Corporate Structure and Business Types Notes

CORPORATE STRUCTURE NOTES

BUSINESS TYPES
  • Considerations for choosing business type:
    • Potential risk
    • Liability
    • Money needed
    • Expected earnings
  • Types of business:
    • Sole Proprietorship: One owner running the business.
    • Partnerships: Two or more people working together for profit.
    • Joint Venture: Collaboration for a specific project.
    • Corporation: Separate legal entity with its own rights.
SOLE PROPRIETORSHIP
  • Definition: Simplest form of business, one owner makes all decisions.
  • Legal Framework:
    • Minimal regulation; must follow laws on health, taxes, and zoning.
    • May require specific business licenses.
  • Operative Ability: Can hire employees, but must comply with employment laws.
Naming
  • Must register a business name if it differs from the owner's name.
  • The name must be distinguishable from other registered businesses.
Advantages
  • Complete freedom in decision-making.
  • Flexible operation and quick decisions.
  • Ability to enter contracts easily.
Disadvantages
  • Unlimited personal liability for business debts.
  • Limited ability to raise capital.
  • Proprietor's skills can limit the business's management capabilities.
  • Taxed as personal income (can deduct business expenses).
PARTNERSHIP
  • Definition: A business run by two or more persons in common for profit.
  • Characteristics:
    • Doesn’t need profit realization; intention to profit is sufficient.
    • Partners contribute money/property and actively participate in decisions.
  • Types:
    • General: No formal registration.
    • Limited: Registered partnerships.
    • LLP (Limited Liability Partnership): Registered for professionals.
Advantages
  • Collaborative pooling of skills and resources.
  • Low cost of establishment.
  • Partnerships can own property.
Disadvantages
  • Joint and several liability: All partners share liability for debts.
  • Agency principles bind all partners to actions of one.
  • Shares gross returns, limiting individual partner gains.
  • May face difficulties raising capital.
Partnership Agreement
  • Can be expressed (written/oral) agreeing on terms as long as legal.
  • Rights and responsibilities detailed therein, governed by The Partnership Act.
  • Partners may express terms to govern relationships and obligations.
DISSOLUTION
  • Occurs due to factors like:
    • Agreement
    • Specific term expiration
    • Death or insolvency
    • Breach of agreement.
CORPORATION
  • Definition: A legal entity separate from its owners.
  • Formation: Incorporates federally, provincially, or territorially; requires Articles of Incorporation.
  • Legal Features:
    • Owns rights and debts independently.
    • Shareholders hold limited liability—personal assets are protected.
Consequences of Separate Corporate Personality
  • Acts independently of shareholders and directors.
  • Operates continuously regardless of changes in shareholder life.
Limited Liability
  • Shareholders’ risks limited to their investment.
  • Only corporate assets liable for debts; personal assets protected.
Disadvantages of Corporations
  • Complicated to manage; many regulations.
  • Raising funds restricted unless publicly listed.
  • Going public is expensive and complex.
SHAREHOLDERS
  • Roles: Approve budgets, elect directors, and receive dividends.
  • Rights derive from shares:
    • Voting on directors, auditors, significant transactions.
Rights to Information
  • Access to financial statements prior to meetings.
  • Right to inspect specific business records.
  • Shareholders lack direct access to financial records.
DIRECTORS
  • Responsibilities: Manage and supervise corporate affairs; must act in the best interests of the corporation.
  • Duties:
    • Duty of good faith: prioritize corporate interests.
    • Care: exercise prudence comparable to a reasonable person.
Liabilities of Directors
  • Must avoid conflicts of interest and uphold fiduciary duties.
OFFICERS
  • Manage corporation's day-to-day operations.
  • Must fulfill legal obligations regarding non-competition and confidentiality.
FINANCING SOURCES
  • Equity: Issuing shares (stated and paid-up capital).
  • Debt: Bonds and debentures for long-term funding.
    • Bonds provide fixed returns and redemption at maturity.
RAISING CAPITAL
  • Public corporations: Can issue shares to the public.
  • Private corporations: Limited to private sales; subject to specific exemptions.
SECURITIES ACT
  • Set to balance interests between capital raising for companies and investor protection.
  • Ensures investors have confidence while allowing growth for corporations.
DISSOLUTION
  • Corporations may cease operations due to inability to profit, or involuntarily dissolved by the state.
  • Process dictated by law until complete cessation of existence.