10-1 Chapter 10 Copyright © 2010 by Nelson Education Limited. Form of Organization and Legal Issues...

10-1Chapter 10 Copyright © 2010 by Nelson Education Limited.

Form of Form of Organization and Organization and Legal IssuesLegal Issues

Form of Form of Organization and Organization and Legal IssuesLegal Issues

1010

PowerPoint Presentation by PowerPoint Presentation by

Ian Anderson, Algonquin CollegeIan Anderson, Algonquin College


Looking AheadLooking 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


Legal Forms of OrganizationLegal Forms of Organization

• In launching a new business, an entrepreneur must choose a form of legal organization. The most common options are:– Sole proprietorship– Partnership– Corporation


Legal Forms of OrganizationLegal Forms of Organization

Exhibit 10-1


The Sole Proprietorship OptionThe Sole Proprietorship Option

• Sole Proprietorship–A business owned and operated by one person–Disadvantages

• Unlimited personal liability• No tax free benefits• Death/incapacity of owner terminates business

–Advantages• Ownership of the company name and assets may be

transferred.• There is generally no registration or filing fee.• Freedom from interference


The Partnership OptionThe Partnership Option

• Partnership– A legal entity formed by two or more co-owners to carry on a

business for profit.

• Partner Qualifications– Required: of legal age to contract– Desired: Honest, healthy, capable, and compatible

• Questions about Partnership Formation– What is our business concept?– How are we going to structure ownership?– Why do we need each other?– How do our lifestyles differ?


The Limited PartnershipThe Limited Partnership

• Limited Partnership– This form of ownership consists of at least one general

partner and one or more limited partners

– General partner

• a partner in a limited partnership who has unlimited personal liability

– Limited partner

• a partner in a limited partnership who is not active in its management and has limited personal liability


Sharing Workload

Sharing FinancialBurden

Sharing EmotionalBurden

Procuring ExecutiveTalent

Companionship

InterpersonalConflicts

Dilution of Equity

Dissatisfactionwith Partner

Absence of OneClear Leader

Frustration of NotCalling Own Shots

Advantages DisadvantagesThe Advantages and Disadvantages

of Partnerships

The Advantages and Disadvantages

of Partnerships


Partnership TermsPartnership Terms

• Articles of Partnership–A document that states explicitly

the rights and duties of partners.

• Agency Power–The ability of any one partner

to legally bind (e.g., borrow money) the other partners.


Rights and Duties of Partners in a Partnership Agreement

Rights and Duties of Partners in a Partnership Agreement

• 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

• 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


The Corporation OptionThe Corporation Option

• Corporation– A business organization that exists as a legal

entity and provides limited liability for its owners.

• Legal Entity– A business organization that is recognized by

the law as having a separate legal existence


Articles of AssociationArticles of Association

• Restrictions if any on share transfers

• Names and addresses of incorporator and first year’s directors

• Name of company• Restrictions, if any, on

business the corporation may carry on

• Location of principal office

• Classes, voting privileges and, maximum number of shares the corporation is allowed to issue


• Share Certificate

–A document specifying the number of shares owned by a shareholder

• Pre-emptive Right

–The right of shareholders to buy new shares before they are offered to the public.

• Legal Status

–Ownership provides control over the firm.

–Ownership limits liability to investment in the firm.

–Ownership can be transferred without affecting the firm’s operations

Rights and Status of ShareholdersRights and Status of Shareholders


Limited Liability of ShareholdersLimited Liability of Shareholders

• For most shareholders, their limited liability is a major advantage of the corporate form of organization. Their financial liability is limited to the amount of money they invest in the business.


