Category: Organizing Your Business

Categories
Business Law Organizing Your Business

Legal Entity Review: Sole Proprietorships

photo of person journaling representing a sole proprietorship

This volume of the legal entity review series will cover sole proprietorships in Ontario. Sole proprietorships are a popular and flexible choice for entrepreneurs and business owners who work alone and prefer a flexible and low maintenance business structure. Similar to our post reviewing general partnerships, we will review a sole proprietorship’s formation, liability risks, and dissolution in the context of Ontario law.

“Sole” is the Key Word

The sole proprietorship is the simplest form of business structure characterized by an individual carrying on business in their own name. Many small businesses operate as sole proprietorships. The distinguishing factor of sole proprietorships is that there are no other owners and no legal distinction between the owner and the business. This is important when considering legal liability, which will be discussed below.

Formation of a Sole Proprietorship

As with many businesses in Ontario, the sole proprietorship must comply with the Business Names Act. Specifically, section 2(2) states that:

“No individual shall carry on business or identify his or her business to the public under a name other than his or her own name unless the name is registered by that individual.” 

If the potential sole proprietor intends to carry on business in a name other than their own, it must be registered with the province. Otherwise, there are no other legal steps to take as the sole proprietorship is automatically formed when an individual begins doing business in their name.

However, this does not exempt the business from other legal requirements, such as having the necessary permits to perform services, filing business taxes, maintaining insurance, and registering for HST.

The Issue with Liability

The minimal formal requirements to register and form a sole proprietorship may make it seem like the most attractive option for the business owner. However, this benefit is counterbalanced by the lack of legal protection a sole proprietor offers.

Unlike general partnerships and corporations, a sole proprietor is not a distinct legal entity from its owners. This means that the owner is personally responsible for all aspects of the business, including its finances, liabilities, and day-to-day operations. If an action is commenced against a sole proprietor, the personal assets of the owner may be seized if damages are awarded against them. Even if the sole proprietor incurs debts for the business, the owner’s home or savings may be used to satisfy those obligations.

The primary protection of a sole proprietor is through contract or insurance. Further, it is not uncommon for sole proprietors to maintain (or be required to maintain) commercial general liability insurance. If the sole proprietorship is sued, the Business Name Act states that leave of the court is required to defend the lawsuit under a different name than that of the business. Depending on the specifics of the case, however, this may be difficult to achieve.

Dissolution of a Sole Proprietorship

In order to cancel or dissolve the sole proprietorship, the business owner must close the business by filing the appropriate request with the provincial government to cancel the Master Business License.

Taxation of Sole Proprietorships

Under the Income Tax Act, individuals with business income must report that income on a calendar-year (fiscal period) basis. This requirement also applies to sole proprietorships. However, the sole proprietor may elect to use a non-calendar-year fiscal year, such a request to be filed with the Minister of National Revenue (“MNR”).

Similarly, the income or losses from the sole proprietorship must be amalgamated with the business owner’s personal income or losses, and this total amount is subject to the applicable tax rate under the Income Tax Act. Sole proprietors are permitted to offset their income from other sources and carry it back to reduce income in any three previous taxation years in the 20 years following the year of the loss.

There could be various tax benefits for business owners choosing between a sole proprietor versus another type of legal entity so it is important to consult experts when making this important decision.

Contact the Corporate Lawyers at Bader Law for Trusted Business Law Advice

The experienced business lawyers at Bader Law regularly help business owners organize their business structures and help them choose the appropriate entity to carry on business under. Our lawyers provide clients with a review of their specific needs and work closely with them to design contracts and business structures that align with their goals and contemplate future potential issues. Whether you run a small family business or manage a large corporation, our team has the requisite knowledge to effectively address the needs of your organization.

Our business law team also regularly advises clients on corporate transactions, shareholder agreements and disputes, and business organizations. To schedule a consultation with one of our corporate lawyers, call us at 289-652-9092 or contact us online.

Categories
Business Law Organizing Your Business

Legal Entity Review: General Partnerships

Business owners can choose from several legal entities when beginning their endeavour, and these entities will be the topic of a legal entity review series. This series will begin with a comprehensive review of general partnerships. This blog post will unravel the complexities surrounding the formation of a general partnership, the responsibilities of partners, liability risks, and dissolution of these entities in the context of Ontario law. This blog post will allow you to consider all the implications of forming a general partnership and whether it is suitable for your needs.

