The ways in which business organizations are structured in Canadian Business Law will have varying legal effects and consequences in respect of their formation, management and liabilities to owners and shareholders. In Canada, businesses can be structed in three ways: Sole Proprietorships, Partnerships and Corporations. Each type of business structure comes with certain advantages and disadvantages. Business owners certainly ought to consider such advantages and disadvantages in determining what will best meet their corporate needs.
Three Types of Business Organizations
The most basic form of business organization in Canadian Law is the Sole Proprietorship. Sole Proprietorships can be formed only by one individual that acts as the sole owner of the business. In a sole proprietorship, there is no legal separation between the owner and the business. Sole proprietorships are easy to start and easy to carry on business without being bound by any registration requirements unless the business owner wishes to operate under a name that is not his or her own. In that case, name registration is required for such businesses, which is also, a relatively simple and inexpensive process.
Sole Proprietors can enter into contracts with other people and organizations such as employees or contractors but cannot contract with themselves since they are considered the same entity. Sole Proprietors are personally accountable to others for breach of contracts, tort exposure and other liabilities. In regard to liabilities, one of the drawbacks therefore is that Sole Proprietors cannot limit personal liabilities against losses arising from the operation of business. On the other hand, one of the benefits is that business losses can be deductible from personal tax obligations.
Partnerships are recognized by common law but currently governed by modern partnership acts. For a partnership to exist, the Ontario Partnership Act requires two or more business owners to carry on a business with a common view to profit. Partnerships do not have a separate legal personality from partners. Business registration is not required unless a name that is different from the name of the partners is used for the operation of business.
Partners exercise control over the business, participate in management, share profits and jointly assume responsibility for carrying on business. Every partner is jointly liable for all debts and obligations incurred from the business with personal assets. One significant aspect of unlimited personal liability is that partners owe a fiduciary duty to one another, under which partners should conduct themselves in the utmost good faith with regard to the partnership and other partners, and personal interest of all partners are subsidiary to the interest of the partnership.
In a partnership scheme, it is possible for one or more partners to have limited liability in proportion with the rights and powers conferred upon them. Within the framework of Limited Partnership Act of Ontario, limited partners can restrict their liabilities only to the obligations in respect of the value of money and other property they contribute or agree to contribute to the limited partnership. Limited Partnerships can always be formed with at least one general partner with unlimited liability. A declaration is to be filed with the Registrar for the formation of Limited Partnerships. It is best, when contemplating a partnership, to ensure a well-framed partnership agreement.
Business corporations are regulated by both federal and provincial Business Corporation Acts depending on which jurisdiction they are incorporated under and subject to the rules and regulations of the relevant Business Corporation Act. Incorporation is completed by filing of Articles of Incorporation and creating a separate legal entity from shareholders of the corporation.
The most important outcome derived from the existence of separate legal entity is the limited liability that shareholders can enjoy in investing and taking risks associated with the operation of business. Corporations can exercise the rights and powers conferred upon them through agents i.e. Board of Directors. Shareholders are entitled to restrict the rights and powers of the Board of Directors by Unanimous Shareholders Agreement.
Canadian Law does not set any minimum capital amount for a corporation to be registered. In other words, any size of business from small businesses to large corporations can be incorporated for the purposes of limited liability, attracting investors to the corporation and accommodating diverse needs and expectations of shareholders. In complex corporate structures, Articles of Incorporation, By-laws and Shareholders Agreements incorporate more casuistic and detailed terms for the protection of shareholders as well as tax saving purposes. But, such detail is not always necessary for small or medium sized corporations with one or a few shareholders.
A Short Comparison with Turkish Business Law
Business organizations envisioned under Turkish Business Law are classified under two main categories: non-legal entities and legal entities. The first category consists of Sole Proprietorships and Partnerships and the common trait of such two business forms is that they do not possess a separate legal personality. The legal rules and regulations of these two forms of business organizations under Turkish Law are identical to the ones under Canadian Business Law in many ways.
The second category of business includes General Partnership, Commandite Company, Joint Stock Company, Limited Liability Company, and Cooperatives. These types of businesses are characterized by a separate legal entity from that of their participants. Canadian Law differs from Turkish Law in regulating corporations. Turkish Law contemplates multiple forms of corporations while Canadian Law only has one form of corporation that has a separate legal personality.
Despite one form of corporation structured under Canadian Business Law, in practice the rules and regulations governing corporations give business owners flexibility and discretion to shape the character and nature of different corporations analogous to the ones in Turkish Law, through Articles of Incorporation, By-laws and Shareholder Agreements. It can be said that business organizations are required to fit one of the legally categorized forms of business under Turkish Law and be subject to the legal regime associated with that while Canadian Business Law envisions a one-fits-all legal regime of business organization.
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