Chpt 25: Corporations Flashcards
What does it mean for corporations to be legal persons
They have rights and obligations separate from their creator or owner.
What are some characteristics of corporations as compared to partnerships?
Liability- Corporation shareholders are not liable to the business’s debts. But this may change for small businesses
Transfer of ownership - Unlike in partnerships, shareholders can relinquish their ownership by transferring their shares
Management - Shareholders can have limited liability and be managers
Duty of Good Faith - Shareholders dont have the fiduciary responsibilities that partners do
Continuity - Shares can be sold or transferred at will. A corporation will continue indefinitely regardless of the status of the shareholders
Taxation - Corporations are taxable entities
What rights do a corporation have?
The same as a natural person
When does the limited liability of shareholders not apply?
- Small corporations often have to have personal guarantees of loans
- If dividends are give even though there are no profits, shareholders are responsible for debts
- If a shareholder receives company property before the corporation declares insolvency may be liable for stuff they received
- Negligent conduct while on the job, may still be liable
Give an example of when a corporation is not a separate entity
Private corporations charges less tax for the first $500 000 of their annual income
What are the three conditions for lifting the corporate veil
- The individual must control the corporation
- Control must have been used to commit fraud, a wrong or a breach of duty
- The misconduct must be the cause of the plaintiff’s injury
How do you incorporate in Canada
- Sign and deliver articles of incorporation forms to a government office
- Government gives a certificate of incorporation
Can you choose to be federal or provincially incorporated?
Yes, as long as your business isn’t regulated federally.
What is the constitution of the corporation?
Usually the article of incorporation
What is in the articles of corporation?
- Name of the corporation
- Place where the registered office is situated
- Classes and # of shares the corporation can issue
- Rights and restrictions to each class of share
- Restrictions on transfers of shares
- Number of directors
- Any other restrictions
What are things to consider while choosing a name
- Government must approve, cant be similar to others and cant imply it’s government associated etc…
- Can be a number if you dont care
What are bylaws?
- Internal working rules of a corporation
General operating rules are needed to govern day-to-day activities
What are the necessities of the operating rules
- Defined at first meeting
- Deals with matters of election for directors
- Quorum is necessary -> min number of people who must be present
What is the Authorization to Directors Bylaw
- Deals with the power the director has
- Directors can borrow on security of corporations assets without permission
- But cannot sell corporations property without permission
What is the most important difference between public and private corporations?
Public companies can issue shares to the general public which private companies have a restricted # of shareholders who can’t distribute to general public
What is an important regulatory consideration public companies must acknowledge?
Public companies must adhere to regulations of the province they issues shares in
What is an important advantage of being a private company?
Disclosure and transparency obligations are light, making it easy for private companies to operate in relative privacy
What are professional corporations?
Certain professions that were not traditionally allowed to incorporate have been allowed to under provincial laws to get tax benefits that partnerships do not.
Some professions can form regular corporations even if they aren’t listed as okay to make PCs
What is authorized capital?
The maximum number of shares that a corporation is permitted to issue.
The money value of the shares it issues is defined in a corporation’s charter
What is issued capital? What is paid-up capital?
Issued capital is the shares that have been issued by the corporation.
Paid-up capital that have been issued and fully paid for.
Does a corporation have to set an upper limit on the number of share it issues?
No, but it must keep a stated capital account, the amount received for the issue of its shares
What are the ways you can become a shareholder?
1) Be one of the original applicants
2) Buying shares issues by the corporation
3) Acquiring previously issued shares from another shareholder
What is a bond?
A bond is like a loan to a business, with pre-determined, regular interest payments made to the bond-holder and an option to redeem the principal at maturity
How is a bond different than a common share?
- Unlike bond-holders, Common shareholders have no preferential right and aren’t owed anything
- Bond holders dont have to pay tax on the interest the receive
- Bonds are usually secured by a mortgage meaning they get repaid before general creditors and shareholders
What rights do bondholders have?
None really, except preferential payment.
But in the case of financial difficulties, a trustee can take part in management on behalf of trustees
What rights to common shareholders have?
- Control over management via voting for board of directors
- Paid dividends only after bondholders and preferred shareholders
- Only paid in liquidation after creditors and preferred shareholders
What rights do preferred shareholders have?
- No management rights unless not paid their dividend
- When dividends are handed out, get a fixed amount
- Fixed redemption price before shareholders
What are two class right that may cause issues with preferred shareholders
1) Cumulative Right - Should preferred shareholders be paid any years of dividend they missed before common shareholders get anything
2) Participating Right - After principal has been paid in liquidation, do they still get surplus stuff?
What is pre-emptive right?
A class right that discusses whether existing shareholders reserve the right to keep the same % in the company when new shares are issued