Death or Withdrawal of ShareholdersDeath or Withdrawal of Shareholders

• Unlike a partnership interest, 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


Issues in Choosing an Organizational Form

Issues in Choosing an Organizational Form

• Factors that affect the choice of the firm’s structure:–Initial organizational costs and requirements–Limited versus unlimited liability for the owners–Continuity of business–Transferability of ownership–Management control–Attractiveness for raising equity capital–Income taxes


Comparison of Legal Forms of Organization

Comparison of Legal Forms of Organization

Sole proprietorship

General partnership

Corporation

Form oforganizationpreferred

Minimum requirements;generally no registrationor filing fee

Minimum requirements; generally no registration orfiling fee; written partnershipagreement not legally required but strongly suggested

Most expensive and greatestrequirements; filing fees; compliance with provincial regulations for corporations

Proprietorship orgeneral partnership

Unlimited liability

Unlimited liability

Liability limited to investmentin company

Corporation

Limited to proprietor’spersonal capital

Limited to partner’sability and desire tocontribute capital

Usually the most attractive form forraising capital

Corporation

Form ofOrganization

Initial OrganizationalRequirements and Costs

Liability ofOwners

Attractiveness forRaising Capital

Exhibit 10-2


The Board of Directors and DutiesThe Board of Directors and Duties

• Board of Directors–The governing body of a corporation, elected by the

shareholders–Inside directors

• Board members who work for the firm–Outside director

• Board members who do not work for the firm

• Duties–Elect the firm’s officers (top management)–Approve management’s plans and policies–Review performance and declare dividends


The Board of Directors and Advisory Councils

The Board of Directors and Advisory Councils

• Contributions of Board of Directors–Bring knowledge and experience

• Review policy decisions• Provide general direction• Monitor the firm’s ethical behaviour• Mediate and resolve disputes among top management

• Alternative: Advisory Council–Provides advice but does not have the fiduciary

responsibility for the direction of the firm.


Federal Income TaxesFederal Income Taxes

• Sole Proprietorship– Self-employed persons are taxed on their business incomes at tax

rates set for individuals.

• Partnership– The partnership does not pay taxes; allocated shares of income

from partnership are taxed as personal income for each of the partners.

• Corporation– As a separate legal entity, it reports its income and pays any taxes

related to these profits.


Federal Income Taxes and Sole Proprietorship

Federal Income Taxes and Sole Proprietorship

Sole ProprietorshipExample of taxes due from a married couple with $150,000 in income from the business that they operate as self-employed persons

Range of Taxable Income Tax Rate

$0 to $37,885 15%

$37,886 to $75,769 22%

$75,770 to $123,184 26%

$123,185 and over 29%

Income x Tax Rate= TaxesFirst $37,885 15% $5,682.75Next $37,884 22% $8,334.48Next $47,415 26% $12,327.90Remaining $26,816 29% $ 7,776.64Total $150,000 $34,121.77


Federal Income Taxes and CorporationsFederal Income Taxes and Corporations

CorporationsTaxable income under $400,000 is taxed at the federal corporate tax rate of 12%. Provincial tax rates vary.

Any profits of the corporation that are distributed to the shareholders (dividends) are taxed again as personal income.

INCOME TAX

Small business income up to $400,000 11.0%

Investment income 34.7%


Laws and RegulationsRegulating Competition

Laws and RegulationsRegulating Competition

• Competition Act (Federal)– Designed to maintain a competitive economy– Prohibits:

• Discounts not offered to all customers

• Tied selling

• Refusal to deal

• Exclusive dealing


Laws and RegulationsProtecting Consumers

Laws and RegulationsProtecting Consumers

• Ontario Business Practices Act

• Canadian Consumer Packaging and Labelling Act

• Textile Labelling Act

• Food and Drug Act

• Hazardous Products Act

• Motor Vehicle Safety Act


Laws and RegulationsProtecting Investors & Public Welfare

Laws and RegulationsProtecting Investors & Public Welfare

• Protecting Investors– Securities Act

• Promoting Public Welfare– Ontario Environmental Protection Act– Municipal health bylaws– Canadian Human Rights Act


Laws and Regulations Protecting Employee Rights

Laws and Regulations Protecting Employee Rights

• Occupational health and safety acts

• Employment standards codes

• Workers’ compensation acts


Laws and RegulationsProtecting Intangible Assets

Laws and RegulationsProtecting 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


Business AgreementsBusiness Agreements

Exhibit 10-5


ContractsContracts

• Legally-binding agreements with employees, customers, suppliers and others– Offer– Voluntary agreement– Competent contracting parties– Legal act– Consideration– Form consistent with content

10-1 Chapter 10 Copyright © 2010 by Nelson Education Limited. Form of Organization and Legal Issues...

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