Law Notes Final

Chapter 21 basic forms of business

Sole Proprietorship
•Automatically comes into existence when an individual begins to conduct business.
•There is no legal separation between the business and the individual.
•Sole proprietors must comply with the general requirements imposed on all businesses:
• May need to register business name.
• May need to acquire a particular licence - eg. lawyers, accountants, restaurants, etc. Liability -
Sole Proprietorship Consequences of no separation between owner and business:
Proprietor Is: 1. Entitled to all income. 2. Liable for all obligations including contracts. 3. Liable
for all torts, and can be vicariously liable for employees. 4. All personal assets are available for
debts, not just those in the business. 5. Must borrow money personally to finance the business.
6. For income tax purposes, the business income (or loss) is included in the personal income
tax return of the sole proprietor.

Ontario Business Names Act - Name of business needs to be registered under there name
2(2) - No individual shall carry on business or identify his or her business to the public
under a name other than his or her own name unless the name is registered by that
individual.

Purpose of law - so that someone who wants to sue or notify the business will have a person
and an address for service. Partnership -
What is it? Defined in the Ontario Partnership Act as - “the relation that subsists between
persons carrying on a business in common with a view to profit” ● More than one person ●
Carry on a business in common ● With a view to profit Formation of a partnership ● Automatic:
when two or more people carry on a business together with a view to profit, it is a partnership
and no need for documentation. ● Example from text: You and James agree that he will buy a
lawnmower and you will cut the lawns for interested homeowners and you will split the profit. ●
You created a partnership even if you never make a profit - you intended to make a profit. Why
is the goal of profit a requirement? ● PROFIT = [GROSS REVENUE] MINUS [COSTS] ●
Rationale: If you share profits: you are concerned with the entire business operation, including
management of the expenses. You have a true financial stake in the overall success of the
business as an owner would have. ● If you are compensated only out of revenue: you have a
stake only in how much the business can sell. Contrast Partnership with Joint Venture ● Joint
Venture - where two or more persons carry on a specific project or business activity together. ●
May agree to share revenues or share the products produced or extracted, or even share
revenues less specified expenses, but not sharing overall profits. ● Usually only for a specific
project, rather than an ongoing business venture. ● Joint Ventures are common in business: ○
two mining companies enter into a joint venture to develop a specific mine. ○ three computer
companies enter into a joint venture for a specific application Factors Indicating a Partnership ●
Sharing profits (not just revenues) or losses ● Jointly owning property or jointly contributing
capital ● Involvement in business — especially management ● Joint authority for contracts and
bank accounts ● Equal access to business information ● Holding each other out as partners or
acquiescing ● Engaging in ongoing activity rather than one project Is this a partnership? ● A
Canadian bought what was called a “partnership interest” in an American owned construction
venture that had incurred losses in Canada. ● The American could not use the losses on their
US tax return. ● The Canadian acquired the “partnership interest” and then sold it, to incur those
losses. Those losses would offset other Canadian income, so that the tax savings would more
than offset the cost of the partnership interest. ● Can the Canadian use the partnership losses
on their Canadian tax return? The Income Tax Act requires that it be a partnership loss. IRAC
Issue: Was this an investment in a partnership? Rule: A partnership is where two or more
people carry on business together with a view to profit Application: The investor did not intend to
carry on a business. Also, there was no intention to make a profit - the intention was to acquire
a loss. Conclusion: This was not a partnership interest, and therefore could not use this as a
partnership loss on the Canadian tax return. Backman v. Canada, 2001 SCC 10 (CanLII), [2001]
1 SCR 367 [link] ● Is this a partnership? You Be the Judge 21.1 ● Groscki’s business provided
tax and accounting services. ● Durocher agreed to review accounting statements and prepare
tax returns for Groscki’s clients for $20 an hour plus $900 a month (1999 dollars) ● They both
agreed that Durocher would be classified as an “independent contractor” for tax reasons. ●
Later, Durocher borrowed $25,000 from the bank and it went into the business, though Groscki
paid the interest and installments on this loan ● Facts continued next slide Partnership? Facts
continued ● Over time, Durocher assumed more responsibility for managing the business and
Groscki got involved in other businesses. ● Letterhead changed to “Groscki and Durocher” ●
But Durocher was not given signing authority on the business bank account or specific share of
profits. ● Question - had Groscki and Durocher become partners? IRAC Issue: Had Groscki and
