Chapter 24/25 - Ready to Study

Question 1

What are the three kinds of business organizations? What does the type of organization determine?

Answer 1

1. Sole Proprietorship
2. Partnership
3. Corporation

Determines:

1) the question of liabilities and obligations
2) Rules and laws that apply to organization

Question 2

What laws effect sole proprietorships?

Answer 2

> no formalities necessary to start
separate account for taxation is required
appropriate tax number for the business must be obtained
deductions for employees must be conducted in accordance with statute

> Licensing may be required from different organizations
zoning laws may apply.
if you carry on a business with a name other than your name, you must register that name.
common law will apply to your business

Question 3

What is the Liability of sole proprietors?

Answer 3

> the sole proprietor is personally liable for all debts of business.

> Many sole proprietor seek to make themselves judgement proof; set up your assets in such a way that even if someone comes after you, you have nothing in their name. like house in wife’s name.

Question 4

What is a partnership? what are the elements?

Answer 4

Two or more persons carrying on business in common with a view to profit

Persons > does not mean a natural person: can mean corporation.
> view to profit: does not include charities

Elements:

1. A relationship
2. between persons
3. carrying on business in common
4. with a view to profit
   > the test is broad on purpose so that it is difficult for partners to avoid liability. downside is that some who did not intend to be a part can be brought in.

Notes on the elements:
> if you are caught in that definition yo are subject to the partnership act
> whether you are a partner is a factual question

Question 5

What is a partnership agreement? What happens if a partnership does not have one?

Answer 5

An agreement between persons to create a partnership and usually to set out the terms of the relationship

> can be oral or written
oral is not recommended as terms can be difficult to prove
unless partners agree otherwise the partnership act is going to apply terms
example 1 : if you don’t have an agreement, using company car on personal time is a no no.
example 2 : profits would be shared equally

partners are entitled to be reimbursed for expenses.
> new partners are not allowed in without the consent of all partners.

Question 6

What terms are typically covered in partnership agreements?

Answer 6

> identity of partners
name of the firm
nature of the business to be carried on
duration of the relationship
method of terminating the partnership
rules for introducing new partners
consequences of retirement or death of an existing partner
participation in management or death of an existing partner
contribution of each partner in terms of work and responsibilities
capital contribution of each partner
ownership of property used in the business
sharing of profits and losses
procedure for resolving disputes.

Question 7

What is the liability of members of a partnership?

Answer 7

(a) liability of partnerships generally
> each partner is personally liable for the debts and liabilities while they are a partner. Joint. Must use personal assets to cover debts. Partners may try to judgement proof.
> each partner is liable for the actions of the other partners.
> Negligence: partners are liable for errors and omissions of other partners.
> new partners will not be liable for things that happened in past. retired partners may be.
> if a retired partner is still holding themselves out to be a partner (ie. name to still be used) they are still liable.

Question 8

What are Limited liability partnerships?

Answer 8

1998 they started

> special partnership
individual partners are only personal liable for there own negligent acts and those below them
only allowed for certain professions
strict rules
Risk is allowed because there is a minimum insurance requirements.
must be registered as a LLB and only operate under that name.

Question 9

What are Limited partnerships?

Answer 9

> requires at least one general partner with unlimited liability
1 or more limited partners
limited partners have liability that is limited to the amount of money that they contributed to the business
if you are limited partner you cannot participate in the business
partnership must be registered with the government
status as a limited partner can be lost

Question 10

What is a joint venture?

Answer 10

A joint venture is an agreement between two or more parties (often corporations) to collaborate on the management of a specific project.

There are not partnerships.

Question 11

What are the Partners fiduciary duties to each other?

Answer 11

Fiduciary duties
> obligations of the upmost good faith
> must always act in the benefit of their fiduciary and not in their self interest. ie. the best interest of the partnership

INFO, NO SECRETS, NO COMPETE

1) a duty to provide full info
> relevant info must be shared
2) no secret benefits
> every partner must account for an benefit that they derive without consent. ie. any transaction using name of partnership must be shared. if not it is violation of fiduciary duty
3) not to compete with the partnership
> cant have a business of the same venture
> if you lose money its on you. if you profit you share

Question 12

How is a partnership terminated?

