Law-C5-Business Organizations

Question 1

What are the 3 Most common business organizations?

Answer 1

• Sole proprietorships: describes an individual carrying on a business.
• Corporation (or company): refers to a separate legal “person” pursuant to federal and provincial statutes.
• Partnership: a group of individuals or corporations who pool their resources together to run a business.

Question 2

What is a Joint Venture

Answer 2

• Joint venture (less common): is an organization between 2 or more joint venturers who act together, but retain their separate legal status.

Question 3

Sole Proprietorship Advantages and Disadvantages

Answer 3

Advantages

• lower setup costs: no reporting and filing requirements
• at low income levels, there may be tax advantages
• greatest freedom from regulations
• sole proprietor gets all profits

Disadvantages

• sole proprietors are completely and fully liable for all obligations of the business
• at certain income levels, individuals are taxed higher at a higher rate than corporations
• difficulty raising capital

Question 4

Corporation Advantages and Disadvantages

Answer 4

Advantages

• limited liability
• ownership is transferable
• separate legal entity
• possible tax advantage
• easier to raise capital

Disadvantages

• closely regulated
• most expensive to organize
• extensive record keeping required
• possible conflicts between shareholders and executives

Question 5

Partnership Advantages and Disadvantages

Answer 5

Advantages

• ease of formation
• low start-up costs
• possible tax advantages
• limited regulation

Disadvantages

• unlimited liability
• divided authority
• difficulty raising additional capital and finding suitable partners
• possible conflicts between partners

Question 6

What are three aspects of Sole Proprietorships?

Answer 6

• Sole proprietors obtain all profits and take all losses of a business – there is no difference between a sole proprietor and an individual
• A sole proprietor can register a business name (which is simply a trade name that the individual works under); the sole proprietor would still remain liable for all business obligations; provincial legislation usually requires a business name to be registered
• Sole proprietors must also follow all other legislative requirements for a business – eg. if sole proprietors hire people, they are bound by mandatory labour laws

Question 7

What are the six aspects of Partnerships?

Answer 7

• Governed by Partnership Act in each province
• Partnerships usually involve entering into a partnership agreement that sets out rules including authority, profit division, and procedures for business decisions and dissolving the partnership
• Most provinces require partnerships to register; similar to sole proprietors, partnerships must follow all other legal requirements
• Fiduciary Duty (more on this in Ch.12): is a relationship of special trust in partnerships. Each partner owes the other partners a fiduciary duty (these duties cannot be altered) eg. This duty forbids partners from operating a separate competing business, from taking profits of the business solely for themselves, must act in the best interest of the partnerships, and declare conflicts of interests.
• Limited partnerships: have at least one general partner and one limited partner. A general partner, who runs the business, has unlimited liability. Limited partners are liable only for their cash contribution to the business; they cannot actively participate in the business, or they lose their limited liability status
• Limited liability partnerships: limit the liability of a partner to ONLY the liability of that partner (these partnerships must carry a certain level of liability insurance) eg. If A, B, C are limited liability partners and A is negligent, only A’s assets and the assets of the partnership as a whole are at risk – B’s and C’s assets are not at risk.

Question 8

What is the definition of a Corporation? What must it have wherever it does Business?

Answer 8

A separate legal entity that permits large numbers of people to invest in a common business venture, while limiting the liability of the business to the new legal person, ie. the corporation. Corporations must have Corp., Inc., or Ltd. as part of its name and must be registered in every province in which it does business

Question 9

What are the two kinds of corporations?

Answer 9

• Private corporation: is a corporation in which all shares are held by a small group of shareholders. One advantage is that profits and losses do not need to be made public. Articles of incorporation for private corporation have significant restrictions on use of shares eg. Shareholders cannot offer shares to the public.
• Public corporation: is one in which shares are publicly traded (generally in a stock exchange). Public corporations operate under strict rules, including giving public access to accounting records.

Question 10

What are seven aspects of a Corporation?

Answer 10

• Organization & control: Corporations are owned by shareholders in proportion to their shareholdings. Individuals, partnerships, and corporations can be shareholders. Shareholders elect the directors, who in turn elect the officers of the company.
• Corporate rules may restrict individuals’ authority for contracts.
• Debt is an obligation to pay. Equity is the residual value of a property or business after deducting mortgage and liability costs. eg. Debt financing comes from bank; equity investment comes from shareholders or profit.
• Officers, directors, & shareholders must obey specific rules governing their action. Officers & directors owe fiduciary duties to the corporation
• Protection for officers & directors include: obtaining corporate indemnities (contractual promises) and liability insurance.
• Best defense against personal liability for officers and directors is due diligence, which means that all active and reasonable steps have been taken to ensure the corporation was not in breach of the statute in question.
• Not all insider trading is unlawful.