Chapter 6 - Forms of Business Ownership

Question 1

What does the operation of a business involve?

Answer 1

The operations of a business involves the continuous series of acts of commerce performed by a merchant, generally with the object of earning a profit.

Question 2

What must be considered when selecting a form of business ownership?

Answer 2

• Nature of the transaction
• The funds required and available to begin business
• The type of work to be done
• The number of people to be involved

Question 3

What are the types of proprietership in Canada?

Answer 3

1) Sole proprietership
2) Partnership
3) Corporations

Question 4

Who has the right to govern, regulate and make laws on business?

Answer 4

Each province has the right to make laws regarding property and civil right . This allows provinces to govern Sole proprieterships and Partnerships, considered personal businesses ownership

Personal meaning the business is operated by a person who undertakes the risks and keeps the profits “personally”

Question 5

What are Sole Proprieterships ?

Answer 5

The most common form of business start-ups, due to its simplistic nature, and encompasses all entreprises undertaken by one single individual, selected when;

• one has very limited capital
• one chooses to maintain only a part time participation in the entreprise & doesn’t want to take on partners.

Question 6

What happens when a maried person, or minor decide to start a Sole Propriertership?

Answer 6

iA Married Person has the right to start a business, however the legal right of each spouse to dispose the property he or she owns personally may be restricted by the government of their marriage regime

Minors engaged in any type business is considered to be of full age with regards to business transactions These minors cannot claim lesion (taken advantage of due to age)

Question 7

Characteristics of a SP : Start up and Registration

Answer 7

• Needs to register with the registraire des entreprise .
• Needs to pay annual fee

Registering a business name gives you sole exclusivity to that name, exept when using a personal name as the name of the business. This person is not required to register.

Declarations Sole Proprieterships are public.

Question 8

Characteristics of a SP : Ownership

Answer 8

The Owner is one that maintains 100% financial control and interest. Once an agreement is made with another individual, the legal form changes to partnership.

Transfer of Ownership
Transfer of ownership is not possible its a personal business and 1 in the eye of the law.

• One must inherit or buy the business and then register a new business ownership in their name.

Question 9

Characteristics of a SP : Liability for Debts

Answer 9

Personal business ownership = personal debt to its owner.

• If the business becomes bankrupt, so too does its owner. The business and person are 1 in the law.
• The business debt remains even upons the owners death and must be paid by their estate before a family heir division of assets.

Question 10

Characteristics of a SP : Management & Profit

Answer 10

The SP is the only person who manages the business.
The SP takes all the risk, and therefor is entitled to all the profit - considered personal incomed and tazed as such.

Question 11

Characteristics of a SP : Termination

Answer 11

An SP is terminated when the business owner dies or cease doing business. This person is still responsible for all debts incurred along a declaration of ceased activities.

Question 12

What are Partnerships ?

Answer 12

When two or more people operate a business together, they entre into a a Contract of Partnership

Under this contract, each member agrees to contribute to their common venture in return for a share of profits, outlined in a Partnership Agreement .

Question 13

Characteristics of a P : Start up and Registration

Answer 13

All P must register, identifying all the partners, location and type of business they will operate. This registration becomes public

Question 14

Characteristics of a P : Ownership

Answer 14

The Owners
Division of ownership does not have to be 50/50 or equal amongst multiple members.

Transfer of Ownership
Transfer of ownership is permitted but within limits; all partners must agree on how to deal with each partner’s share depending on circumstances (death, or wish to exit)

Question 15

Characteristics of a P : Liability for Debts

Answer 15

P are personal forms of business. The partners each have unlimited, personal liability.

Partners are solidarily liable - any one or more of the partners may be required to pay all or part of the debt owed by the business.

Question 16

Characteristics of a P : Management

Answer 16

The partners will manage the business themselves within the partnership agreement as well as identifying how to manage disputes. The agreement should include

• How much time each partner will devote to the business
• What are the responsibilities of each partner
• What happens if one partner becomes too ill to wrok.

Question 17

Characteristics of a P : Profits

Answer 17

Profits are to be split between partners depending on their agreement.

• It is illegal to exclude a partner from a share of the profits - any agreement to such is null.
• Each partners’s profits are personal and are taxed as such

Question 18

Characteristics of a P : Termination

Answer 18

Considered a “fragile form of business ownership” as it is easy toi terminate

• It is terminated upon the agreement of the partners, by bankruptcy of upon the accomplishement of its objectives.

Question 19

What is a Limited Partnership ?

Answer 19

Occurs when some partners want to invest in the business, but are prepared to leave the management to the other partners.

• Special Partners are liable for the debts only to the extent of a stipulated amount they have contributed into the partnership, as stated in the partnership declaration. If the amount isn’t statred they are solidarily libale as a general partner
• Special partners are not permitted to take part in day-to-day operations

Question 20

What is a Corporation

Answer 20

Corporations are created by the government as seperate legal persons than its owner and can therfore own assets, have debts, enter contracts, hire people and be sued.

Question 21

Characteristics of a C: Start up & Application

Answer 21

The most complex and expensive of the three ownership forms. An application must be approved by the government which includes Several steps:

(i) Federal vs provincial incorporation
(ii) Determining by-laws
(iii) Identifying principle place of business
(iv) Selecting a name of the incorporation

Question 22

(i) Application: Federal or Provincial Incorporation?

