Chapter 21: Basic Forms of Business Organizations

What is a sole proprietorship?

A business owned and operated by a single individual, with no separation between the owner and the business.

What is the primary advantage of a sole proprietorship?

It is simple to set up and dissolve.

What is the main disadvantage of a sole proprietorship?

The owner has unlimited personal liability for business debts.

What legal requirements must a sole proprietorship meet?

Provincial registration for a business name (if different from the owner's name) and possibly a business license.

What defines a general partnership?

A partnership where two or more people carry on a business together with the intent to make a profit.

What are the three main types of partnerships?

General partnerships, limited liability partnerships (LLP), and limited partnerships.

What is a limited liability partnership (LLP)?

A partnership where individual partners are not personally responsible for the negligence and certain liabilities of other partners.

What is a limited partnership?

A partnership that includes at least one general partner with unlimited liability and at least one limited partner with limited liability.

What is the consequence of partnership regarding liability?

Each partner is an agent of the partnership and can commit the partnership to obligations, extending risk to all partners.

What is the process of creating a corporation?

A corporation is created by filing with a government agency and is governed by the laws of the jurisdiction of incorporation.

What is the significance of a corporation's separate legal existence?

A corporation is treated as a separate legal entity, meaning it can own property, incur liabilities, and be taxed separately from its shareholders.

What are the basic rights associated with shares in a corporation?

The right to vote for directors, receive dividends, and receive property upon dissolution after debts are paid.

What distinguishes preferred shares from common shares?

Preferred shares typically do not have voting rights and have a fixed dividend, with priority over common shares in the event of liquidation.

What is the role of shareholders in a corporation?

Shareholders elect directors to manage the corporation, but they do not manage the corporation themselves.

What is the risk of unintended partnership?

A relationship may be classified as a partnership even without formal agreement, leading to shared liability.

What should partners do to manage risks when leaving a partnership?

Give notice to clients, remove their name from partnership registrations, and document their departure.

What is 'piercing the corporate veil'?

A legal concept where a court holds shareholders personally liable for corporate obligations due to fraud or wrongdoing.

What is the primary purpose of a partnership agreement?

To outline key issues such as partner admission, profit division, and management responsibilities.

What are co-operatives?

Corporations owned by members who seek to benefit from the co-operative's activities, often set up as not-for-profit entities.

What is the implication of a partner's fiduciary duty?

Partners must act in the best interest of the partnership and other partners, restricting partnerships to trusted individuals.

What happens upon the dissolution of a partnership?

Claims are paid in the order of debts to non-partners, debts to partners, and then capital invested, with any remainder distributed according to profit rights.

What is the importance of a business license for a sole proprietorship?

It may be required depending on the type of business and local regulations.

How does income taxation differ for corporations and shareholders?

Corporations are taxed on their income, while shareholders are taxed only when they receive dividends.

What is a key factor in determining the liability of limited partners?

Limited partners lose their limited liability status if they control the business, but not if they merely advise management.

What are the statutory default rules regarding partnership management?

Default rules typically provide equality among partners for financial interests and management, though this may vary by agreement.