Answer 12

> partnership agreement should cover this
where no agreements any partner may terminate at any time with notice; everything will be dealt with as per the partnership act
upon dissolution the partnership must pay debts first.
if insufficient assets then debts paid from personal assets
if surplus, loans first, then capital contributions repaid, then shared equally or as per partnership agreement

Question 13

What is a corporation?

Answer 13

A legal person formed by incorporating according to a prescribed legal procedure

> is a separate legal entity
a person in the law
the corporation is liable for debts and obligations
and employee liabilities
investors are not personally liable for the liabilities of the corporation

> Management is easier >
have owners, directors (managers), and officers (administration)
managed by a board of directors. chosen by majority election of owners (shareholders)

> shareholders do not own a fiduciary duty to the corporation. They can do whatever they want
directors do have a fiduciary duty to the corporation

Question 14

What are the Characteristics of Corporations?

Answer 14

SEPARATE. TRANSFER, CONTINUITY, TAXABLE

1. separate legal entity
2. transfer of ownership
   > investors have more freedom to transfer shares of the business as desired
3. continuity > the corporate is not affected by the movement of personnel.
4. Taxable entity in its own right

Question 15

What are the implications of corporations as separate legal entities?

Answer 15

> this is the main benefit of the corporation.
huge advantage only available to corporations

> rule of Solomon P 592. established the corporate veil.

Limits to corporate veil > would have to very serious for court to breach this as they would be disregarding separate legal existence

Question 16

When will court lift corporate veil?

Answer 16

To lift the corporate veil the courts would ignore the separate existence of corporations.

The following conditions must be met:

INDIVIDUAL, FRAUD, CAUSE TO PLAINTIFF

1. Individual controls the corporation
2. control was exercised to commit a fraud or wrong
3. misconduct must be the cause of the plaintiffs loss or injury

All three must be satisfied. Note this for the exam&raquo_space;>

Question 17

What are the rules governing for profit corporations?

Answer 17

> the OBCA > Ontario Business corporations act

> CBCA > Canada “ “ “

Question 18

How is a corporation formed?

Answer 18

> can choose where to incorporate

> formal steps must be taken to form corporation
must submit articles of incorporation to correct government office. If filled out properly > you will get a certificate of incorporation

They will set out:

NSDL

> set out name of corp
set out place of registered office
set out the classes of shares, the max amounts, the rights and restrictions of each class, restrictions on transfers. If privately held there are rules recording transfer of shares.
Sets out number of directors
set out any restrictions on doing business.
articles set limits on what the directors can due
less restrictions = more flexibility
articles can be amended > through special filing and majority of shareholders

> after created, you have a number and must organize:
create bylaws
annual meeting required

Question 19

What are the two types of corporations?

Answer 19

public > trade shares on stock exchanges

private > most are in Ontario > not allow to sell shares publicly > restriction on how shares transferred

Question 20

How do corporations raise capital?

Answer 20

By:
1) issuing shares (equity financing)
> does not create liability
> dilutes ownership

2) borrowing (debt financing)
> increases assets as well as liabilities.
> does not dilute ownership stake and profits.

3) financing through retained profits
> does not create liability
> does not dilute ownership
> reduces dividend.

Question 21

What are the different types of security holders? and their rights?

Answer 21

1. Bondholders
   > lenders to the corporation
   > will receive a coupon payment
   > bondholders may have clauses written into bond indentures to exert some control

2. Common Shareholders
> Owners of a portion of the corporation
> Elect board of governors
> Elect on major changes
> no entitled dividend

3. Preferred Shareholders
   > are owners, but are more similar to creditors.
   > Usually entitled to a fixed dividend
   > typically no right to vote

Question 22

What is the dissolution of a corporation? What is the priority of payment upon liquidation?

Answer 22

> no longer going to be in existence
liquidated

1. secured creditors (ex. lean or mortgage on real property.&raquo_space; secured against an asset)
2. preferred creditors ( employees for unpaid wages)
3. unsecured creditors
4. preferred shareholders
5. common shareholders get what is left

Note: bondholders are creditors > usually secured