Answer 22

Federal law: CBCA
Provincial Law: QBCA

• Incorporate under CBCA if operating in two or more provinces
• Incorporate under QBCA if operating solely in Quebec

A Provinvially incorporated company may carry on business in other provinces, but cannot branch out without obtaining a liscence for each provice. Exept with QC and ON agreement

Question 23

Federal Incorporation

Answer 23

Federal Incorporation requires the completion and filing of a document called the Article of Incorporation and may only be filled by a person who is

• over 18 years of age
• of sound mind
• not a bankrupt

Quebec Incorporation is very similar to CBCA

Question 24

(ii) Application: Determine by-laws

Answer 24

Every coorporation must prepare a set of internal rules stating how the company may borrow money, issue bonds, elect BOD and hold meetings with shareholders.

By laws are proposed by the BOD and approved by Shareholders.

Question 25

(iii) Application: Identify Principle Place of Business

Answer 25

A corporation must maintain, under the CBCA a registered office within Canada. Under QBCA, the head office must be within Quebec. A registered head office served as a place to keep inportant documents including * Article of Incorporation & by-laws * Certificate of Incorporation * Unanimous Shareholder agreements * Minutes of shareholder/BOD meetings * Register of coorporation shares/securities * official company seal if any

Question 26

(iv) Application: Select Name of the Corporation

Answer 26

Must respect the following rules: * name must not be deceptive or misleading * must not be the same to that of any other business * must not invoke a relation to a government body * the last word of the name muct be any of the following: **corp., Inc., Ltf., or Societe par action de regine federal** * Under CBCA the name may be either French, English, or both, which then must use Inc. * Under QBCA, the name must be in french. NUANS is the computarized list of all companies incorporated in Canda, when a new application is received, this list is cross referenced to ensure the names do not conflict with existing companies. a company may also use a number to incorporate

Question 27

Characteristics of a C: Ownership - **Common v. Preferred Sahres**

Answer 27

Ownership of a corporation is denoted by shares, divided into common and preferred. * **common shareholders** are voted on and given the power to vote and is given a dividend if a dividend is given out (not obligated) * **preffered shareholders** have no voting rights within a company but are guaranteed a certain dicident on their investement (i.e. 10%) paid out of company profits **before** any dividends are paid to the common shareholders

Question 28

Characteristics of a C: Transfer of Ownership

Answer 28

SIMPLE, since it is not a personal form of ownership, it is an objective one. * the owner of a corporation does not own the assets of the business, only shares, which are easily transferrable * evidence of ownerships is shown in the **share certificate** This makes raising capital easy by selling more common shares, if accepting by BOD. If the share is being sold to the public, one must file a **prospectus** with the proper regulations, showcasing the financial results of recent year and names of major shareholders/directors * it may also raise capital through loans and **debentures**, a guarantee to repay, or a **bond**, providing specific pledge or motgage.

Question 29

Characteristics of a C: Liability for debts

Answer 29

No shareholder can be called upon to bear any portion of a companie's debt, even in the case of bankruptcy, this is called the **coorporate veil** . This is only for shareholders - The coorporation itself remains fulyt liable for all its debts without limit. However, shareholders may be liable is * They fails to fulfil their promise of financial assistance, and can be pursued for their promised contribution * If they participated in fraud * Liable for the commitements they made prior to the incorporation

Question 30

Characteristics of a C: Management

Answer 30

A corp. is managed by its common shareholders, without direct power to manage it's affairs. Shareholders are appointed the power to elect the Directors of the Corp who will act as mandataries and manage the affairs of the cooporation. Common Shareholders leggaly must meet periodically. The first meeting must bewithin 18 months of incorporation and afterwards a minimum of a least once each 15 months.

Question 31

Characteristics of a C: Management - **BOD**

Answer 31

Responsibilitries of the directors include acting honestly and in good faith, for the best interest of the corporation, and exercising this power with care and diligence. A director is held personally liable if * benefit personally from the use of company property without permission * fail to disclose any conflict of interest * failt to disclose personal acquisition of corporation property * for up to 6 months of unpaid wages to employees * for the payement of any divident which would render the corporation insolvent

Question 32

Characteristics of a C: Management - **Operations of the Corp**

Answer 32

BOD will establish company policy. The officers of the corporation will carry out these policies. Once the BOD makes the decision, the CEO must implement it.

Question 33

Characteristics of a C: Management - **Unanimous Shareholder's Agreement**

Answer 33

This agreement enablesthe shareholders to restrict the powers of the directors. If shareholders takeover management rights through a USA, they will then be held accountable to the same legal standards as the BOD and can be pursued personally for failing to meet said standards.

Question 34

Characteristics of a C: Profits

Answer 34

Profits belong to the corporation. The coorporation can then decide whether to release dividends or not (expetion towards preferred shareholders).

Question 35

Characteristics of a C: Termination

Answer 35

The company will exist forever, unless the shareholders decide to end its existence and surrender its charter. It may also be terminated through bankruptcy or by order of the court for violation of a provision law.