PowerPoint
Presentations for
Small Business Management:
Launching and Growing New Ventures,
Fifth Canadian Edition
Adapted by
Cheryl Dowell
Algonquin College
CHAPTER 10
Form of Organization and
Legal Issues
10-2
LOOKING AHEAD
After studying this chapter, you should be able to:
1.
Identify the common legal forms of organization used by small
businesses and describe the characteristics of each.
2.
Identify factors to consider in choosing among the primary legal
forms of organization.
3.
Describe the effective use of boards of directors and advisory
councils.
4.
Explain how different forms of organization are taxed by the federal
government.
5.
Understanding the major legal and regulatory issues businesses face
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10-3
FORMS OF LEGAL ORGANIZATION
LO 1
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10-4
FORMS OF LEGAL ORGANIZATION
sole
proprietorship
• a business owned and operated by one
person
unlimited
liability
• liability on the part of an owner that
extends beyond the owner’s investment in
the business
partnership
• a legal entity based on the voluntary
association of two or more persons to carry
on, as co-owners, a business for profit
LO 1
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10-5
PARTNERSHIP
Clarify the following expectations before a partnership agreement:
1.
2.
3.
4.
What is our business concept?
How are we going to structure ownership?
Why do we need each other?
How do our lifestyles differ?
A strong partnership requires partners who are
honest, healthy, capable, and compatible.
LO 1
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10-6
RIGHTS AND DUTIES OF PARTNERS
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Date and formation of partnership
Names and addresses of partners
Statement of fact of partnership
Statement of business purpose(s)
Duration of the business
Name and location of the business
Amount invested by each partner
Sharing ratio for profits & losses
Partner’s right if any re: withdrawal
of funds for personal use
• Provision for accounting records
and their accessibility to partners
LO 1
• Specific duties of each partner
• Provision for dissolution and
sharing of the net assets
• Restraint on partner's
assumption of special
obligations, such as endorsing a
note of another
• Provision for protection of
surviving partners decedent’s
estate, and so forth in the even
of a partner’s death
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10-7
CORPORATION
corporation
• exists as a legal entity and provides limited
liability to its owners
• Canada Business Corporations Act
legal entity
• recognized by law as having a separate legal
existence
• can sue and be sued, hold and sell property,
engage in business operations that are stipulated
in the articles of association, and pay taxes
separately from corporation’s owners
LO 1
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10-8
ARTICLES OF ASSOCIATION
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Name of company
Restrictions, on business
Location of principal office
Classes, voting privileges and, maximum number of
shares the corporation is allowed to issue
• Restrictions on share transfers
• Names and addresses of incorporator and first year’s
directors
LO 1
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10-9
RIGHTS AND STATUS OF
SHAREHOLDERS
• Share Certificate
– document specifying number of shares owned by a
shareholder
• Pre-emptive Right
– right of shareholders to buy new shares before they
are offered to the public
• Legal Status
– Ownership:
• provides control over the firm
• limits liability to investment in the firm
• can be transferred without affecting the firm’s operations
LO 1
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10-10
LIMITED LIABILITY OF SHAREHOLDERS
• for most shareholders, limited liability is a
major advantage of the corporate form of
organization
• financial liability is limited to the amount of
money invested in the business
LO 1
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10-11
DEATH OR WITHDRAWAL
SHAREHOLDERS
• ownership in a corporation is readily transferable
• exchange of shares is sufficient to convey an
ownership interest to a different individual
• shares of large corporations are exchanged
constantly without noticeable effect on the
operation of the business
• for a small firm, a change of owners can involve
numerous complications
LO 1
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10-12
CHOOSING AN
ORGANIZATIONAL FORM
LO 2
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10-13
THE BOARD OF DIRECTORS AND
DUTIES
• Board of Directors
– governing body of a corporation
– elected by the shareholders
– Inside directors
• Board members who work for firm
– Outside directors
• Board members who do not work for firm
LO 3
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10-14
THE BOARD OF DIRECTORS AND
DUTIES
• Duties
– Elect the firm’s officers (top management)
– Approve management’s plans and policies
– Review performance and declare dividends
LO 3
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10-15
THE BOARD OF DIRECTORS
AND ADVISORY COUNCILS
Contributions of Board of Directors
• Bring knowledge and experience
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Review policy decisions
Provide general direction
Monitor the firm’s ethical behaviour
Mediate and resolve disputes among top management
Alternative: Advisory Council
•
LO 3
Provides advice but does not have fiduciary responsibility
for direction of firm
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10-16
FEDERAL INCOME TAX
• Sole Proprietorship
– self-employed persons are taxed on their business
incomes at tax rates set for individual
• Partnership
– does not pay taxes
– allocated shares of income from partnership are taxed
as personal income for each partner
• Corporation
– separate legal entity
– reports income and pays any taxes related to these
profits
LO 4
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10-17
HOW BUSINESSES ARE TAXED
Canada Revenue Agency
LO 4
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10-18
LAWS AND REGULATIONS
REGULATING COMPETITION
• Competition Act (Federal)
– Designed to maintain a competitive economy
– Prohibits:
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LO 4
Discounts not offered to all customers
Tied selling
Refusal to deal
Exclusive dealing
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10-19
LAWS AND REGULATIONS
PROTECTING CONSUMERS
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Ontario Business Practices Act
Canadian Consumer Packaging and Labelling Act
Textile Labelling Act
Food and Drug Act
Hazardous Products Act
Motor Vehicle Safety Act
PIPEDA www.privacyforbusiness.ic.gc.ca
LO 5
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10-20
LAWS AND REGULATIONS
• Protecting Investors
– Securities Act
• Promoting Public Welfare
– Ontario Environmental Protection Act
– Municipal health bylaws
– Canadian Human Rights Act
• Protecting Employee Rights
– Occupational health and safety acts
– Employment standards codes
– Workers’ compensation acts
LO 5
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10-21
LAWS AND REGULATIONS
INTANGIBLE ASSETS
• Trademarks, e.g., Sony, Acura
• Patents, e.g., Post-It notes
• Copyrights, e.g., songs, books
• Industrial Design
• Integrated Circuit Topography
• Plant Breeders’ Rights
LO 5
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10-22
BUSINESS AGREEMENTS
AND THE LAW
LO 5
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10-23
CONTRACTS
• Legally-binding agreements with employees,
customers, suppliers and others
– Offer
– Voluntary agreement
– Competent contracting parties
– Legal act
– Consideration
– Form consistent with content
LO 5
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10-24
NEGOTIABLE INSTRUMENTS
• There must be a written, signed,
unconditional promise or order to pay
• The amount to be paid in money must be
specified
• The instrument must provide for payment on
demand at a definite time or at a
determinable time
• The instrument must be payable to the
bearer or to the order of someone
LO 5
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10-25