General Partnerships, Generally

In Ontario, general partnerships are governed by the Partnerships Act and the common law (as specified by section 45 of the Partnerships Act). The Partnerships Act outlines the legal foundation for general partnerships and defines partners’ rights, responsibilities, and liabilities, addressing critical aspects like profit sharing, decision-making, and dissolution procedures. This blog post will outline the basic requirements for general partnerships below, as contained in the legislation and supplemented by the common law.

Partnership Formation

There are three requirements for a partnership to exist, per the Partnership Act, namely:

  1. There must be a “business,” which includes “every trade, occupation, and profession.” The definition of broad virtually any commercial activity would likely constitute a business. Few potential partnerships would fail on these grounds;
  2. There must be a “view to profit,” which essentially excludes charitable, social, or cultural endeavours; and
  3. There must be an agreement to carry on business in common and share profits. In this sense, the rules of contract formation apply, where a contract can be written or oral, as long as it includes the essential elements of a contract.

The third criterion is the most wrought with failure, as it may be difficult to establish that the persons or entities entering the agreement intended to be partners. As with most endeavours, it is best to ensure that an agreement is made in writing, clearly setting out the terms, including the profit sharing between the partners. Obtaining legal advice during the negotiation and drafting process is important to ensure that this agreement is fair and sound.

Partnership Registration

The potential partnership must comply with the Business Names Act, which includes special rules for general partnerships. The legislation specifies that the partnership can only conduct business if its name is registered by all the partners. Failure to adhere to this requirement has severe consequences; it prevents the partnership and its partners from maintaining a proceeding in Ontario as it relates to the partnership’s business.

Needless to say, registering the partnership name should be a priority for a partnership.

No Separate Legal Existence

Unlike other business entities, partnerships are not a separate legal entity from its partners. Partners can sue or be sued in the partnership name. This also has implications for employment law matters. A fundamental rule for contractual formation is that no person can contract with him or herself. Since the partnership is not a separate legal entity, a partner cannot also be an employee, as the employment contract would be between the same person.

Liability

Each partner in the partnership is jointly liable with the other partners to the full extent of his or her assets for all debts and obligations incurred while a partner. Reduced further, this means that each partner can be held accountable for the partnership’s debts for their personal belongings. Liability also extends beyond death, as the deceased partner’s estate also remains severally liable if they remain unsatisfied.

It is also important to note that the partner will not be liable for any losses incurred by the partnership before becoming a partner. However, retirement does not work the same way, as partners can still be liable for losses incurred by the partnership prior to retirement unless discharged by agreement. In general, business owners should carefully review all liability obligations that arise during a general partnership.

Partners in Relation to Each Other

As noted above, partners can be parties to an agreement that governs their relationship, but this is not always the case. In the absence of such an agreement, the Partnership Act’s provisions will apply, a non-exhaustive and simple list of which is below:

  • Partners will share equally in profits and contribute equally to losses;
  • The partnership must indemnify partners for personal liabilities or preservation of the partnership;
  • Partners are not entitled to interest on their contributions to the partnership;
  • Partners are entitled to take part in the management of the partnership, and
  • A majority vote can decide disputes for ordinary matters, but a change in the nature of the business must be unanimous.

As long as the agreement satisfies the above formation requirements, the partnership is protected by the Partnerships Act. Even so, a written agreement can avoid a myriad of disputes not contemplated by the legislation.

Dissolution of a Partnership

An agreement between the partners usually governs dissolution, but the Partnership Act includes a variety of situations when a partnership is dissolved. Generally, it expires if the term has been fixed and surpassed, if the specific purpose for its existence has been terminated, by notice of one partner to the others, and by the death of a partner. Nevertheless, these situations can be excluded by agreement between the partners.

