Business organizations

BUS-101 introduced the main forms of business ownership and their advantages and disadvantages. This lesson looks at the legal rules underneath them: how agents bind the businesses they act for, how partners become liable for each other's acts, what it means for a corporation to be a separate legal person and when courts will look past it, and how franchises and joint ventures are structured and regulated. The choice of form is a legal decision with consequences for liability, tax, control and the ability to raise money, and it should be made deliberately with advice from a lawyer and an accountant. Corporate governance and directors' duties follow in lesson 9.

Agency: how businesses act

Every business acts through people. An agent is a person authorized to act on behalf of another, the principal, in dealings with third parties. Employees, partners, directors, officers, brokers and sales representatives are all agents for some purposes. When an agent acts within its authority, the principal is bound by the contract as if it had made it itself, and the agent usually drops out. Agency relationships can be created by express agreement, by implication from conduct or a position held, by ratification after the fact or, in some cases, by estoppel.

Authority comes in two kinds. Actual authority is what the principal has actually given the agent, expressly or by implication; a purchasing manager has implied authority to place ordinary orders for supplies. Apparent (or ostensible) authority arises when the principal's words or conduct lead a third party reasonably to believe that the agent has authority, even if the agent does not. If a company gives someone the title "vice-president of sales" and lets them negotiate deals, customers may reasonably assume they can sign standard sales contracts, even if an internal policy requires the CEO's approval. Internal limits do not bind outsiders who do not know of them. A principal may also ratify an unauthorized contract after the fact by accepting it, which binds the principal from the start.

Agents owe principals fiduciary duties: to act in good faith and in the principal's best interests, to avoid conflicts of interest, not to make secret profits, to keep confidences, to follow lawful instructions and to account for money and property. An agent who exceeds its authority and binds no one may be personally liable to the third party for breach of an implied warranty of authority. Principals are also liable for torts committed by agents within their authority, a form of the vicarious liability discussed in lesson 6.

Sole proprietorships

A sole proprietorship is a business owned by one individual without incorporating. There is no separate legal entity: the owner owns the assets, signs the contracts, is personally liable for all business debts and torts without limit and reports business income on their personal tax return. Little formality is required, although an owner who operates under a name other than their own legal name must register it under provincial business names legislation, such as Ontario's Business Names Act, and obtain any municipal licences and CRA program accounts needed, such as a GST/HST number. Personal liability is the main drawback; insurance can manage some risks, but not contractual debts.

Partnerships

Provincial partnership acts define a partnership as the relation that subsists between persons carrying on a business in common with a view to profit. A partnership can arise without any written agreement or even an intention to be partners, if people in fact carry on business together and share profits; sharing gross revenues or co-owning property does not by itself create a partnership. In Backman v. Canada, 2001 SCC 63, the Supreme Court stressed that the three elements, a business, carried on in common, with a view to profit, are judged on the facts as a whole. In a general partnership, each partner is an agent of the firm and the other partners for the purpose of the business, so one partner can bind the firm to contracts within the usual course of business. Partners are jointly liable for the firm's debts and jointly and severally liable for wrongs committed by a partner in the ordinary course of business, without limit and out of their personal assets.

A partnership agreement should cover capital contributions, profit and loss sharing, management and voting, admission of new partners, what happens when a partner dies, retires or becomes bankrupt, restrictions on competition and how disputes are resolved. Without an agreement, the statute supplies default rules that are rarely ideal: profits are shared equally regardless of contribution, every partner has an equal say in management, and in some cases the departure of a partner dissolves the partnership.

Two other forms limit liability. In a limited partnership, created by registration under provincial limited partnerships statutes, at least one general partner has unlimited liability and manages the business, while limited partners contribute capital and are liable only to the extent of their contribution, provided they do not take part in the control of the business; a limited partner who does may lose that protection. Limited partnerships are common in real estate, resource and investment funds, often with a corporation as the general partner. Limited liability partnerships (LLPs), available in most provinces mainly for regulated professions such as law and accounting, protect each partner from personal liability for the negligence of other partners, while each remains liable for their own negligence and that of people they supervise, and the firm's assets remain exposed.

Corporations

A corporation is a legal person separate from its shareholders, with the capacity, rights, powers and privileges of a natural person. It can own property, make contracts, sue and be sued and continue indefinitely regardless of changes in ownership. This principle comes from Salomon v. A. Salomon & Co. Ltd. (1897), in which the House of Lords held that a company formed by a boot maker, who held almost all its shares and was also a secured creditor, was a separate person from him, so its unsecured creditors could not reach his personal assets when it failed. Shareholders' liability is limited to what they paid or agreed to pay for their shares.

