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Chapter 10

COMMERCE 1AA3 Chapter Notes - Chapter 10: Canada Business Corporations Act, Chief Executive Officer, Bmo Nesbitt Burns


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Emad Mohammad
Chapter
10

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Chapte : Shaeholdes' Euity
Learning Objective One: Explain the Main Features of a Corporation
Separate Legal Entity Continuous
A corporation is a business entity formed under federal or provincial law
The federal or provincial government grants articles of incorporation, which consist of
documents giving the governing body's permission to form a corporation
A corporation is a distinct entity, an artificial person that exists apart from its owners,
shareholders
Has many of the same rights as a person
Can buy, own, and sell property
Assets and liabilities in the business belong to the corporation, not the owners
Can enter into contracts, sue and be sued
Life and Transferability of Ownership
Corporations have continuous lives regardless of changes in their ownership
Shareholders may transfer shares as they wish
o May sell or trade the shares to another person, give them away, bequeath them in a
will, or dispose of them in any other way
o Transfer of shares does not affect the continuity of the corporation
o Proprietorships and partnerships terminate when ownership changes
Limited Liability
Shareholders have limited liability for the corporation's debts, so they have no personal
obligation to repay the company's liabilities
The most that a shareholder can lose on an investment in a corporation's share is the cost
of the investment
One of the most attractive features of the corporate form of organization
Enables corporations to raise more capital from a wider group of investors than
proprietorships and partnerships
o Proprietorships and partnerships are personally liable for all the debts of their
business unless they are organized as an LLP or an LLC
Separation of Ownership and Management
Shareholders own the corporation but a board of directors, elected by shareholders,
appoints officers to manage the business
Company managers should run the business in the best interests of its shareholders, who
rightfully own the company, but the separation between owners and managers may
create problems
o Corporate officers may run the business for their own benefit and not for the
shareholders'
Some managers believe that their goal is to maximize the firm's value
o Other managers believe that they should consider some or all of the other
stakeholders of the corporation
Corporate Taxation
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Because they are separate legal entities, corporations must pay income taxes separate
from those borne by the individual shareholders
Sole proprietors and partners pay individual income taxes based on their share of the
business's income
Government Regulation
Outsiders doing business with the corporation can look no further than the corporation if
it fails to pay its liabilities and debts
To protect a corporation's creditors and the shareholders, both federal and provincial
governments monitor corporations
o Consists mainly of ensuring that corporations disclose the information in financial
statements that investors and creditors need to make informed decisions
Advantages
Can raise ore capital than a proprietorship or partnership
Continuous life
Ease of transferring ownership
Limited liability of shareholders
Disadvantages
Separation of ownership and management
Corporate taxation
Government regulation
Controlling and Managing a Corporation
The ultimate control of a corporation rests with the shareholders
The shareholders elect a board of directors, which sets the company policy and appoints
officers
The board elects a chairperson, who usually is the most powerful person in the
organization
The board also appoints the Chief Executive Officer (CEO), who often acts as the president
in charge of day-to-day operations
Large corporations may also have vice-presidents in charge of sales,
manufacturing, accounting, and finance (CFO)
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Shareholders' Rights
Ownership of shares entitles shareholders to four basic rights, unless specific rights are
withheld by agreement with the shareholders
1. The right to sell the shares
a. Shareholders have the right to sell their shares to other parties when they no longer
wish to own them
2. The right to vote
a. Shareholders have the right to participate in management by voting on matters that
come before them
b. It is the shareholders' sole voice in the management of the corporation
c. A shareholder is usually entitled to one vote for each common share owned
d. There are some classes of common shares that give the holder multiple votes or no
votes
3. The right to receive dividends
a. Shareholders have the right to receive a proportionate share of any distributions
from the company's retained earnings
b. Each share in a particular class receives an equal dividend
4. The right to receive a residual interest upon liquidation
a. Shareholders have the right to receive a proportionate share of any assets remaining
after the corporation pays all liabilities upon liquidation
Shareholders' Equity
Shareholders' equity represents the shareholders' ownership interest in the assets of a
corporation
Four common and separate components
1. Share capital - amounts contributed by shareholders in exchange for shares in the
corporation
2. Contributed surplus - any amounts contributed by shareholders in excess of amounts
allocated to share capital
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