1.6 BUSINESS LAW
• Three basic forms,
- sole proprietorship
- partnership
- corporations
• proprietorship
- owner and company are one entity in the courts.
- profits and losses are the owners
• partnerships
- all partners are considered personally responsible for the profits and loses of the partnership, except in the case of silent partners.
- a silent partner must have no control in the day to day operation of the business and is essentially a financier.
- Joint ventures are partnerships limited to a single project.
- partnerships should be registered (The Partnership Act of Ontario) before they act as legal entities.
- partnerships will dissolve when one of the partners dies or becomes bankrupt or insolvent.
- partnership agreements are needed to determine responsibilities (financial, management duties, work) provisions for adding or expelling partners, etc.
- corporations can also be partners.
- limited partnerships are registered partnerships (Limited Partnerships Act of Ontario) where one or more partners can limit their liability to their own contribution. They cannot be advertised as part of the firm, represent themselves as a general partner, partake in business decisions, etc.
• corporation/limited company (“a fictitious person”)
- federal or provincial corporations
- a corporation has the same legal status as an individual. This principle is called the “corporate veil” [Salomon v. Salomon & Co. Ltd.]. This may be lifted in some cases when fraud is involved [Fern Brand Waxes Ltd. vs. Pearl]
- this provides a tax shelter for shareholders
- this also acts as a liability shield
- Other circumstances will also set aside the corporate veil, such as common control of multiple corporations [Nedco Ltd. v. Clark et. al.]
- a corporation exists as long as it complies with its governing statute, and no legal steps have been made to dissolve it.
- quite often banks will require personal guarantees from shareholders for any corporate loans (this sidesteps the liability shelter of corporations).
- the taxes paid for profits/dividends made by a corporation can be lower than those paid out by a sole proprietorship.
- engineers can form engineering corporations
- corporations can be formed by,
- federal statutes
- provincial statutes
- by following provincial acts (eg, Canada Business Corporations Act or Business Corporations Act of Ontario)
- federal and provincial corporations can trade outside their jurisdiction
- federal corporations (unlike many others) are well suited to Canada wide business, but beyond certain financial levels they must file public annual financial statements.
- provincial corporations may requires licences to conduct business in other provinces.
- “objects” are the purposes of the business which a corporation may opt to define or limit. Some businesses, such as engineering corporations are limited by statute already. (eg, the primary control must rest with an engineer holding a certificate of authorization)
- a private corporation has a limited number of shareholders (<50) with controlled transfer and ownership of shares.
- a public corporation offers shares for sale publicly (often to generate investment capitol). The shareholders elect a board of directors. The board of directors appoint officers to manage day to day affairs.
- in private corporations, shareholders agreements are often used to set up ownership, control new shares, sale of shares, etc. Minority shareholders can be very vulnerable if not protected by a shareholders agreement.
- The directors standard of care is a legal measure of the principles required to maintain a corporation as a distinct entity.
- directors must act honestly and in good faith while working toward the interests of the corporation
- directors are liable for up to 6 months of wages for the corporation if actions begin within 6 months of termination if the corporation is sued because of the director, the corporation become bankrupt or goes into liquidation.
- directors can also be fined or jailed (The Combines Investigations Act) if they fail to submit certain returns.
- can be prosecuted and are liable under the Canada Income Tax Act
- directors can be prosecuted if the corporation is not properly identified during business transactions.
- directors can be prosecuted if false statements are made on corporate reports, returns, notices or other official corporation documents.
- Directors in corporations are required to disclose all conflicts of interest that pertain to any business in the company. Not doing so will make the directors liable for any profit or gain.