Businesses can incorporate federally under the Canada Business Corporations Act (CBCA) or under a provincial statute such as Ontario's Business Corporations Act (OBCA) or British Columbia's Business Corporations Act. Federal incorporation protects the corporate name across Canada and allows the corporation to carry on business in every province, although it must still register extra-provincially in the provinces where it operates. Incorporation requires filing articles of incorporation, which set out the name, registered office, classes and maximum number of shares, any restrictions on share transfers or business, and the number of directors. The corporation then adopts by-laws, which govern internal procedures such as meetings and officers, issues shares and records everything in a minute book and securities register. Most small corporations are private companies with restrictions on share transfers, and shareholders often sign a unanimous shareholder agreement that can transfer some of the directors' powers to the shareholders.

Corporations are taxed separately. A Canadian-controlled private corporation (CCPC) pays a reduced combined federal and provincial rate on its first $500,000 of active business income, through the small business deduction (federal rate 9 %), with personal tax due when profits are paid out as salary or dividends. Integration aims to make the total tax similar to earning the income personally, but the deferral available when profits are left in the corporation makes incorporation attractive for profitable businesses. Tax planning is a specialist area; BUS-110 and the accounting courses go further.

Lifting the corporate veil

Courts respect the separate legal personality of corporations in almost all cases, but they will disregard it, lifting or piercing the corporate veil, in narrow circumstances. Canadian courts generally require that the corporation be completely dominated and controlled by its owner and be used as a shield for fraudulent or improper conduct (Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., 1996, Ontario). Simply owning all the shares, or forming a corporation to limit liability, is not enough: that is exactly what incorporation is for. Courts have also lifted the veil where a corporation was a sham created to evade an existing legal obligation, such as a restrictive covenant. More often, individuals are made liable directly, not by lifting the veil: an officer who personally commits a tort, such as fraudulent misrepresentation, is personally liable even if acting for the corporation, and statutes impose personal liability on directors for certain debts.

Statutory liabilities of directors

Limited liability protects shareholders, but directors face personal liability under many statutes, whether or not they own shares. Under the CBCA (section 119) and provincial equivalents, directors are jointly and severally liable for up to six months' unpaid wages owed to employees, subject to conditions. Under the Income Tax Act and Excise Tax Act, directors are personally liable for unremitted source deductions (income tax, Canada Pension Plan and Employment Insurance) and GST/HST, unless they exercised the degree of care, diligence and skill a reasonably prudent person would have exercised to prevent the failure. Environmental and occupational health and safety statutes can impose fines and orders on directors and officers personally. Directors' and officers' (D&O) insurance and indemnification by the corporation help manage these risks but do not cover every liability, such as unremitted deductions.

Limited liability companies and other forms

Canada has no equivalent of the American limited liability company (LLC); Canadian businesses that want limited liability incorporate or, for professionals, form LLPs or professional corporations. Canadians often encounter LLCs when doing business in the United States. For Canadian tax purposes, a US LLC is generally treated as a corporation, not a pass-through, which can cause double taxation for Canadian residents who own one, so tax advice is essential before using an LLC for cross-border activities. Co-operatives, governed by federal and provincial co-operative statutes, are owned by their members and follow the one-member, one-vote principle. Not-for-profit corporations operate under statutes such as the Canada Not-for-profit Corporations Act and Ontario's Not-for-Profit Corporations Act, 2010.

Franchises and joint ventures

A franchise is a contractual relationship in which a franchisor licenses its trademarks and business system to franchisees, who pay fees and royalties and operate under the franchisor's controls. Six provinces have franchise disclosure legislation: Alberta, Ontario (the Arthur Wishart Act), Manitoba, New Brunswick, Prince Edward Island and British Columbia (the Franchises Act, in force since February 1, 2024). These statutes require the franchisor to give prospective franchisees a disclosure document with prescribed information, including financial statements and litigation history, at least 14 days before the franchisee signs any agreement or pays any money. If disclosure is late or materially deficient, franchisees can rescind within set periods and recover their losses. The statutes also impose a duty of fair dealing on both parties and protect franchisees' right to associate. A joint venture is a business arrangement in which parties combine resources for a specific project; it can be structured as a contract, a partnership or a jointly owned corporation, each with different liability and tax consequences.

Transparency rules are increasing. Since January 22, 2024, corporations under the CBCA must file information about individuals with significant control (generally those who own or control 25 % or more of the shares by votes or value, or exercise direct or indirect influence that results in control) with Corporations Canada, which makes most of it publicly searchable. Several provinces, including Ontario, British Columbia and Quebec, require corporations to keep similar registers, and Quebec makes its information public.