Business Law Chapter 6

Business ownership

What is an enterprise?

*The carrying on by one or more persons of an* __*organised economic activity*__*, whether or not it is* __*commercial in nature*__*,* __*consisting of producing, administering or alienating property, or providing a service, constitutes the carrying on of an enterprise*__

What are the 3 forms of business

1. Sole Proprietorship
2. Partnership
3. Corporation

What is a Sole Proprietorship?

* An enterprise or a business venture by **one** single individual 
* __**There is no separate legal entity.**__
* __**Person and business = one in the same**__ 

If there is no legal entity then it’s a…

Sole Proprietorship

How do you start up a Sole Proprietorship?

* Don’t need to register the name is own name
* Only register under specific conditions

When do you register a sole proprietorship?

You need to register a sole proprietorship If


1. You use a name other than your own (legal purposes)
2. If you have more than 30,000$ in sales in a year
3. If there’s a regulatory requirement (ex:bar, restaurant)

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What is the liability of a sole proprietorship?

UNLIMITED

Who owns a sole proprietorship?

The owner owns it in full = 100%

Who keeps the profits in a sole proprietorship?

The owner owns it in full = 100%

Management of a sole proprietorship?

1.  **Responsibility for decisions/actions made by the company** 

Can you legally transfer ownership of a sole proprietorship?

No. **Not legally possible owner and business = same (Assets can be sold)**

How is a sole proprietorship terminated?

Death of owner, Bankruptcy

What are the advantages of a sole proprietorship?

* Easy and Simple Start-Up
* Low Start-Up costs
* Easy to Dissolve
* 100% CONTROL of the business

What are the disadvantages

of a sole proprietorship?

* Unlimited Liability
* Lack of Continuity
* Financing Difficulties
* Goodwill Difficulties

What is goodwill in business?

Goodwill is **the value a company gets from its brand, customer base and reputation associated with its intellectual property (Ex: selling your customers)**

What is a Partnership?

* A enterprise/business venture entered into by two or more individuals
* There is no legal separation between people and business

How is the start-up of a partnership?

* Have a partnership declaration
* Partnership Agreement (Not legally required) 
* __**All**__ partners = **general partners** → equal rights to business 

What are the liability of a partnership?

* Unlimited liability between partners → solidarily liable
* Can be limited through the partnership agreement

What are the 2 ways that a partnership agreement can limit liability?

2 ways →


1. Instate a clause in partnership agreement to limit certain partners ex: Partner B will be responsible for 40%, Partner A 40% and Partner C 20%
2. Instate a: Limited liability partner → More of an investor than a decision maker

Who owns the enterprise in a partnership?

Equal ownership (if no partnership agreement in place) 

Who keeps the profits in a partnership?

* Equal profits (if no partnership agreement in place)  

Who manages the partnership?

* Equal rights of Management (if no partnership agreement in place)  

Can you legally transfer ownership of a partnership?

**Not legally possible = you are the business**

BUT Assets can be sold within or outside of the company

Who can get the assets of one of the business partners in a partnership?

In the partnership agreement you can state a Right of First Refusal = The assets must be sold to other partners first (before third parties)

Or shotgun clause

What is the shotgun clause?

 →  A makes an offer to B to buy him out → B can accept the offer or turn the table around and buy out A for the exact same offer made prior. A is forced to accept the offer.

How is a partnership terminated?

**The bankruptcy of the business/partners,**

**all chose to terminate,**

**death of partners** 

What are the advantages of a partnership?

* Simple Start-Up
* Low Start Up costs
* easy to dissolve
* easier financing

What are the disadvantages of a partnership?

* Unlimited Liability
* Lack of Continuity
* conflict
* Transfer Difficulties

What is a corporation ?

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A corporation is an organization that is a legal entity separate from its owners

* Own Patrimony
* Full enjoyment of all civil rights
* Including Canadian Charter and Quebec Charter Except administration over people

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What is corporate jurisdiction?

(Canadian Business Corporations Act → CBCA)

* A federal corporation may carry on business throughout Canada
* A corporation can carry on its business and powers in any jurisdiction outside of Canada
* Provincial corporation limited to territory,

except if: Incorporate through subsidiary Regulatory allowance

What are corporate powers?

**Extent of Powers (s. 16(1) CBCA))**

* No need to pass a by-law to grant powers on the corporation or Board of Directors

**Restrictions (s. 16(2) CBCA))**

* Can’t carry on a business or exercise a power restricted by its Articles of Incorporation

**Tier Protection (s. 16(3) CBCA))**

* No act of the corporation is invalidated solely because it is contrary to its Articles of Incorporation

What’s the start-up process like for a Corporation?

* **Fed. V. Prov.** 

**→** **Federal**: Can operate in **any** province, Name protection, More bureaucratic requirements, Higher start-up costs  **Provincial**:  Must register in **each** province, name protection, less bureaucratic requirements, lower start-up costs 

**Form of Corporation** →  *Private* V. *Public* 

* Have **Articles of Incorporation** →  Documents that describe the corporation (a.k.a the company’s “*constitution*”)
* **Determine the By-Laws →** Rules between the shareholders and the corporation (Shareholder meetings, Election process of directors and officers, Issue bonds, it may borrow money)
* Identify Principal Place of Business →  Location of documents for shareholders


* Select Name (CBCA) 

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What is the difference between provincial or federal startup for corporations?

