CHAPTER 6

Forms of Business
Ownership
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 Chapter Objectives

At the end of this lesson, you should understand:

• Various legal forms that can be used for the ownership of a
business
• The general commercial partnership and the limited
partnership
• The concept of corporate legal personality and the
characteristics of the corporation
• The legal procedure used to start a business using any of the
forms of ownership discussed.

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 What is an
Enterprise?
Definition – Enterprise?
 The carrying on by one or more persons of an
organized economic activity, whether or not it is
commercial in nature, consisting of producing,
administering or alienating property, or providing
a service, constitutes the carrying on of an
enterprise. (art. 1525)
 Operations of a business = Transacting of a series of acts of commerce by a merchant,
generally with object of earning a profit
 One act by an individual = private undertaking, not an organized economic activity
 Constitution Act, 1867, Section 92
Exclusive Power of the provincial legislatures (Authority to govern, regulate and
make laws on business and commercial transactions)

-> provincial government to regulate:

• Sole proprietorship
• Partnership
Both are « personal » forms of
business ownership

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 Choosing a Form of Ownership

Forms (ownership structure) of Business?

• Sole proprietorship 1.Start-Up

• Businesses owned and usually Need to consider:
• Nature of 2.Liability
managed by a single individual
transactions to 3.Ownership
• Partnership be carried out
• Voluntary agreements • Funds required 4.Profit
where two or more people (and available)
act as co-owners; there are 5.Management
• Type of work
several types • Number of 6.Ownership
• Corporation people Transfer
• Legal entities, separate from their
owners 7.Termination

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 Sole Proprietorship
Definition?

• An enterprise or a business venture by

one single individual
• Represents 50% of businesses in
Quebec
• Least complex form, no formalities
• License from municipal authorities may be
required
• If the company has a name other than Act respecting the legal
publicity of enterprises
that of its owner, a Quebec business
number (NEQ) must be obtained

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 Sole Proprietorship
Registraire des entreprises

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 Sole Proprietorship
Advantages & Disadvantages

Advantages Disadvantages
• Simple start-up • Unlimited liability

• Low start-up costs • Lack of continuity

• Easy to dissolve • Financing difficulties

• Complete control • Limited ability to attract

and retain talented
• Possible tax advantage
employees

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 Partnership
Definition?

• An enterprise or a business
venture entered into by two or
more individuals

Partners in a business are like spouses: they depend greatly

upon each other, must cooperate, can create liability for each
other, and often end up with irreconcilable differences

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 Partnership
Advantages & Disadvantages

Advantages Disadvantages
• Simple start-up • Unlimited liability

• Low start-up costs • Conflict

• Easy to dissolve • Lack of continuity

• Easier Financing • Transfer difficulties

• Shared responsibilities
• Possible tax advantage
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 General Partnership
General partnership – all partners have
the right to participate in the management
of the firm, and all share unlimited liability

• Easy to Set Up and Operate

• No formal process required
• Obtain Employer Identification Number
• Obtain all necessary federal, provincial, and local
licenses and permits
• Register Assumed Name Certificate, if necessary
• Partnership Agreement (optional, but highly
recommended)
 Limited Partnership
Limited partnership – includes at least one general
partner and at least one limited partner (who has limited
liability)
– all partners are actively involved but they have some form
of limited liability, which varies by jurisdiction
• Limited Partnership is not considered as a taxable entity: LP is not
required to file corporate tax returns and pay income taxes.
• All profit received by Limited Partnership passes through the
company to its partners.
• Partners, who are not Canadian residents do not have tax liabilities
in Canada. If a partner is a Canadian resident, he is required to
include his part of profit received through his Limited Partnership
into his personal tax return and pay personal income tax.
 Formation of Limited
Partnership
• File Certificate of Limited Partnership with Services
Quebec.
• Contract of Partnership must respect certain
requirements of the Civil Code of Quebec
• Name must contain the words “Limited Partnership.”
• A written partnership agreement is required.
• A partnership agreement is essential to clarify
management accountability, ownership and profit
distribution.
• Maintain certain records as required by provincial
law.
 General vs Limited
There are four characteristics that distinguish a limited partnership
from a general partnership:
• It is operated by a single general partner with unlimited
liability, supported by other “limited partners.”
• The single general partner gets a bigger share of the earnings
in exchange for increased contributions and risk.
• The limited partners contribute capital but cannot be involved
in the company’s management.
• The liability of the limited partners is capped by the amount of
capital they contribute.
***In some provinces, limited partnerships are available only to
groups of professionals such as lawyers, consultants or doctors.
 Special Partnerships

