Business Organizations

Sole Proprietorships Partnerships

Corporations

Business Organizations

Sole Proprietorships

Partnerships

Limited

Limited Liability

Corporations

Sole Proprietorships

A sole proprietorship is an individual carrying on business in his or her own name, or under a business name.

All the individuals assets are liable for the businesss risks. A sole proprietor can register a business name, which simply is

trade name in which the said individual is carrying out a business activity.

Generally Provincial legislation requires that the name of the business be registered, but this act does not change the status of the business.

Sole proprietor must obtain a Business Licence, and if he or she hires others, they must comply with related Labour and Employment Standards legislation.

Engineering and Geoscience Associations will require that the business carry the appropriate liability insurance, and in some cases require proof a client awareness that the business is a sole proprietorship

Sole Proprietorships

Disadvantages:

Unlimited Liability Lack of continuity in business organization in absence of the owner Difficulty in raising capital Advantages:

Set up costs are lower Greater freedom from Regulation Owner in direct control of decision making No corporate reporting and tax filings simpler All profits to the owner

Partnerships

Partnerships are governed by a Partnership Act in each province, and usually requires that the partnership is registered.

It is good business for the Partners to enter into a Partnership Agreement that sets down the rules related to contracts, division of profits, procedures for business decisions, and most importantly dissolving the partnership.

Each Partner is jointly liable for all debts and obligations of the business. The Partnership must obtain a Business Licence, and if it hires others, it must

comply with related Labour and Employment Standards legislation. Each Partner owes each other a fiduciary duty Engineering partnership, like the sole proprietorship, are required to carry liability

insurance

A fiduciary duty is a special trust that forbid the partners from entering into separate competing businesses, from taking profits solely for personal gain, requires that they always act in the best interest of the partnershipand to declare conflicts of interest.

Limited Partnership

:

Limited partnerships have one general partner, and one limited partner.

General partners runs the business, and has unlimited liability.

Limited partners are liable only for their cash contribution to the business, and in some provinces, the profits that they derive for the business relative to their cash contribution.

Limited Partners cannot actively participate in the business.

Limited Liability Partnerships

Limited Liability Partnerships is a partnership in which the liability of the partners is limited only to the liability of the particular partner.

Partnerships

Disadvantages:

Unlimited liability

Lack of continuity

Divided authority

Difficulty in raising capital

Difficulty in finding suitable partners

Possible development of conflict between partners

Advantages:

Ease of formation

Relatively low start-up costs

Additional sources of investment capital

Possible tax advantages

Limited Regulation

Broader management base

Corporations A corporation is considered to be legal person,

that is capable of carrying out business.

It is the corporation that is responsible for all debts and obligations of the business in question, and this liability does not extend to the Shareholders, Officers, Directors or Employees.

Corporations are created pursuant to the Canada Business Corporations Act, RSC 1985, c.C-44 and related provincial statue.

Corporations

Disadvantages:

Closely Regulated

Most expensive to for organization

Charter restrictions

Extensive record keeping necessary

Possible development of conflict between Shareholders and Executives

Advantages:

Limited liability

Specialized management

Continuous existence

Separate legal entity

Possible Tax advantage

Easier to raise capital

Corporate Organization and Control

Corporations are owned by Shareholders, in proportions to their shareholdings.

The Individual, Partnerships, or Corporation can be shareholders.

Shareholders vote to elect Directors, and authorize fundamental changes to the corporation.

Legal documents such as the Articles of Incorporation, Memorandum of Association, or Letters of Patent (depending on the jurisdiction of where the corporation is formed) creates the corporation, defines the type and number of shares issued, and the name of the corporation.

Corporate Capacity

A Corporation, as a legal entity, has the capacity to enter contracts.

A Corporations Directors, Officers or Employees have the authority to enter into contracts, in the name of the Corporation; however this authority is both defined and limited according to the Corporations By-Laws.

Corporate Debt and Equity

A Corporations value is based on its debt and equity.

Debt is the Corporations obligations to pay or render a service to someone else.

Equity is the residual value of a property or business after deducting mortgage and liability costs.

Debt Financing usually comes from a Bank.

Equity Investment usually comes from Shareholders.

Equity comes through the earning of profits.

Public and Private Corporations

A Private Corporation is a corporation in which all of the shares are held by a small group of shareholders

In a Private Corporation, the profit/loss of the corporation does not have to be made public, only the names of the Directors, Officers, and Shareholders.

A Public Corporation is one that the shares are publically traded, generally on the stock exchange.

A Public Corporation operates under stringent legislative rules that include public access to, and the filing of accounting records.

Directors, Officers and Shareholders

A Corporations Directors, Officers and Shareholders must observe specific rules governing their actions.

This includes: A Fiduciary Duty, Conflict of Interest, and Governmental Liabilities, and abstaining from Insider Trading

Fiduciary Duty

Directors and Officers owe a Fiduciary Duty to the Corporation

The Directors and Officers cannot operated a separate competing business or take profits from the corporation solely for themselves.

They must act in the best interests of the business, be loyal to the corporation, act honestly and in good faith, and declare all conflicts of interest.

These obligations are absolute, and only owed to the corporation and do not extend to the Shareholders.

Having said this, in some Provinces, now permit derivative actions, which are court actions by the oppressed minority shareholders against a corporations Directors and Officers.

Conflict of Interest

In general, for corporations, a conflict of interest occurs when the interests of the corporation conflict or could conflict with interests of the Director or Officer.(Contact)

Conflict of interests can also occur when the personal interest of the Director or Officer is in conflict with his or her duty to the Corporation.(Party Gift)

Governmental Liabilities

Several Statues and Regulations place specific obligations and liabilities on Directors and Officers. In Labour Standards Legislation, Directors and Officers have an obligation for unpaid employee wages in case of bankruptcy. Environmental Legislation places due diligence obligations on Directors and Officers. Profession Legislation and other Statues such as the, Aeronautics Act

(R.S.C. 1985,c. A-2); the Defence and Production Act (R.S.C. 1985, c.D-1); the Export and Import Permit Act (R.S.C. 1985, c. E-19) Directors and Officers can be found individually guilty of the same offence as the corporation.

Directors and Officers have specific duties under the Bank Act (S.C. 1991) c. 46); the Bankruptcy Act (R.S.C. 1985, c. B-3); and the Consumer Products

Warranties Act (R.S.C. 1978, c. C-30).

Governmental Liabilities, cont.

Directors and Officers can also be liable for unpaid wages under Provincial Labour Standards Legislation, unpaid GST/HST under the Excise Tax Act (R.S.C. 1985, c.E-15); failure to remit Canada Pension Plan deductions; failure to maintain and remit income tax under the Income Tax Act (R.S.C. 1985, c.1); breaches of occupational health and safety legislation and of trust under construction lien statutes.

The principal defence for Directors and Officers against liability is due diligence.

However, being passive or ignorant of any of the offences does not constitute a defence. Corporations can obtain a corporate indemnity to pay for the costs

associated with the potential liability of Directors and Officers. Liability Insurance is recommended to cover costs. Some statutes impose criminal penalties against Directors and

Officers.

Insider Trading

Unlawful Insider Trading occurs when investors use or are provided with privileged, non-public information to trade on securities or commodities markets in contravention to the law.

Insider Trading may include the purchase or sale of shares prior to the disclosure of a corporate news release, or may involve the purchase or sale of shares on the basis of information that may never be released to shareholders.

This includes non-public information, or stock tipping, about a company.

Both civil and criminal penalties are available for insider trading and stock tipping, and apply to anyone who participates in the information exchange.