Chpt 25: Corporations

Question 1

What does it mean for corporations to be legal persons

Answer 1

They have rights and obligations separate from their creator or owner.

Question 2

What are some characteristics of corporations as compared to partnerships?

Answer 2

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

Question 3

What rights do a corporation have?

Answer 3

The same as a natural person

Question 4

When does the limited liability of shareholders not apply?

Answer 4

• 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

Question 5

Give an example of when a corporation is not a separate entity

Answer 5

Private corporations charges less tax for the first $500 000 of their annual income

Question 6

What are the three conditions for lifting the corporate veil

Answer 6

• 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

Question 7

How do you incorporate in Canada

Answer 7

• Sign and deliver articles of incorporation forms to a government office
• Government gives a certificate of incorporation

Question 8

Can you choose to be federal or provincially incorporated?

Answer 8

Yes, as long as your business isn’t regulated federally.

Question 9

What is the constitution of the corporation?

Answer 9

Usually the article of incorporation

Question 10

What is in the articles of corporation?

Answer 10

• 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

Question 11

What are things to consider while choosing a name

Answer 11

• Government must approve, cant be similar to others and cant imply it’s government associated etc…
• Can be a number if you dont care

Question 12

What are bylaws?

Answer 12

• Internal working rules of a corporation

General operating rules are needed to govern day-to-day activities

Question 13

What are the necessities of the operating rules

Answer 13

• Defined at first meeting
• Deals with matters of election for directors
• Quorum is necessary -> min number of people who must be present

Question 14

What is the Authorization to Directors Bylaw

Answer 14

• Deals with the power the director has
• Directors can borrow on security of corporations assets without permission
• But cannot sell corporations property without permission

Question 15

What is the most important difference between public and private corporations?

Answer 15

Public companies can issue shares to the general public which private companies have a restricted # of shareholders who can’t distribute to general public

Question 16

What is an important regulatory consideration public companies must acknowledge?

Answer 16

Public companies must adhere to regulations of the province they issues shares in

Question 17

What is an important advantage of being a private company?

Answer 17

Disclosure and transparency obligations are light, making it easy for private companies to operate in relative privacy

Question 18

What are professional corporations?

Answer 18

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

Question 19

What is authorized capital?

Answer 19

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

Question 20

What is issued capital? What is paid-up capital?

Answer 20

Issued capital is the shares that have been issued by the corporation.

Paid-up capital that have been issued and fully paid for.

Question 21

Does a corporation have to set an upper limit on the number of share it issues?

Answer 21

No, but it must keep a stated capital account, the amount received for the issue of its shares

Question 22

What are the ways you can become a shareholder?

Answer 22

1) Be one of the original applicants
2) Buying shares issues by the corporation
3) Acquiring previously issued shares from another shareholder

Question 23

What is a bond?

Answer 23

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

Question 24

How is a bond different than a common share?

Answer 24

• 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

Question 25

What rights do bondholders have?

Answer 25

None really, except preferential payment.

But in the case of financial difficulties, a trustee can take part in management on behalf of trustees

Question 26

What rights to common shareholders have?

Answer 26

• 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

Question 27

What rights do preferred shareholders have?

Answer 27

• No management rights unless not paid their dividend
• When dividends are handed out, get a fixed amount
• Fixed redemption price before shareholders

Question 28

What are two class right that may cause issues with preferred shareholders

Answer 28

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?

Question 29

What is pre-emptive right?

Answer 29

A class right that discusses whether existing shareholders reserve the right to keep the same % in the company when new shares are issued