Module 6: Legislation Governing Business Organizations

Question 1

sole proprietorship

Answer 1

The simplest form of organization, consisting of a single owner. If the business is operated under the owner’s name, there are no business registration requirements. Because it is unincorporated, a sole proprietorship is not considered to be a separate legal entity from the owner. The owner’s business affairs are considered part of his or her personal affairs in terms of income.

Question 2

partnership

Answer 2

is essentially the same as a sole proprietorship, except that there is more than one owner. It is not incorporated, so once again it is not considered to be a separate legal entity from its collective owners. The profits and management responsibilities of a partnership are shared according to a partnership agreement. All partners need not have identical interests in the business.

Question 3

The Partnership Act of Ontario

Answer 3

provides the following definition of a partnership as a legal business structure: “the relation that subsists between persons carrying on a business in common with a view to profit.” Thus, where two or more persons, whether individuals or corporations, carry on business with a view to profit, the relationship is called a partnership and the members are called partners.

Question 4

Co-ownership

Answer 4

two or more people jointly own property. This is different from partnership.

Question 5

The 5 parts of a partnership

Answer 5

1) A partnership is a relationship.
2) It is between persons.
3) It is for carrying business.
4) It is in common.
5) It operates with a view to a profit.

Question 6

general partnership

Answer 6

a legal business structure in which all partners, usually individuals, share responsibility and liability for the business. There are different types of partnerships in addition to general partnerships.

Question 7

Three types of Partnerships

Answer 7

1. limited partnership
2. limited liability partnership or LLP
3. joint venture

Question 8

A limited partnership

Answer 8

is one in which partners have different levels of liability. There must be at least one partner whose liability is unlimited. One or more of the other partners may then have limited liability, in that he or she is only liable to the extent of his or her contribution to the firm. The formation of a limited partnership in Ontario is governed by a separate piece of legislation, The Limited Partnerships Act. A limited partnership must be established in the prescribed manner and is more like a corporation in the set up process.

Question 9

A limited liability partnership or LLP

Answer 9

is a type of partnership used by professionals who, by the nature of their profession, are not legally allowed to form a corporation. Such as Lawyers and accountants. An LLP allows the partners to limit their liability for their employees’ and fellow partners’ errors, while at the same time be fully liable for all other liabilities of the partnership as well as their own work.

Question 10

A joint venture

Answer 10

is a partnership that is usually formed between two or more corporations for the purpose of conducting joint business. It is formed through a contractual agreement, not an equity agreement.

Question 11

Two elements to form a partnership

Answer 11

1) Agreement.
2) Partnership formalities.

Question 12

What should a Partnership Agreement include?

Answer 12

1. The name of the firm.
2. The nature of business to be conducted.
3. The duration of partnership, including whether it is for a fixed term and/or whether it can be terminated by notice.
4. The rules for the introduction of new partners.
5. The procedure for the retirement or death of existing partners, including whether the business will continue and how the retiring partners’ share will be paid for.
6. How each partner will participate in the management of the business.
7. How the business will be conducted, who will have the power to do what and who will have which responsibilities or duties.
8. How disputes will be resolved, possibly including arbitration and/or valuation.
9. The financial structure of the partnership.

Question 13

Partnership Duties

Answer 13

• A duty to abide by the terms of the partnership agreement.
• A duty of care.
• A duty of good faith.

Question 14

Duty of Good Faith Includes

Answer 14

• A duty to render true accounts and full information.
• A duty to account for benefits, especially secret profits.
• A duty not to compete with the partnership.

Question 15

Partnership Formalities

Answer 15

Registration is not required when a partnership identifies itself or carries on business under a name that is composed of the names of the partners.

Question 16

Internal liability

Answer 16

is the responsibilities that partners have to each other as partners.

Question 17

External liability

Answer 17

is the responsibilities that partners have to clients, vendors and creditors of the business. External liability is unlimited.

Question 18

Contractual liability

Answer 18

arises out of the agreements signed on behalf of the partnership. Any issues specifically among the parties to the contract fall under contract law

Question 19

Actual authority

Answer 19

can be spelled out in the partnership agreement. It can also be deemed to exist when a partner is taking action directly related to the business of the partnership. For example, if a partner in a house cleaning business pledges credit for the purchase of a vacuum cleaner, there is actual authority. If, however, the same partner pledges credit for a stereo system, which is clearly not related to the business of the partnership, then there is no actual authority. Actual authority can also be implied from previous conduct of the partners or from general circumstances.

Question 20

Apparent authority

Answer 20

is when the other party to the contract had no reason to believe the partner did not have actual authority.

Question 21

Two categories of non-contractual liability in partnerships

Answer 21

1) Interception
2) Defalcation (embezzlement)

Question 22

Interception

Answer 22

a partner acting within the scope of apparent authority, receives money on behalf of the business before it actually gets to the business and misapplies it. The transaction does not get recorded in the business’ records. Even though the business does not know about the transaction it is still liable because the transaction was done in the name of the business.

Question 23

Defalcation

Answer 23

a partnership receives money, the transaction is recorded in the business’ records and the money received on behalf of the business is then misapplied by one or more of the partners. This is also known as embezzlement.

Question 24

joint liability

Answer 24

the plaintiff may bring only one action against all partners at the same time, not several actions against each partner individually. In joint liability, a judgement against or release of one partner in joint liability, bars any subsequent action against the others not included in the joint liability.

Question 25

joint and several liability

Answer 25

each partner is liable alone for any obligations of other partners, and an action against one of the partners is sufficient to bind all other partners. The plaintiff may bring several actions and issue separate statement of claims against each partner at the same time, or successively.

