Business law - Chapter 9: Business structures

The structure of a business

Determines the legal framework, ownership arrangements, tax obligations, liability limitations, and governance mechanisms of a business

Sole proprietorships

When the individual is both the owner and operator of the business

Sole proprietorships (con’t)

Is not a separate legal entity or person

Where are sole proprietorships most common?

When the business is just starting or is relatively small in scope.

e.g. A local ice cream shop which is operated by only one individual with no other employees.

Advantages of sole proprietorship

• Quick set-up

• Full control

• Flexibility in allowing management changes

• Beneficial taxes

disadvantages of sole proprietorship

• Limited resources

• The business will end upon the death/incapacitation of the owner

• Less creative input

• The owner is liable for all the business’s debts and obligations

Partnerships

A business structure where two or more individuals join together to carry out the business

Advantages of partnerships

• Each partner has unique experiences they can contribute

• Division of labour and workload

• Increased capital and more finances

• The partners can discuss decisions at length and provide their own inputs

Disadvantages of partnerships

• Potential for conflicts regarding decisions

• A partner’s departure can disrupt operations

• Hard ownership transfers

• The personal assets of the partners are at risk in the event of a lawsuit

General partnership

A classic form of partnership where two or more individuals or entities come together to carry on a business for profit and share unlimited liability

General partnership (con’t)

Each partner contributes capital, assets, skills, or labour to the business and shares in the profits and losses, and participate in the management and decision-making processes of the partnership

General partnership (III)

Each partner is personally liable for the debts and obligations of the partnership, meaning their personal assets can be used to satisfy the partnership’s liabilities

Legal Test for General Partnerships

1. carrying on business;

This refers to engaging in commercial activities, such as selling goods or providing services with the intention of making a profit. It suggests regular and ongoing business activities rather than engaging in occasional or one-time transactions. When carrying on a business, partners actively participate in its management and operation.

2. in common;

Partners should be aligned with one another in operating the business. Here, all of the partners are acting together towards their financial success or the “view to profit”. There should be a joint and concerted effort by the partners for the business’ success.

3. with a view to profit.

The primary objective of the partnership is to generate financial profits through the partnership’s business activities. While other goals, such as providing a service to the community or promoting a cause may exist, the overarching purpose is to achieve financial gains.

Limited partnerships

A business partnership that consists of at least one general partner and one or more limited partners

Limited partnerships (con’t)

Provides a way for partners to pool their resources and conduct business while expressly limiting some of the liability concerns experienced by general partners

General partner(s)

A partner who assumes full liability for the partnership’s debts and obligations and has

• Management authority

• Decision-making power

• Responsibility for the day-to-day operations of the business

• Personal liability for the partnership’s debts

Limited partner(s)

Investors in the partnership who typically contribute capital or assets to the business with limited liability, meaning their personal liability is restricted to the amount they have invested in the partnership

Limited partner(s) (con’t)

They don’t participate in the management or day-to-day operations of the business and usually have a more passive role

Limited Liability Partnerships

A partnership structure that combines elements of a partnership and a corporation, designed to offer the partners limited liability protection while maintaining the profit-sharing benefits of the partnership

Limited Liability Partnerships (con’t)

The partners have limited personal liability for the debts and obligations of the partnership, meaning their personal assets are generally protected in the event the LLP faces lawsuits or other liabilities.

Who mostly uses limited liability partnerships?

Professionals such as lawyers, accountants, architects, and consultants

Corporations

A separate legal entity (person) distinct from its owners (the shareholders) or managers (the directors or officers)

Corporations (con’t)

As a “person”, corporations have legal rights similar to those of individuals like the ability to enter into contracts, sue or be sued, and own property.

A primary advantage of corporations

The shareholders’ liability is generally limited to their investment in the corporation

Reasons why business owners should contemplate incorporation

• Ongoing existence even after changes in shareholders/management occur

• There are more ways to raise capital

• Transferring ownership is more flexible

Reasons why business owners should contemplate incorporation (con’t)

• Tax benefits are available

• The company has personhood and can act on its own behalf, and provides a shield of protection to its shareholders and directors

• Limited liability where neither shareholders nor directors can be liable for the debts or liabilities of the corporation

Incorporation of companies with provincial objects

Provinces would regulate the creation and administration of provincially-focused companies; once registered under the CBCA, the company can operate across Canada and conduct business in multiple provinces and territories

Incorporation of companies with provincial objects (con’t)

The decision to choose between federal and provincial incorporation is in the hands of the business owner and depends on several factors, including the nature of the business, its scope, and where it expects to be doing business

e.g. Incorporating provincially is suitable for businesses that primarily operate within a specific province or territory and have no intention of expanding nationally

Reserving a name

Businesses must request their name and have its reservation approved by the relevant Registrar of Companies

How does the naming process start?

It typically starts with a search of existing company names to determine whether the name is available or if there could be conflict with an existing registered business

The articles of incorporation

The primary document that outlines the internal rules and regulations of the company

The articles of incorporation (con’t)

The articles will typically contain several provisions, including:

• rights and duties of the shareholders and directors;

• procedures to be followed in electing directors or holding meetings;

• special rights or restrictions attached to the shares;

• restrictions, if any, on the business that may be carried on by the corporation; and

• powers that may be exercised by the corporation.

The Certificate of Incorporation

Is issued by the BC Corporate Registry upon approval of the incorporation application and incorporation of the corporation

The corporate veil

The legal separation between a company or corporation and its shareholders, directors, and officers

The corporate veil (con’t)

It is designed to ensure corporations have access to investors and qualified individuals to serve as directors

Registered and Records Office (R and R office)

Ensures proper management of its essential documents

The responsibilities of the R and R office

Carefully preserving and organizing various documents, including:

• the Certificate of Incorporation which serves as legal proof of the corporation’s formation and existence;

• the Central Securities Register which contains details about the company’s shares and their ownership;

• the Register of Directors which provides an updated list of individuals serving as directors within the corporation;

The responsibilities of the R and R office (con’t)

• copies of shareholder resolutions which are decisions passed by the shareholders; and

• the minutes of every shareholder and directors’ meeting, capturing the decisions, discussions, and resolutions made during these gatherings.

Share capital

Details such as the number and classes of shares authorized by the corporation, any restrictions on share transfers, and any other relevant provisions related to share capital

Three fundamental rights that shareholders can exercise

• Voting Rights – shareholders have the right to vote in corporate elections. Each share typically carries one vote, and shareholders can participate in important decisions that require shareholder approval, such as the appointment of directors, mergers, or major changes in the company’s bylaws.

• Dividend Rights – shareholders are entitled to receive dividends, which are a portion of the company’s profits distributed to shareholders. Common shareholders receive dividends after any obligations to preferred shareholders have been fulfilled.

• Liquidation Rights – Shareholders may have the right to receive a portion of the remaining assets after dissolution. After all debts and obligations have been settled, common shareholders are entitled to the residual value or proceeds from the liquidation in proportion to their ownership.

Piercing the corporate veil

Allows a court to disregard the separate legal identity of a corporation and hold its shareholders or directors personally liable for the corporation’s debts or liabilities.

Piercing the corporate veil (con’t)

Is used when a court determines that the corporation has been involved in some form of fraud, injustice, or unfair activity

Legal Test for Piercing the Corporate Veil

1. The company was formed for the express purpose of committing a wrongful act;

2. Once the company was formed, those in control of it expressly directed a wrongful act;

3. The company is a sham – that is, a mere agent, or façade, or alter ego, of a controlling corporator; or

4. Clear and express statutory provisions permit the lifting of the corporate veil.