Limited liability partnership (LLP)- a special

type of limited partnership, in which all partners
are limited partners
Master limited partnership (MLP)- a
partnership whose shares are traded on stock
exchanges, just like corporations
 Selecting a Partner

• “Don’t go into business with a friend because you

will likely lose that friend”

• Characteristics of a “good” partner?

 Partnership
Agreements
• Advisable even if Articles of Partnership
the partners are Should address the following:
friends 1) legal name of the partnership
• Can delineate the 2) nature of the business
responsibilities of 3) duration of the partnership
each partner and 4) contributions
protect everyone 5) sales, loans and leases
with an interest in 6) withdrawals and salaries
the business 7) responsibility and authority
8) dissolution
9) arbitration
 Corporation – An
Definition?
Artificial Entity
• A corporation is a legal entity, separate and distinct from its owners.
• Corporations are owned by shareholders.
• The board of directors establishes the mission and objectives.
• The board is elected by the shareholders to represent their interests,
but rarely gets involved in day-to-day management.
• Officers are appointed by Board to run day to day operations
As separate legal entity, a corporation can do anything a
natural person can do, such as owning property, entering
into binding contracts, borrowing money, and initiating
lawsuits—all in its own name.

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Corporations - Basic Concepts

A statutory immortal being.

• Shareholders/ Directors/ Officers/
• Employees “Exists” in one particular state
• Shareholders vote and elect Directors
• Directors are called the “Board of Directors” and
must meet regularly, vote to approve or disapprove
actions and must have meeting minutes
• Officers execute the orders of the Board

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 Corporations
Shareholder/Board Member/
Officer/ Employee
• Corporations must comply with
specific laws (often Corporate
Internal rules stating how:
Code) of the province and they  It may borrow money
are incorporated in.  Issue bonds
• Corps must also comply with  Elect directors and officers
 Hold meetings of shareholders
own Articles of Incorporation
and Bylaws (if any).
• Securities Laws apply to
publicly traded corporations and
sometimes other corps and other
business organizations

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 Corporations - Advantages
• Limited liability: its owners, shareholders are not
personally liable for the debts of their firm.
• Permanence: unaffected by the death or withdrawal of an
owner.
• Easy to transfer ownership: Simply selling stock will do
the trick.
• Ability to raise capital: Only corporations can issue
stock or bonds.
• Specialized management: Large corporations typically
find it easier to hire qualified professional managers, due
to more resources and growth opportunities.

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 Corporations - Disadvantages
• Expense/complexity of formation and operation: Establishing
a corporation requires significant paperwork, including articles
of incorporation and corporate bylaws, plus filing fees federally,
or in each province where the corporation does business.
• Complications if operating across jurisdictions: must register
to do business as a “foreign corporation” in order to operate in
any province of Canada other than the one in which it is
incorporated.
• Taxation at 2 levels: Earnings that the corporation redistributes
to shareholders (dividends) are taxed again as personal income.
• Paperwork and regulation: Publicly traded corporations must
send detailed reports to shareholders and to the various
government and regulatory agencies.
• Conflicts of interest: Top executives could pursue their own
interests at the expense of shareholder interests (e.g., power,
money, perks).
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 Types of Corporations