Question 26

5 Steps of ending a partnership

Answer 26

1) Upon notice, any partner may determine the partnership ended. 2) With a fixed-term partnership, upon expiration of the term. 3) If the partnership was for a single project or piece of business, upon termination of the project. 4) Upon the death or insolvency of a partner if this is specified as a term of dissolution in the partnership agreement. 5)Through a court order.

Question 27

Corporation

Answer 27

is a separate and distinct legal entity. It is taxed independently and must file annual income tax returns. Ownership of a corporation is expressed through the ownership of shares in its capital stock. Shareholders have limited liability. Generally speaking, in the case of bankruptcy or a judgment against the corporation, the assets available to satisfy creditors do not include the personal assets of the individual shareholders unless they have provided personal guarantees to the creditors.

Question 28

Two Acts that govern Corporations

Answer 28

1) In Ontario, the creation and regulation of provincial corporations is governed by The 𝗢𝗻𝘁𝗮𝗿𝗶𝗼 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗖𝗼𝗿𝗽𝗼𝗿𝗮𝘁𝗶𝗼𝗻𝘀 𝗔𝗰𝘁. 2) Federally, the creation and regulation of federal corporations is governed by The 𝗖𝗮𝗻𝗮𝗱𝗮 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗖𝗼𝗿𝗽𝗼𝗿𝗮𝘁𝗶𝗼𝗻𝘀 𝗔𝗰𝘁.

Question 29

A private corporation

Answer 29

is one whose shares are not available for purchase by the general public. The most common type of private corporation is a Canadian-controlled private corporation or CCPC. To be classified as a CCPC, a corporation must be clearly controlled by a Canadian resident and by private, not public interests.

Question 30

A public corporation

Answer 30

is one whose shares can be bought and sold on a designated stock exchange. Public corporations have very strict accounting and reporting rules to follow in order to be allowed to trade their shares on a public stock exchange.

Question 31

A widely-held corporation

Answer 31

is one that has many shareholders. This usually, but not always, means that it is also a public corporation with shares traded on a designated stock exchange.

Question 32

A closely-held corporation

Answer 32

is a corporation established by the government to operate at arm's length from the government. Crown corporations are wholly owned by the government, either directly or indirectly. They can be fully-government-funded, self- sufficient or profit-making.

Question 33

A corporate minute book

Answer 33

is a hard copy history of all of the important decisions made by a business. While not always required, a corporate minute book is recommended because it provides evidence that the business is indeed operating as a corporation.

Question 34

Shareholders

Answer 34

are the owners of the corporation. As owners, they have supplied equity capital to the corporation and therefore expect a return on their investment either through dividends, or an increase in the capital value of their shares. A shareholder does not own the assets of the corporation, instead a shareholder has rights in the corporation. Share holders have Voting Rights. Dividend Rights. Dissolution Rights.

Question 35

What are the rights for shareholders?

Answer 35

1. The right to attend and vote at meetings. 2. The right to receive any dividend declared if allowed by the class of share. 3. The right to receive the surplus on dissolution of the corporation Rights: Voting, Dividend, Dissolution, Redemption, Share Transfers | pg. 200-201

Question 36

Directors

Answer 36

are chosen to govern the affairs of a corporation. Together they make up the Board of Directors for the corporation.

Question 37

Officers

Answer 37

are the executive group responsible for the day-to-day running of the corporation. Officers are generally appointed by the directors and are employees of the corporation.

Question 38

A share

Answer 38

is a form of security or evidence of indebtedness issued by a corporation which represents an investment that does not result in the creation of a debtor-creditor relationship. A share is an item of personal property that may be transferred from one owner to another. Shares are often called equity securities in order to distinguish them from other forms of debt securities.

Question 39

Redemption Rights

Answer 39

Redemption is the repurchase of shares by the corporation.

Question 40

Common shares

Answer 40

entitle their shareholders to what is left, after dividends have been paid to, or surplus is distributed to shares that have a preference. These shareholders normally have full voting rights. Common shares are usually held by those interested in having some control of the corporation.

Question 41

Preferred shares

Answer 41

have two possible special rights: dividend rights and windup rights. With **dividend rights** the shareholders may have the right to be paid a dividend before any dividend is paid on common shares. With **windup rights** the preferred shareholders may have the right to be paid first, on the winding-up of the corporation, up to a stated amount

Question 42

Equity Capital

Answer 42

The money raised through the issuance of shares

Question 43

Debt Capital

Answer 43

The money raised through borrowing

Question 44

# Equity vs. Debt The power or control

Answer 44

Equity capital requires the owners of the corporation to cede some power and control to shareholders.

Question 45

# Equity vs. Debt Participation in profits and surplus

Answer 45

Equity capital requires that profits and surpluses be shared with shareholders.

Question 46

# Equity vs. Debt The risk of loss

Answer 46

Debt capital creates a higher risk of loss for the corporation than does equity capital. Debt needs to be repaid, whereas equity does not. Interest needs to be paid, whereas dividends might not need to be paid.

Question 47

# Equity vs. Debt Short-term vs. Long-term

Answer 47

Debt capital is often, but not always, seen as a short-term growth strategy whereas equity capital is seen as a long-term strategy

Question 48

# Debt Capital What kind of debt is 'Notes'?

Answer 48

These are short-term debts advanced by a single lender, for example short-term bank loans, and are usually secured by accounts receivable or inventories.

Question 49

# Debt Capital Bonds

Answer 49

These are debt instruments issued in units to raise a collective sum from many lenders. They have a longer redemption period than notes and normally do not call for any payment of principal until the term expires.

Question 50

Debentures

Answer 50

These are usually issued through a trustee to raise a large sum from many independent lenders. They are ordinarily secured by a floating charge over the corporate assets and are not attached to any remaining assets of the corporation until the corporation signals that it is unable to pay its debts.