Corporation

The corporation is a distinct legal entity in law and capable of assuming its own obligations

-Usually the safest vehicle for conducting business because the owners are normally shielded from personal liability

 

Corporation Terminology

Shareholder-Person who has an ownership interest in a corporation

Director-Person elected by shareholders to manage a corporation

Limited Liability-Responsibility of obligations restricted to the amount of investments

Dividend-Division of profits payable to shareholders

 

Corporation

Pros

-Limited Liability

-Flexibility

-Greater access to capital

-Continuous existence

-Tax Benefits

-Transferability

-Potentially broad management base

Cons

-Higher Costs

-Public disclosure

-Greater regulation

-Dissolution

-Tax disadvantage

-Possible loss of control

-Potential bureaucracy

 

The Corporation

Profit sharing: Profits of the corporation are distributed to shareholders through dividends

Decision Making: The corporation is managed by a board of directors, which in turn is elected by shareholders. In addition, officers-that is, high ranking corporate employees-can be hired by board to assist in running the corporation.

Sources of Capital: A corporation can get its capital in 2 ways: it can borrow or its directors can issue shares

Taxation: Because it is a separate legal entity, a corporation pays its own taxes

Transferability: the fact that a corporation has a separate legal identity often allows for easy transference of an ownership interest represented by shares

Perpetual Existence: Because the corporation exists independently of its shareholders, the death or bankruptcy of 1 or more shareholders does not affect the existence of the corporation

 

Business Arrangements

There are additional ways to carry on the business activity itself. These ways are not distinct business organizations but are, for the lack of a more accurate term, arrangements

 

Franchise

An agreement whereby an owner of a trademark or trade name permits another to sell a product or service under that trademark or trade name

Disclosure Requirement: Franchisors are required to deliver a disclosure document to perspective franchisees 14 days prior to franchisees entering into binding agreements or paying money

Franchisees have the right to rescind or cancel the franchise agreement within certain time periods if they do not receive a disclosure document

Parties to a franchise agreement have the duty of fair dealing in the performance and enforcement of the agreement.

Right of Association: Franchises have the right to associate with one another and form or join an organization of franchisees.

 

Other Business Arrangements

Distributorship or Dealership: Contractual relationship where one business agrees to sell another’s product

Strategic Alliance: Cooperative arrangement among businesses that many involve joint research, technology sharing, or joint use of productions

Joint Venture: Grouping of 2 or more businesses to undertake a particular project

What are the legal risks with a joint venture?

Sales Agency-Arrangement in which a manufacturer or distributor contracts with an agent to sell goods or services on its behalf

Product licensing: Agreement whereby the owner of a trademark or other property right grants to another the right to manufacture and distribute products associated with the trademark to other proprietary rights

 

Pre-Incorporation Issues

Whether to incorporate federally or provincially

What types of shares will be available and to whom

What to name the corporation

 

Federal or Provincial Corporation?

Federally incorporated corporations have the right to carry on business in each province

Provincially incorporated corporations have the right to carry on business only in the province in which they are incorporated (with some exceptions)

 

Deciding on Share Structure

Share-Represents an ownership interest in the issuing corporation

-A corporation may simply have 1 type or class of shares with all the basic shareholder rights attached to it.

Classes of shares may include a combination of various rights and privileges, including

-voting rights

-financial rights

-preference rights

-cumulative rights

-redemption rights

 

Widely Held Corporation

Widely Held Corporation: Shares are normally traded on the stock exchange(available to general public)

Secure legislation: Corporations are subject to regulations in those provinces in which the securities are issued or traded

 

Closely Held Corporation

Closely Held or “private” corporation-Does not sell its shares to the public

-many small and large businesses are closely held corporations, meaning that their shares are not traded on the stock market

-legislation often limits the number of shareholders

-may be subject to lower tax rate

 

Naming the Corporation

-All jurisdictions require a company to be identified by a name or designated number

-must be distinctive

-must not cause confusion with any existing name or trademark

-must include a legal element (Ltd, Corp, Inc)

-must not include any unacceptable terms.

 

Naming The Corporation

Nuans Report: Document that shows the result of a search for a business name to ensure the name is not already in use

 

The Process of Incorporation

-Articles of Incorporation

-Notice of registered office

-Notice of directors

-Newly upgraded automated search (NUANS) report

-Filing fee payable to receiver General of Canada

 

Articles of Incorporation

Defines the basic characteristics of corporations and sets out the basic features of the corporation, including:

-Name and place of corporation’s registered office

-Class and number of shares

-Any restriction on transferring of shares

-The number of directors

-Restrictions on the business that can be carried on

-Any other provisions that an incorporator requires to customize the corporation

 

Creating the Corporation

Articles of Incorporation are filed along with “Notice of Directors” and “Notice of Address”

Fee is paid

If in order, a “Certificate of Incorporation” will be issued.

 

First Directors Meeting

First Directors call an organizational meeting to

-make bylaws

-adopt forms of share certificates and corporate records

-authorize the issue of shares and other securities

-appoint officers

-appoint auditor

-make banking arrangements

-transact any other business

 

Financing the Corporation

A corporation may raise money by borrowing

-Bonds: Document evidencing a debt owed by the corporation, often used to refer to a secured debt

-Debentures: Document evidencing a debt owed by the corporation, often used to refer to an unsecured debt

-Securities: Shares and bonds issued by a corporation

A corporation may raise money by selling shares

-Shares are issued to investors in exchange for a purchase price

-Provides flexible means of raising capital

-Provides opportunity to benefit from corporation’s growth

 

Securities Legislation

-Provides the mechanism for the transfer of securities

-Seeks to ensure that all investors have the ability to access adequate information in order to make informed decisions

-Ensures that the system is such that the public has confidence in the marketplace

-Regulates those engaged in the trading of securities

-Removes or punishes those participants not complying with established rules

 

Selling Securities to the Public

Any corporation wishing to sell securities to the public must:

-register

-file a prospectus-Statement by the issuing company of prescribed information

-insider trading restrictions-Insiders must report any trading they have engaged in

Insider Trading

Transactions in shares based on confidential information of a material nature

Insider-person who has a special relationship with a corporation

Tippee-person who acquires confidential information from an insider

 

The Corporation: A legal Person?

-A corporation is a legal person in the eyes of the law

-How can a corporation commit a tort when it does not have a mind of its own and does not have a physical existence?

 

“Identification Theory” of Corporate Liability

Developed by the courts and provides that a corporation is liable when the person committing the wrong is the corporation’s directing mind

 

Vicarious Liability

-Identification theory establishes when a corporation has primary liability in tort

-A corporation can also have vicarious liability, when a wrong or breach of contract occurs as a result of the conduct of an employee

 

Contract Liability of Corporations

Agency Law generally determines when a corporation is liable on a contract

Outsiders can now generally rely on the apparent authority of agents-the corporation would be liable on the contract

To avoid personal liability, contracts signed should clearly indicate that the person is signing on behalf of the corporation and is not signing in a personal capacity

 

Criminal and Regulatory Liability of Corporations

Criminal and Regulatory Liability

-Criminal Liability-Judiciary adapted identification theory

-Liability for the corporation if the person who committed the crime was a directing mind of the corporation

-This proved problematic, as it was too difficult to prove

New Criminal Code Provisions

-expanded the range of individuals whose actions can trigger liability by broadening corporate responsibility for all criminal offences and by increasing the penalties

-senior offices are now under a positive obligation to act when they have knowledge that an offence has been or will be committed

-stiffer penalties and corporate probation orders

Regulatory Offences: An offence contrary to the public interest

-corporation and sometimes even its directors and officers face penalties, including civil liability for damages

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