Contact the Corporate Lawyers at Bader Law for Trusted Business Law Advice

The experienced business lawyers at Bader Law regularly help business owners organize their business structures and draft partnership agreements. Our lawyers review each client’s specific needs and work with them to design contracts that contemplate future events and set out strategies for managing a variety of potential issues. We help clients ranging from small family businesses to large corporations, and our team has the requisite knowledge to address the needs of any organization effectively.

Our business law team also regularly advises clients on corporate transactions, shareholder agreements and disputes, and business organizations. To schedule a consultation with one of our corporate lawyers, call us at 289-652-9092 or contact us online.

Categories
Organizing Your Business Shareholder Agreements & Disputes

Ontario Court Reminds Shareholders To Ensure Business Arrangements Are In Writing

The recent decision of Basegmez et al. v Akman et al. released by the Ontario Superior Court is a potent reminder that it is important for all business partners, including friends and family members, to reduce their verbal contractual arrangements to writing. Due to the absence of written contracts in this case, a dispute between partners resulted in “misunderstandings, the collapse of a potentially lucrative development opportunity and the destruction of decades-long friendships.”

This case also acts as a further reminder that the requirements of the Ontario Business Corporations Act should always be considered. This includes the requirement to fully disclose contracts that personally benefit one officer or director to other shareholders in writing or risk those contracts being invalidated by the courts.

Three friends and experienced businessmen planned an ambitious property redevelopment together

The issues in Basegmez et al. v. Akman et al., arose from a dispute regarding a property development project. In 2014, the Respondent, Ali Akman (the “Respondent shareholder”) acquired the Delta Hotel in Scarborough for a property redevelopment project. The Respondent shareholder learned that he had secured this property while he was on his yacht in the Turkish Riviera. At the time on the yacht next to him was a business acquaintance, Volkan Basegmez (“Volkan” or the “Applicant shareholders”). The two decided that Volkan would invest $6 million into the property redevelopment project in exchange for a 40% interest.

Three weeks after speaking with Volkan, the Respondent shareholder spoke with his friend and another Applicant in this case, Serdar Kocturk (“Serdar” or the “Applicant shareholders”). The Respondent shareholder and Serdar had a close relationship as they had previously invested in projects and vacationed together. Serdar agreed to pay $3 million for a 20% interest in the project.

The three friends incorporated Tarn Construction together to redevelop the property. They planned to construct two towers with over 700 condominium units, demolish part of the existing hotel to construct a further high-rise condominium and demolish part of the existing hotel’s parking garage to build a low-rise commercial building with parks, restaurants, cafes, and shops.

Applicant shareholders discovered undisclosed contracts between Tarn Construction and a corporation solely held by the Respondent shareholder

The project moved forward until July 2016, when the 2015 financial statements were completed. The financial statements revealed that the Respondent shareholder had created a set of Class B shares that gave him total control of the project, despite only holding 40% of the equity. The Applicant shareholders conducted further investigations into the finances of the project. They quickly discovered that the Respondent shareholder had entered Tarn Financial into a management agreement with a corporation owned by himself while paying that corporation 4% of hotel revenue as a management fee.

The Respondent shareholder had signed an agreement for both Tarn Construction and his solely owned corporation. The Respondent shareholder was also charging Tarn Construction development fees for his work on the project without the knowledge of the Applicant shareholders.

A shareholder dispute resulted in the corporation being ordered to liquidate

The Applicant shareholders believed that the Respondent shareholder was not entitled to charge Tarn Construction development fees because the Respondent shareholder was already receiving a greater rateable portion of equity than the other two.

The Respondent shareholder alleged that the parties had agreed that he could do so. The parties were unable to resolve the disputes amongst themselves, which led to the Applicant shareholders bringing an oppression application before the Ontario Superior Court, seeking a winding up of Tarn Construction.

The oppression remedy was granted and Tarn Financial was ordered to be liquidated.

Lack of written contract deprives shareholder of multi-million dollar claim

Before Tarn Construction could be wound up, a trial was held to resolve outstanding financial issues, including development fees and hotel management fees which the Respondent shareholder claimed.

Regarding development fees, the Respondent shareholder alleged that because third-party developer’s rates were so high, he and the Applicant shareholders had all agreed that he would do the development work for a to-be-determined fee. The development fees being claimed totalled almost $10 million dollars, at which time the Respondent shareholder had been paid $1 million. The Respondent shareholder justified this fee by stating that he had completed significant work to move the project forwards, including rezoning, architectural design, and site plan approval, as well as working with dozens of consultants.

