module 6 - types of businesses

Question 1

businesses usually fall into three types..

Answer 1

1. sole proprietorship
2. partnership
3. corporation

Question 2

sole proprietorship

Answer 2

one person doing the business (e.g. consulting), they can hire multiple people but are the ones in charge

Question 3

what are the benefits of sole proprietorship? disadvantages?

Answer 3

disadvantages: unlimited personal liability, if things go wrong including harm caused by your employees, then you are liable and the plaintiff can go after your personal assets
additionally, limited protection from insurance and very costly ad taxes are costly
benefits: process is very simply, since only need to register business name and pay taxes such as PST and GST

Question 4

partnership

Answer 4

common type of business where partners share equally in the decision making, profits, and liabilities, unless agreed upon otherwise through partnership agreement

Question 5

what are the three types of partnerships

Answer 5

1. general partnership
2. limited partnership
3. limited liability partnership

Question 6

what is a general partnership?

Answer 6

unlimited personal liability and fiduciary duties to one another
(partners can be liable for the actions of the other partner)

Question 7

what is a limited liability partnership?

Answer 7

partnership without unlimited personal liability, so personally liable
- you cannot participate in the day-to-day decision making

Question 8

what is a limited liability partnership?

Answer 8

partnerships for professions like law or accounting where partners are not liable for the other’s mistake at all, only their own

Question 9

process for a limited liability partnership?

Answer 9

typically a contract but even if you don’t create a partnership agreement, if you act like a partnership, the law will assume so unless stated otherwise

Question 10

what is a corporation?

Answer 10

an institution created by law that is separate from the shareholders who create it
- if things go wrong, the corporation is responsible not shareholders/owners/individuals

Question 11

what level of liability do corporations have?

Answer 11

limited legal liability - shareholders and directors/management have no personal liability

Question 12

what is the purpose of a corporation?

Answer 12

gives business people and investors (including shareholders), incentives to create a business without being concerned that they will be personally liable and ruined if something goes wrong

Question 13

what are the types of corporations?

Answer 13

broadly held corporation (publicly traded) and closely held corporation (private/family firms)

Question 14

corporation process?

Answer 14

registration of articles of incorporation, provincially (BC) or nationally (Canada) and creation of shareholder agreement

Question 15

governance of corporations?

Answer 15

a shareholder agreement is necessary, the corporation also needs a Officers, directors, management, and shareholders

Question 16

what is fiduciary duty?

Answer 16

the duty of officers and directors of the corporation to act honestly and in good faith, with a view to the best interests of the corporation
- duty of loyalty

Question 17

what are some examples of violations of fiduciary duty

Answer 17

fraud, conflicts of interest, harming the corporation, competing with corporation

Question 17

what does the best interest of the corporation mean?

Answer 17

business judgement rules gives deference to officers and directors in making complicated decisions about what actually is the best interest and balancing interests
- best interests of the corporation is not just the shareholder interest
-

Question 17

how does fiduciary duty work with best interests of the corporation

Answer 17

fiduciary duty can require officers and directors to consider interests of employers, suppliers, government and the environment in evaluation of what is in the “best interest”

Question 18

duty of care? (corporation)

Answer 18

every director and officer of a corporation in exercising his powers and discharging his duties, shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances

Question 19

how does a corporation protect their creditors?

Answer 19

officers and directors cannot pay dividends or purchase shares unless there are reasonable grounds to believe that the corporation can pay debts to its creditors as the come due

Question 20

solvency test?

Answer 20

WHAT IS IT?
- if officers/directors do not meet the solvency test, aka they pay dividends even when they know they cannot pay creditors (?), can be a breach of duty of care

Question 21

business judgment rule?

Answer 21

directors and management have discretion to exercise their judgement about what is in the best interests of the corporation

Question 22

lifting the corporate veil (?)

Answer 22

when owners, shareholders, or directors of the business act negligently or fraudulently, courts will look deeper than the business judgement rule and may find personal liability

Question 23

when do courts turn aside the business judgment rule and lift the corporate veil?

Answer 23

when directors and officers fail to …
- abide by duties like reporting through prospectus (accurate docs?) and holding annual meetings
- adhere to fiduciary duty to the company
- fail to act according to their duty of care to do their job with diligence and with skills that a reasonably prudent person would expect in the circumstances

Question 24

in situations where there has been some type of environmental pollution by the corporation which breaks the law, what can corporations do?

Answer 24

management/officers can claim that they acted with care and due diligence if they can provide evidence that they created procedures to avoid the environmental accidents
- must also provide evidence, and prove that they were not aware that these procedures were not being followed

Question 25

what is a risk for shareholders?
(balancing act?)

Answer 25

when investing, you now have rights, but this may be a risk
- directors and management are expected to act in the overall best interest of the corp., but they are also expected to maximize shareholder value

Question 26

shareholder remedies?

Answer 26

when corporations fail to respect shareholders’ rights, these shareholder can take actions to defend their rights, through
1) oppression remedies
2) dissent actions and pre-emptive rights for minority shareholders
3) representative or derivative actions when corporations have been wronged

Question 27

what is the purpose of bankruptcy?

Answer 27

the laws for bankruptcy make it easier to deal with paying creditors and debts of corporations and consumers

Question 28

what is the process for bankruptcy?

Answer 28

a person/corporation files for bankruptcy than all debt actions are suspended, until the bankruptcy processes are finished

Question 29

what is an agenet?

Answer 29

an employee, or independent contractor that represents you (the principal employer) in dealing with a third party
e.g. lawyers, accountants, real estate agents, boards

Question 30

what are some problems that agents can cause?

Answer 30

they can have some problem with the contract, or they might be negligent/cause tort to the third party

Question 31

vicarious liability for agent?

Answer 31

does the agent have the authority to act for the principal? has the third party been misled? if party has been harmed, they can sue the agent or the principal for tort or contract issues
- agents have a fiduciary duty and best interests
- vicarious liability depends if the conduct is authorized

Question 32

what are the different kinds of risks and issues in opening an online business?

Answer 32

need a secure and online domain(presence), need to consider jurisdiction, contracts

Question 33

jurisdiction for online businesses?

Answer 33

where is your business located or registered? which laws apply?

Question 34

website problems?

Answer 34

issues of terms of use, privacy and user-generated content, comments from other creators, content from other creators, transactions B2B or B2C, offering products? what happens if there is fraud

Question 35

contract problems for online business?

Answer 35

must ensure that capacity is made for those entering contracts, must ensure it is legal in the jurisdiction, must consider the fairness and disclosure, legality, dispute, and arbitrations or going to court

Question 36

what other problems do businesses need to deal with (privacy/data security/identity theft)

Answer 36

• who is liable when a website is hacked?
• what is the business liable for?
• obligations of keeping data secure
• need to identify these risks, evaluate and plan strategy against them