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Business Organizations

This document summarizes different types of business organizations including sole proprietorships, partnerships, and corporations. Sole proprietorships are owned and operated by one individual who is personally liable for all business debts. Partnerships are owned by two or more individuals who are jointly liable for business debts. Corporations provide limited liability for owners and can raise capital through the sale of shares. Directors and officers have fiduciary duties to act in the best interests of the corporation and avoid conflicts of interest.

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52 views20 pages

Business Organizations

This document summarizes different types of business organizations including sole proprietorships, partnerships, and corporations. Sole proprietorships are owned and operated by one individual who is personally liable for all business debts. Partnerships are owned by two or more individuals who are jointly liable for business debts. Corporations provide limited liability for owners and can raise capital through the sale of shares. Directors and officers have fiduciary duties to act in the best interests of the corporation and avoid conflicts of interest.

Uploaded by

werewaro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Business Organizations

Sole Proprietorships Partnerships


Corporations

Business Organizations
Sole Proprietorships
Partnerships
Limited
Limited Liability

Corporations

Sole Proprietorships
A sole proprietorship is an individual carrying on business in his or her
own name, or under a business name.
All the individuals assets are liable for the businesss risks.
A sole proprietor can register a business name, which simply is
trade name in which the said individual is carrying out a business
activity.
Generally Provincial legislation requires that the name of the business
be registered, but this act does not change the status of the business.
Sole proprietor must obtain a Business Licence, and if he or she hires
others, they must comply with related Labour and Employment
Standards legislation.
Engineering and Geoscience Associations will require that the business
carry the appropriate liability insurance, and in some cases require
proof a client awareness that the business is a sole proprietorship

Sole Proprietorships
Disadvantages:
Unlimited Liability
Lack of continuity in business organization in absence of the owner
Difficulty in raising capital
Advantages:
Set up costs are lower
Greater freedom from Regulation
Owner in direct control of decision making
No corporate reporting and tax filings simpler
All profits to the owner

Partnerships

Partnerships are governed by a Partnership Act in each province, and usually


requires that the partnership is registered.
It is good business for the Partners to enter into a Partnership Agreement that
sets down the rules related to contracts, division of profits, procedures for
business decisions, and most importantly dissolving the partnership.
Each Partner is jointly liable for all debts and obligations of the business.
The Partnership must obtain a Business Licence, and if it hires others, it must
comply with related Labour and Employment Standards legislation.
Each Partner owes each other a fiduciary duty
Engineering partnership, like the sole proprietorship, are required to carry liability
insurance
A fiduciary duty is a special trust that forbid the partners from entering into
separate competing businesses, from taking profits solely for personal gain,
requires that they always act in the best interest of the partnershipand to declare
conflicts of interest.

Limited Partnership
:
Limited partnerships have one general partner, and
one limited partner.
General partners runs the business, and has unlimited
liability.
Limited partners are liable only for their cash
contribution to the business, and in some provinces,
the profits that they derive for the business relative to
their cash contribution.
Limited Partners cannot actively participate in the
business.

Limited Liability Partnerships


Limited Liability Partnerships is a partnership
in which the liability of the partners is limited
only to the liability of the particular partner.

Partnerships
Disadvantages:
Unlimited liability
Lack of continuity
Divided authority
Difficulty in raising capital
Difficulty in finding suitable partners
Possible development of conflict between partners
Advantages:
Ease of formation
Relatively low start-up costs
Additional sources of investment capital
Possible tax advantages
Limited Regulation
Broader management base

Corporations
to be legal person,
A corporation is considered

that is capable of carrying out business.


It is the corporation that is responsible for all
debts and obligations of the business in question,
and this liability does not extend to the
Shareholders, Officers, Directors or Employees.
Corporations are created pursuant to the Canada
Business Corporations Act, RSC 1985, c.C-44 and
related provincial statue.

Corporations
Disadvantages:
Closely Regulated
Most expensive to for organization
Charter restrictions
Extensive record keeping necessary
Possible development of conflict between Shareholders and Executives
Advantages:
Limited liability
Specialized management
Continuous existence
Separate legal entity
Possible Tax advantage
Easier to raise capital

Corporate Organization and Control


Corporations are owned by Shareholders, in
proportions to their shareholdings.
The Individual, Partnerships, or Corporation can be
shareholders.
Shareholders vote to elect Directors, and authorize
fundamental changes to the corporation.
Legal documents such as the Articles of Incorporation,
Memorandum of Association, or Letters of Patent
(depending on the jurisdiction of where the
corporation is formed) creates the corporation, defines
the type and number of shares issued, and the name of
the corporation.

