Chapter 14: Business Forms/ Arrangements

SOURCES OF CAPITAL

- A corporation can get its capital in two ways: it can borrow or its directors can issue shares.

Patnership

A business carried on by two or more persons with the objective of making a profit. Similar to a sole proprietorship, in that neither has a legal personality - or legal existence - separate from the people who comprise them.

Limited Partnership

A partnership in which the liability of some of the partners is limited to their capital contribution At least one partner has unlimited liability (the general partner(s)) while others have limited liability General partners have unlimited liability. Limited partners have a liability limited to the amount that they have contributed to the partnership capital.

Limited Liability Partnership (LLP)

A partnership in which the partners have unlimited liability for their own malpractice but limited liability for other partners' malpractice. Designed to address concerns of professionals who are not permitted to use incorporation as a means of achieving limited liability.

PRODUCT LICENSING

Agreement whereby the owner of a trademark or other property right grants to another the right to manufacture and distribute products associated with the trademark or other proprietary rights

Default Partnership Rules Under Partnership Act

All partners are to share equally in the capital and profits of the business and contribute equally to the losses. Property acquired shall be used exclusively for the partnership. Partner shall be indemnified by the other partners for any liability incurred on behalf of the partnership. A payment made by a partner in excess of his or her agreed subscription shall earn interest. Each partner may take part in the management of the business. No partner is entitled to remuneration for acting in the partnership business. Disputes may be decided by a majority - one must have consent of all members. No new member is admitted without consent of all partners. Partnership books shall be kept at partnership's place of business. No simple majority may expel any partner.

SALES AGENCY

Arrangement in which a manufacturer or distributor contracts with an agent to sell goods or services on its behalf

TAXATION

Because it is a separate legal entity, a corporation pays its own taxes.

Managing Risk in Partnership Relationships

Choose partners with care Educate partners on their authority, its limits, and consequences of exceeding them Monitor activities of partners Notify clients and customers of the departure of partners to prevent being held liable for debts contracted by departed partners Insure against liabilities for wrongdoing

STRATEGIC ALLIANCE

Cooperative arrangement among businesses that may involve joint research, technology sharing, or joint use of productions

JOINT VENTURE

Grouping of two or more businesses to undertake a particular project

Partnership Agreements

Highly recommended If no written agreement, default rules from Partnership Act will apply Agreement should be periodically reviewed Agreement should address the following issues: Creation of the partnership Capital contribution Decision making Profit distribution Changes to partnership Dissolution of partnership

Sole Proprietorship

Oldest, simplest form of business organization No legislation pertaining to sole proprietorship as such but may need to obtain business licence and register trade name An unincorporated business organization that has only one owner Owner has unrestricted legal responsibility for obligations Easy to set up, but business obligations are personal obligations No legal distinction between the business and its owner Owner has unlimited personal liability for all debts and obligations of the business. Examples: Bank loan - Owner must repay the loan Breach of contract - Owner is personally liable for breach Tort committed by employee - Owner is personally liable

PROS/CONS the corp

PROS: Limited liability Flexibility Greater access to capital Continuous existence Tax benefits Transferability Potentially broad management base CONS: Higher costs Public disclosure Greater regulation Dissolution Tax disadvantages Possible loss of control Potential bureaucracy

Partnership Pros /COns

PROS: Simplicity Lower costs Greater access to capital Profit motive Tax benefits CONS: Unlimited personal liability Loss of speed and independence Limitations on transferability Profit sharing Tax disadvantages

Pros/COns of SOle

PROS: Simplicity Speed and independence Profit motive Lower costs Tax benefits - can claim business expenses Control over decision making CONS: Unlimited personal liability Working alone (but can have employees) Limited access to capital (can only borrow) Limited life span (dies with owner) Tax disadvantages (must claim all business income with personal taxes)

Financial Liability in Partnerships

Partners are fully responsible for all debts of the partnership. JOINT LIABILITY - Liability is shared by two or more parties (partners), where each is personally liable for the full amount of the obligation. Bank can proceed against the partner with the most assets.

PROFIT SHARING

Profits of the corporation are distributed to shareholders through dividends.

Corporation Terminology

SHAREHOLDER - Person who has an ownership interest in a corporation DIRECTOR - Person elected by shareholders to manage a corporation LIMITED LIABILITY - Responsibility of obligations restricted to the amount of investment DIVIDEND - Division of profits payable to shareholders

Rules Governing Partnerships

SOURCES OF LAW Partnership legislation (in place in every province) Contract law Agency law

Partnership Act

Sets out default rules for partnerships that can be varied by written agreement. The Partnership Act - A partnership exists when two or more people "carry on business with a view towards profit." The Partnership Act provides that partners are agents of one another as well as agents of the firm in matters relating to the partnership business. Partners also owe a fiduciary duty to each other. The statutory definition of partnership covers people who expressly intend to be partners as well as people who may not necessarily intend to be partners but act as if they are partners.

Joint and Several Liability

The Partnership Act and the law of agency make partners jointly and severally liable for all obligations of the business. JOINT AND SEVERAL LIABILITY - Individual and collective liability for a debt. Each liable party is individually responsible for the entire debt as well as being collectively liable for the entire debt.

The Corporation

The corporation is a distinct legal entity in law and capable of assuming its own obligations. Usually the safest vehicle for conducting business because the owners are normally shielded from personal liability

DECISION MAKING

The corporation is managed by a board of directors, which in turn is elected by the shareholders. In addition, officers - that is, high-ranking corporate employees - can be hired by the board to assist in running the corporation.

TRANSFERABILITY

The fact that a corporation has a separate legal identity often allows for easy transference of an ownership interest represented by shares.