**Federal:** Can operate in any province, Name protection, More bureaucratic requirements, Higher start-up costs 

**Provincial**:  Must register in each province, name protection, less bureaucratic requirements, lower start-up costs

What are the options for registering a corporation’s name under the CBCA (federal)?

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1. __Designated Numbered Company (S.11 (2))__  

* Ex: 101010 Canada Inc. 


* To take time before taking a name 
* No value in having a brand name     


2. __Reserving Name (S.11(1))__

* New or Converting 
* Reserved for 90 days     

What are the conditions for registering a corporation’s name under the CBCA (federal)?

  **1.**  __Must have legal element__ (S.10(1**)) ex:** Inc, Corp, Ltd, SARF 

  **2.** __Alternate name in Eng/Fr__: Combined version must use INC

**3.**  __Trade Name__: Can use other than legal name, No use of legal element

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\n What are the limits (prohibited names) when registering a corporation’s name under the CBCA (federal)?

  **1.**  __Reserved Name:__ Exceptions → Inactive for two years, Permission, Amalgamation 

  **2.** __Confusing Name (Deceptive or Misleading)__  

  **3.**  __Lacking Distinctiveness__ → Only descriptive: Daycare Inc = bad → Name or Geographic name: Smith inc = bad

Secondary meaning rule 

What are the rules when selecting a corporations name in Quebec?

**s.17** 

* (1) Must conform to the language Charter 
* (2) Can’t use a reserved name
* (3) No immoral, obscene or offensive name
*  (4) Must use proper legal element
* (5) Can’t falsely suggests it’s a non-profit
*  (6) Can’t falsely suggests it is or is related to a public authority 
* (7) Can’t falsely suggests it’s related to another
*  (8) Must not cause confusion with other names

What are the 3 conditions for a corporation’s name in Quebec?

1. Name of Enterprise → Must be in French 
2. Juridical Personality → Name in French to obtain JP
3. Name in another language → Allowed if French predominant, Gov authorizes, **Trademark**

What is a certificate of incorporation?

The moment the certificate is received the corporation becomes a legal entity

What document that legally determines if a corporation is a legal entity

the certificate of incorporation

What are the liabilities pre-incorporation Personally Liable

* Personally Liable __*(Except if:*__ Incorporation adopts debt, Creditor Agrees (written contract))
* Fraud

Liabilities in a corporation

Shareholders → Limited liability to investment, Incorporation acts don’t bind them 

Except: For Promises to Inc., Fraud against Inc., Corporate Veil, unanimous   shareholders  agreement  

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Who has ownership of a corporation?

**Common Shares** \n • Voting right \n • Last in line for dividends

**Preferred Shares**

* No Voting Rights
* Higher Dividend rate + priority
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Who receives the profits of the organization?

**Profit →** Belongs to corporation

Who manages a corporation

Board of Directors

* Officers + shareholders

Board of Directors not necessary if *one* shareholder for Quebec Inc.

Who can be a part of the board of directors?

Anybody can be a director except Minors, Not apt, Legal persons, Bankrupt. 

→ *Minimum* 25% have to be  Canadian (residency) and *more than* 50% in __restricted industry__ 

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What is the role of the board of directors?

Oversee and set policy for the company

 Fiduciary Duty + Care: careful in the decision making, all decisions = best for the company  

How many members have to be on the board of directors

Any

Are the board of directors liable?

 No personal liability, __*except*__:


1. Failure to disclose conflict of interest 
2. 6 months of unpaid wages to employees
3. Payment of dividends rendering corp bankrupt
4. Issuing shares in consideration below market value
5. Issue shares without payment (except Quebec)

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Who appoints the officers (ex. CEO)

The board of directors

How can shareholders take on management roles

Through the *Unanimous shareholder agreement =* possible manager role

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Can you legally transfer ownership of a corporation

Yes. **Separate legal entity = transfer possible** 

How is a corporation terminated?

**Bankruptcy, Legal issues (Fraud)** 

What are the advantages of a Corporation?

* Limited Liability
* continuity
* Indefinite Lifespan
* Easier to raise money

What are the disadvantages of a corporation?

* More complex form
* More expensive
* Ease of transfer
* double taxation

Peoples Department Stores Inc. v. Wise

CASE FACTS

Case Facts:

* Wise Inc. buys Peoples
* Both companies were owned by the Wise brothers and were the Directors
* Both companies were in financial difficulty and inventory issues
* The two companies’ operations were consolidated
* A policy was adopted to favour the inventory of Wise
* Both companies were forced into bankruptcy
* Not enough value to pay creditors
* Creditors sued Directors claiming fiduciary duty to creditors similar to that of the statutory fiduciary duty to the company (s. 122(1) CBCA)

Court ruling of Peoples Department Stores Inc. v. Wise

Court Decision:

* Directors owe a duty of care but not fiduciary to creditors
* Fiduciary duty is to company and no evidence Directors committed fraud or were disloyal
* Duty of care was met by Directors therefore not liable towards creditors
* Court found Directors acted in the best interest of the corporations
* Tried to solve inventory issue and failed
* Directors decisions must be reasonable not perfect