Corporate Capacity
A Corporation, as a legal entity, has the
capacity to enter contracts.
A Corporations Directors, Officers or
Employees have the authority to enter into
contracts, in the name of the Corporation;
however this authority is both defined and
limited according to the Corporations ByLaws.

Corporate Debt and Equity


A Corporations value is based on its debt and equity.
Debt is the Corporations obligations to pay or render a
service to someone else.
Equity is the residual value of a property or business
after deducting mortgage and liability costs.
Debt Financing usually comes from a Bank.
Equity Investment usually comes from Shareholders.
Equity comes through the earning of profits.

Public and Private Corporations


A Private Corporation is a corporation in which all of
the shares are held by a small group of shareholders
In a Private Corporation, the profit/loss of the
corporation does not have to be made public, only the
names of the Directors, Officers, and Shareholders.
A Public Corporation is one that the shares are
publically traded, generally on the stock exchange.
A Public Corporation operates under stringent
legislative rules that include public access to, and the
filing of accounting records.

Directors, Officers and Shareholders


A Corporations Directors, Officers and
Shareholders must observe specific rules
governing their actions.
This includes: A Fiduciary Duty, Conflict of
Interest, and Governmental Liabilities, and
abstaining from Insider Trading

Fiduciary Duty
Directors and Officers owe a Fiduciary Duty to the
Corporation
The Directors and Officers cannot operated a separate
competing business or take profits from the corporation
solely for themselves.
They must act in the best interests of the business, be loyal
to the corporation, act honestly and in good faith, and
declare all conflicts of interest.
These obligations are absolute, and only owed to the
corporation and do not extend to the Shareholders.
Having said this, in some Provinces, now permit derivative
actions, which are court actions by the oppressed minority
shareholders against a corporations Directors and Officers.

Conflict of Interest
In general, for corporations, a conflict of
interest occurs when the interests of the
corporation conflict or could conflict with
interests of the Director or Officer.(Contact)
Conflict of interests can also occur when the
personal interest of the Director or Officer is in
conflict with his or her duty to the
Corporation.(Party Gift)

Governmental Liabilities

Several Statues and Regulations place specific obligations and liabilities on


Directors and Officers.
In Labour Standards Legislation, Directors and Officers have an obligation
for unpaid employee wages in case of bankruptcy.
Environmental Legislation places due diligence obligations on Directors
and Officers.
Profession Legislation and other Statues such as the, Aeronautics Act
(R.S.C. 1985,c. A-2); the Defence and Production Act (R.S.C. 1985, c.D-1);
the Export and Import Permit Act (R.S.C. 1985, c. E-19) Directors and
Officers can be found individually guilty of the same offence as the
corporation.
Directors and Officers have specific duties under the Bank Act (S.C. 1991)
c. 46); the Bankruptcy Act (R.S.C. 1985, c. B-3); and the Consumer
Products
Warranties Act (R.S.C. 1978, c. C-30).

Governmental Liabilities, cont.


Directors and Officers can also be liable for unpaid wages under
Provincial Labour Standards Legislation, unpaid GST/HST under the
Excise Tax Act (R.S.C. 1985, c.E-15); failure to remit Canada Pension
Plan deductions; failure to maintain and remit income tax under the
Income Tax Act (R.S.C. 1985, c.1); breaches of occupational health
and safety legislation and of trust under construction lien statutes.
The principal defence for Directors and Officers against liability is
due diligence.
However, being passive or ignorant of any of the offences does not
constitute a defence.
Corporations can obtain a corporate indemnity to pay for the costs
associated with the potential liability of Directors and Officers.
Liability Insurance is recommended to cover costs.
Some statutes impose criminal penalties against Directors and
Officers.

Insider Trading
Unlawful Insider Trading occurs when investors use or are
provided with privileged, non-public information to trade
on securities or commodities markets in contravention to
the law.
Insider Trading may include the purchase or sale of shares
prior to the disclosure of a corporate news release, or may
involve the purchase or sale of shares on the basis of
information that may never be released to shareholders.
This includes non-public information, or stock tipping,
about a company.
Both civil and criminal penalties are available for insider
trading and stock tipping, and apply to anyone who
participates in the information exchange.

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