corporation – an incorporated company that is a legal entity separate from the people who make it up.

Sole Proprietorship  An individual carrying on business alone  Complete control  May register trade name, optional  Few regulations –avoid restricted/illegal activities –meet zoning bylaws –comply with workers’ compensation, employment insurance and income tax

Sole Proprietorship/2  Unlimited liability for debts –No distinction between personal and business assets  Vicarious liability for torts of employees  Taxed on a personal basis

Partnership  Two or more people carrying on business together for the purpose of making a profit  Regulated by Partnership Act.  Most not required to register  Sets out circumstances that do not create a partnership such as –owning property in common

Creation of Partnership  By Inadvertence - implied from conduct –Four Factors:

Creation of Partnership  By Agreement - primarily a contractual relationship - oral or written –Elements of a contract –Contract out of Act  Estoppel –If I represent to someone that you are my partner, I am bound to any agreements you and that person enter

Partner as Agent  Partners are each agents of each other –agency law applies to partners –contracts made by a partner are binding on all the partners  Vicarious liability - all partners are liable for the tortious conduct of a partner or an employee

Unlimited Liability  Partners’ liability is not limited to the assets of the partnership –personal assets may be used to satisfy claims against partnership, cannot contract out of that –third party can collect from any partner –Purchase adequate insurance

Rights and Obligations  Fiduciary Duty - a partner must act in best interest of other partners: –account for all profits, expenses –not use partnership property for personal benefit –?

Rights and Obligations/2  Partnership Act governs partner relationship: –partners share profits equally –expenses are reimbursed by partnership –all partners have right to participate in management

Rights and Obligations/3  no right to salary or wages  major changes must have unanimous agreement  no right to assign their partnership status without consent of all partners  can be modified by partnership agreement but only affects partners

Advantages  Disadvantages may be reduced by insurance  Requirements of unanimous consent protects partners  Less expensive to set up than incorporation  Some tax advantages available

Limited Partnerships  Limited partners are liable only to the extent of their investment if follow provisions in Act  should register as limited partner  at least one general partner  refrain from participating in decision- making  name must not be used

LLP Partnerships  Not all provinces allow  Available only for lawyers and accountants in BC  A partner is not personally liable for conduct of other employees or partners, unless supervising  Must be registered and include LLP name

Dissolution  Notice of intention to dissolve can bring partnerships to an end. Or by: –The death of a partner if only two –Agreement –Bankruptcy of one partner if just two –The court of business is deemed illegal, etc. –Court order

Dissolution/2  Public notice must be given of dissolution to escape further liability

Corporations

The Process of Incorporation  Articles of Incorporation - adapted from US  filing of articles and granting of certificate  used in rest of Canada and federally

Articles of Incorporation  Procedure - –has features of both registration and letters patent systems –Notice of Articles registered –articles of incorporation (not registered) contain constitution, purpose, bylaws controlling day-to-day operation –government body has no discretion

Separate Legal Entity  Incorporation creates a distinct legal entity separate from the people who make it up. –Isolates shareholders from business activity –Limits liability of shareholders and directors – only company assets risked –Courts may “lift corporate veil” to get at insiders who use company to commit crimes or avoid regulations

Capacity  All methods of incorporation now provide for corporations to have all the capacity of a natural person.  Power to contract may be limited in certain situations specified in the legislation

Role of Agents  All activities of a corporation are carried out by agents –actual or apparent authority must be established –employees may be able to bind the corporation –all agents have fiduciary duty to the corporation

Funding the Corporation  Shares - means of providing capital from a large number of sources –par value - company places a monetary value on the share at issue - may not reflect actual value on the market –no par value - value of share is determined by the market

Special Rights and Restrictions  Different classes of shares affect rights of shareholders  Common share –Voting rights, but no preference  Preferred share –- shareholder gets preference when dividends are declared but no vote –if dividends are not paid - preferred shares convert to voting shares

Shareholders Agreement  Shareholders agreement can set out rights of shareholders in a contract with all shareholders  restriction on the transfer and sale of shares often imposed where the company is closely held  Shotgun buyouts when shareholders fall out

Types of Corporations  Closely held corporation - few shareholders –shares not sold openly on stock market –private corporation (non-reporting)  Broadly held corporation - public share offering –more highly structured and regulated (reporting)

Corporate Officers  Directors –directors elected - accountable to shareholders –owe a duty to the company to be careful –fiduciary duty to the corporation - not the shareholders

External Obligations  Duties imposed by statute: –Directors may be personally liable for:  unpaid wages  unpaid taxes  damage to the environment  Employment Standards Act breaches

Officers and Senior Executives  Responsible for day-to-day management, hired by directors  Fiduciary duty  Duties of care and competence  Statutorily imposed duties similar to those of directors

Shareholders  Few obligations unless they hold enough shares to be classified as ‘insiders’  Owe no duty to corporation

Shareholders Rights –access to the records and financial reports of the corporation –receive notice of annual general meetings –right to vote on major changes –Right to vote for directors –first offer of new shares

Minority Shareholder’s Remedies  Derivative (representative) action  Oppression action  Dissent action

Advantages of Incorporation  Limited Liability –unless directors/officers give personal guarantees for loans –or courts “lift corporate veil” and hold principals liable for company’s obligations –shareholders protected from claims against the corporation

Advantages/2  Tax advantages may be gained through incorporation  Succession and Transferability –continues to exist after death of a shareholder –shares can be transferred at will

Advantages/3  Shareholders owe no duty to the company  Shareholders elect directors who appoint managers so are removed from day-to-day operation of company

Disadvantages  Major changes in company structure must be reflected in incorporation documents  Position of minority shareholder is weak  Most expensive way to operate a business, especially if publicly traded

Termination of Corporation  Dissolution of a company can take place in a number of ways. –Winding up provisions in incorporation documents –Voluntarily by the directors –Involuntarily by a creditor (bankruptcy or receivership) –Failure to file annual report for three years