LAW 603 Lecture Notes - Lecture 3: Canada Revenue Agency, Fiduciary, Environment And Climate Change Canada
28 May 2018
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Lecture 3 - Basic Forms of Business Organizations
Tuesday, January 30, 2018
3:08 PM
Basic Forms of Business Organization
• Sole Proprietorship
• Partnership
o General Partnership
o Limited Partnership
o Limited Liability Partnership
• Corporation
Sole Proprietorship
• A sole proprietor conducts business in his or her own name. There is no separate legal structure or
separation between the owner and the business on any level.
o The owner is exclusively and personally responsible for conducting the business;
o The owner is exclusively and personally liable for all torts and contractual or other breaches
in regard to the business;
o Money earned goes to you;
o Everything you own is at risk, all debts incurred against the business is also considered
personal debt
• Advantages
o It is the simplest and least costly form of business to establish and operate;
o It is the simplest and least costly to dissolve.
• Disadvantages
o The owner risks unrestricted and unlimited personal liability.
Partnership
• Legal Characteristics
o Two or more people carry on a business to make a profit;
o By definition, partnership is not an available form of business for non-profit organizations.
Corporation
• A corporation is the most common form of business organization.
• Federal or provincial incorporation:
o Canada Business Corporations Act (CBCA) or
o Ontario Business Corporations Act (OBCA)
• Characteristics of the Corporation
o The corporation is a separate legal person
o The corporation (not shareholders, officers or directors) carries on business, incurs
liabilities, and generates revenue, profits, losses, etc.;
o The corporation has separate income and tax status. Shareholders gain income from the
corporation only by receiving dividends paid on their shares or by selling their shares;
o Subject to exceptions, shareholders, directors, officers and employees (slide 13)
o The corporation has separate income and tax status. Shareholders gain income from the
corporation only by receiving dividends paid on their shares or by selling their shares;
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o Subject to exceptions, shareholders, directors, officers and employees are not personally
liable for the actions of the corporation;
o Ownership is separate from management.
▪ Shareholders elect directors who, in turn, appoint officers to manage the business;
▪ Subject to a Unanimous Shareholders Agreement, the legal responsibility for managing
resides with the board of directors (not the officers and not the shareholders).
• Fiduciary duty
• This concept exists at common law as well as in statute.
o Eah diretor and officer in exercising his powers and discharging his duties shall . . . act
honestly and in good faith with a view to the best interests of the corporation. . . .
[CBCA, s. 122 (1) (a)]
• The OBCA has a comparable provision. [s. 134]
• Duty of Care
o CBCA s. 122 (1)(b); OBCA s. 134 (1)(b);
o Directors and officers are required to exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances.
Non-Profit and Charity Organizations
• Similarities
o Both operate on a non-profit basis;
o Neither can distribute its income to members, directors, officers or trustees;
o Both are exempt from taxation on their income.
What is a Charity?
• A charity must be engaged in the following:
o Relief of poverty;
o Advancement of education;
o Advancement of religion;
o Other purposes beneficial to the community.
• Source
o Special Commissioners of Income Tax v. Pemsel, [1891] A.C. 531 (H.L.)
o Vancouver Society of Immigrant and Visible Minority Women v. Canada (Minister of National
Revenue-M.N.R.), [1999] 1 S.C.R. 10
• A charity can take only one of the following forms:
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o Charitable organization;
o Public foundation;
o Private foundation;
• Only a registered charity can issue receipts to donors for income tax purposes.
• Have to register as a charity through the CRA (Canadian Revenue Agency)
• Non-profits cannot issue receipts for tax purposes
What is a Non-Profit?
• A non-profit can pursue a broader mandate than a charity.
o Under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp), a non-profit organization is defined as
. . . ot a harit . . . orgaized ad operated elusiel for soial elfare, ii
iproeet, pleasure or rereatio or for a other purpose eept profit. . . . (p. 153)
o E.g., recreational, social and arts organizations
o Any profits made has to be re-distributed to their stated purpose
o Your organization cannot be both a charity and non-profit according to the Income Tax Act.
Federal Legal Environment
• Canada Not-for-profit Corporations Act, S.C, 2009, c. 23
o This statute covers the incorporation and general governance of federal non-share capital
corporations;
o It includes the requirements for incorporation, its capacity and powers, eligibility, roles and
responsibilities of officers and directors, etc.
• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp)
o Determines whether an organization is a charity or a non-profit organization;
o Places certain obligations on directors of organizations.
• Charities Registration (Security Information) Act, S.C. 2001, c. 41
o Post-9/11 legislation to ensure charities do not fund terrorist activities.
• Competition Act, R.S.C. 1985, c-34
o Provides rules for regulating the fundraising activities of charities.
• Lobbying Act, R.S.C. 1985, c. 44 (4th Supp.)
o Charities are included with organizations that must register with the government and file an
annual return if they communicate with public office-holders in regard to changes to the law
or other public policy matters.
Ontario Legal Environment
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Document Summary
Lecture 3 - basic forms of business organizations. Sole proprietorship: partnership, general partnership, limited partnership, limited liability partnership, corporation. Sole proprietorship: a sole proprietor conducts business in his or her own name. It is the simplest and least costly form of business to establish and operate; It is the simplest and least costly to dissolve: disadvantages, the owner risks unrestricted and unlimited personal liability. Legal characteristics: two or more people carry on a business to make a profit, by definition, partnership is not an available form of business for non-profit organizations. Corporation: a corporation is the most common form of business organization. Shareholders gain income from the corporation only by receiving dividends paid on their shares or by selling their shares: subject to exceptions, shareholders, directors, officers and employees (slide 13, the corporation has separate income and tax status. Shareholders elect directors who, in turn, appoint officers to manage the business;