• Publicly held/open:
publicly traded Class Activity
1. Find a corporation that is
• Closely held/closed: publicly traded
privately held, or with 2. Find a corporation that
a limited number of has a limited number of
shareholders
shareholders – traded
on occasion

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 Start-Up (Registration)
Federal
• Can operate in any province
• More bureaucratic requirements
• Higher start-up costs
• Canada Business Corporations Act
Provincial
• Must register in each province
• Less bureaucratic requirements
• Lower start-up costs
• Quebec Business Corporations Act

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 Quebec Incorporation

• Under the Quebec Act Respecting the Legal

Publicity of Enterprises
• It is required that any business incorporated outside of
Quebec must, if it wants to do business in Quebec,
register and pay a separate fee to operate in the
province.

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 Select Name
The name:
• Can be a numbered company, such as 1265436
Quebec Inc.
• Must not be deceptive or misleading
• Must not be the same or similar to existing names
• Must include legal element: either Corporation,
Corp., Incorporated, Inc., Limited or Ltd./Ltée.
• Can use “trade name” but not with legal element at
the same time
• If Federal Inc. can be in French or English
• If Quebec Inc. it must be in French

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 Liability of Corporations
Shareholders:
• Limited liability to investment
• Protected against loss of any further funds 
corporate veil
- The domicile of a legal person is at the
place and address of its head office
Legal persons are distinct from their
members. Their acts bind none but themselves,
except as provided by law.

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 Ownership of Corporations
Common Shares
• Voting right
• Last in line for dividends
Preferred Shares
• No voting rights
• Higher dividend rate + priority

Note: Common and Preferred terms are not

legal terms. Law recognizes Class of Shares,
such as Class “A”, Class “B”, etc.

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 Management of Corporations
Board of Directors
• Any amount of Directors
• If publicly traded then minimum three
• Oversee and set policy for the company
• No personal liability, even for bad business
decisions, except:
• Failure to disclose any conflict of interest
• For up to six months of unpaid wages to
employees
• For payment of dividends which would
render the corporation insolvent
.
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 Unanimous Shareholder Agreement
An agreement that allows shareholders of the firm
to restrict the powers of the directors

Why?
• to determine how the company is managed
• protect rights of shareholders

Note: if shareholders take over certain

management rights, then they will be held
accountable to the same standards as the BOD

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Profits of a corporation

• Who do the profits belong to?

• How is it divided amongst shareholders
• Dividend

• Common shareholders vs. preferred shareholders

Initial Steps to Get Corporation
Going
• Elect or establish Directors and Officers.
• Hold first meeting.
• Adopt bylaws.
• When where shareholder and director meetings will be
held
• Procedures and requirements for meetings
• Establish more detail on officers and directors

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 Going Public
• Don’t confuse “going public” with creating a
corporation.
• When you offer the public investment in the
corporation for the first time you are said to be “going
public”
• This marks a significant change in the way a company
will be operated and the obligations of the directors
and officers.
• Rarely will happen at time of creation but can and
occasionally does.

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 Incorporation

• Promoters precede the corporation and have liability that

is not erased by incorporating
• File a charter, forms and fees
• Charter is a public document that has basic information
about the corporation.
• Initial stock allocation and characteristics
• Agent for service
• Name of entity

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 Incorporating a Small Business

• Legal counsel is recommended

• Most provinces have specific standards

• Articles of Incorporation

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 Articles of Incorporation

• Articles of Incorporation are the documents you have

to file.
• At a minimum must include:
• Corporate name
• Location of the company
• Purpose of the company
• Duration
• Names and addresses of incorporators
• Amount and type of stock to be issued
• Capital required at time of incorporation

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Articles of Incorporation (cont’d)
• Names and addresses of initial
directors and officers
• Provisions for regulation of the
affairs of the company
• Right to amend, alter, or repeal
corporate provisions
• Bylaws
• Provisions for stockholders
preemptive rights
• Pre-emptive rights allow existing
shareholders to purchase a new
offering of shares before the
general public
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