Durocher become partners? Rule: A partnership is where two or more persons carry on a
business in common with a view to profit Application: Although their relationship had become
more than employer and employee, they did not share profits. They were sharing revenues and
Durocher did not have management authority. Conclusion: They are not partners. They were
associated - a joint venture. Groscki v. Durocher [1999] O.J. No. 2052 Value of Shares Residual
Value - after all taxes, debts, and other claims paid At winding-up, ABC Corp. is worth: 100,000
Creditors: Smith Jones ($10,000) ($10,000) Residual Value of Corporation $80,000 Therefore,
shareholders of ABC Corp. are entitled to $80,000 upon the winding up of ABC Corp. Duties of
Directors ● Fiduciary relationship of good faith, must act in the best interests of the
corporation, rather than in their own best interests ● Every director shall “act honestly and in
good faith with a view to the best interests of the corporation” Business Corporations Act ,
section 134 ● Must disclose the director’s interest in a contract or property ● Refrain from
discussing or voting on the issue ● Accountable at law for breach of duty Duties of Directors ●
Business corporations are incorporated to earn a profit. ● Shareholders elect the directors. ●
Suppose short term profit interests of shareholders put creditors and employees at risk of loss. ●
Do the directors have a duty to consider the interests of other parties, in addition to the
shareholders? Directors duty to other “stakeholders” Yes, “in determining whether they are
acting with a view to the best interests of the corporation it may be legitimate, given all the
circumstances of a given case, for the board of directors to consider, inter alia, the interests of
shareholders, employees, suppliers, creditors, consumers, governments and the environment.”
Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, Par. 42 Creating
corporation - Articles of Incorporation ● Must file documents with the government office. ● The
proposed name of the corporation. ● The registered office address of the corporation (for
serving documents). ● The “objects” or purpose of the corporation and any restrictions on the
corporation’s activities. ● The number of directors and who the initial directors are. ● The total
number of shares that can be issued (usually “unlimited”) and the classes of shares of the
corporation. ● Any restrictions that may be imposed on the transfer of shares - required for a
private corporation. (Details are securities laws - not covered in this course.) Post-Incorporation
Organization ● Regular meetings of directors and annual meetings of shareholders. ● Or a
resolution signed by all of them. ● Shareholders agreement are common in a small corporation:
Agreement: ○ Who will be the director(s), officer(s), and auditor(s) of the corporation? ○ How will
the directors and shareholders vote on certain issues? ○ What type of contracts and business
will the corporation conduct? ○ How will share transfers to new shareholders be controlled? ○
Can a shareholder force the others to buy their shares if they want to exit? ○ Will arbitration or
mediation be required if there are disputes, thus saving the cost of any court action? Taxation
Concept Summary 21.4 Taxation of Income of Business Organizations Sole Proprietorship
Partnership Corporation Income (or loss) from business added to (or deducted from) the sole
proprietor’s personal taxable income Income (or loss) from business calculated for partnership
but added to (or deducted from) each partner’s personal taxable income • in proportion to
partner’s entitlement to profits • whether or not cash distributed to partner Income (or loss) from
business added to (or deducted from) corporation’s taxable income • Shareholders pay tax only
on distributions actually received from corporation (eg, dividends) What is the best business
structure? You are developing a new computer gaming business. You would like to involve Amy,
so that she will do the programming and you will do the marketing. You expect to lose about
$25,000 each year for the first three years, and then start making money. Options - what are the
advantages and disadvantages of each option? 1. Hire Amy as an employee - cash flow? 2.
Make Amy a partner in a partnership? 3. Incorporate and let Amy earn shares? Best business
structure - continued Same facts , except the new program is a security program, and if it
doesn’t work for a client, your business could be liable for millions of dollars. You would also like
to bring in investors - silent partners who are not involved in management. You still expect to
lose money for the first three years. Options - what are the advantages and disadvantages of
each option? 1. Incorporate? 2. Limited Partnership? Best business structure - continued Same
facts - You have a choice between two professional accounting firms - one is an LLP accounting
firm, and the other is not an LLP. All things being equal, which should you choose? Same facts -
You are a bank considering lending the business money. Which business structure would you
prefer to maximize your loan protection? If it is a small corporation with limited assets, the bank
will insist on a personal guarantee of the owner or from other parties - why?