CHAPTER 02 Types of Business Organizations
A trust is not a separate legal entity. In law, its assets are held by the trustees, who are also liable for obligations incurred in carrying on its activities (although the trustees are entitled to be indemnified out of the trust assets for such liabilities). Unlike shareholders of a corporation, investors in a trust have not had the benefit of statutory limited liability. Therefore, there has been some concern that in certain circumstances investors might be exposed to liabilities arising from the operations of the trust. Ontario has passed legislation clarifying that investors in a publicly traded trust (that is formed under Ontario law and that files its public disclosure documents under Ontario securities laws) will not incur such liabilities as beneficiaries of the trust. Sole Proprietorships A business owned by one person is called a sole proprietorship. This is the simplest form of business organization. The individual is responsible for all the obligations of the business. Accordingly, his or her personal assets are at risk if these obligations are not met. There is no legislation dealing specifically with sole proprietorships; however, a sole proprietor may need to comply with federal, provincial and municipal regulations affecting trade and commerce, licensing and registration. For example, in Ontario, a sole proprietor who carries on business or identifies his or her business to the public under a name other than his or her own name must register the name under the Business Names Act . In Québec, every person who uses a name or designation other than his or her own complete name must register a declaration under the Act respecting the legal publicity of enterprises.
A sole proprietorship may be suitable for a small enterprise because it avoids many of the costs of setting up and running a corporation and the complex regulatory scheme that governs corporations. Non-capital startup losses of the business are generally deductible against the sole proprietor’s income from other sources. The disadvantages of a sole proprietorship are the unlimited liability of the owner and that the business can be transferred only by selling the assets.
Contractual Arrangements
FRANCHISING A franchise is an agreement whereby one party, the franchisor, gives another, the franchisee, the right to make use of a trademark or trade name within a certain territory. Franchising involves an ongoing relationship between the parties. The franchisor generally retains some degree of control over the manner in which the franchisee carries on its business, but neither party is the agent of the other. In Québec, franchises are governed only by the general law of contracts. Ontario has legislation regulating franchises, which defines “franchise” broadly and may apply to some distribution agreements that might not be thought of as franchises. As well as imposing disclosure obligations on franchisors, such legislation imposes a statutory duty of fair dealing in the performance and enforcement of a franchise agreement and precludes a franchise agreement from contracting out of the application of the legislation, or providing for disputes to be litigated or arbitrated in another jurisdiction. Some other Canadian provinces have similar legislation.
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