Despite the Respondent shareholder’s insistence that the development fees had been discussed, he could not produce documentation to corroborate his account and the Court held that there was no agreement to pay him development fees.

Respondent shareholder not entitled to development and hotel management fees due to noncompliance with Business Corporations Act

The Court explained that the Respondent shareholder’s claims also ran afoul of section 132 of the Ontario Business Corporations Act, which provides that officers and directors must disclose in writing the nature and extent of their interest in any contract with the corporation, and that this information must be disclosed when the proposed contract is first considered.

The Respondent shareholder did not comply with this requirement regarding the payment of development fees from Tarn Construction to his own corporation, since this was done without the knowledge of the two Applicant shareholders. Regarding hotel management fees, there was a contract between Tarn Construction and the Respondent shareholder’s solely owned corporation, however, this was made without the knowledge of the Applicant shareholders and therefore did not meet the requirements of section 132.

Section 132 of the Business Corporations Act operates to protect shareholders from prejudice or mischief by controlling shareholders

The Court remarked that there are “good policy reasons” for holding the Respondent shareholder to the requirements of section 132 of the Ontario Business Corporations Act. Even when both sides act in good faith, or are parties known to each other, there is often too much room for disagreement about the terms of complex commercial arrangements.

It would also create opportunities for “mischief” by controlling shareholders to benefit themselves and prejudice other shareholders if non-arms-length contracts are not fully disclosed, in writing, to all shareholders.

Contact the Lawyers at Bader Law in Toronto for Advice on Contacts and Shareholder Disputes

The experienced business lawyers at Bader Law regularly advise clients on the full spectrum of business matters, including start-up and reorganization, corporate financing and lending, corporate transactions, shareholders agreements and disputes, employment issues, and more. In the event of a dispute amongst shareholders, our lawyers work to ensure that resolutions are reached in a timely and cost-effective manner. Call us at 289-652-9092 or contact us online to schedule a consultation with a member of our trusted business law team.

Categories
Organizing Your Business

SCC Rules “Cruel and Unusual Punishment” Charter Protection Does Not Apply to Corporations

In a recent Supreme Court of Canada decision, the court rejected a corporation’s constitutional challenge, in which it alleged that a legislative mandatory minimum fine constituted “cruel and unusual punishment”.

Corporation Challenges Mandatory Minimum Fine

A Quebec corporation had been found guilty of carrying out construction work as a contractor without holding a current license for that purpose, which constituted an offence under s. 46 of the Building Act.

As a result, the corporation was subject to a mandatory minimum fine pursuant to s. 197.1 of the Building Act and was fined $30,843.

The corporation challenged the constitutionality of the mandatory minimum fine in s. 197.1 of the Building Act on the basis that it offended its right to be protected against cruel and unusual treatment or punishment under s. 12 of the Canadian Charter of Rights and Freedoms (the “Charter”). Section 12 of the Charter states:

12. Everyone has the right not to be subjected to any cruel and unusual treatment or punishment.

In response to its constitutional challenge, the Court of Québec dismissed the corporation’s claim, concluding that expanding the protection of rights intrinsically linked to individuals to include corporate rights would trivialize the protection granted by s. 12 of the Charter. In any event, the court held that the minimum corporate fine at issue was far from being cruel and unusual and instead represented the norm in penal regulatory law. The corporation appealed the decision.

Subsequently, the Quebec Superior Court held that corporations were not covered by s. 12, instead finding that its purpose was the protection of human dignity, a notion clearly meant exclusively for “natural persons”. The corporation appealed.

On appeal, the majority at the Quebec Court of Appeal allowed the appeal and held that s. 12 could apply to corporations. It found that s. 12’s association with human dignity did not prevent its application to corporations, since other Charter rights which also protect human dignity — ss. 8 and 11(b) of the Charter — have been held to apply to corporations. Rather than looking at the purpose of the provision, it adopted a “tangible benefit” approach, focusing on whether a corporation could theoretically benefit from the Charter protection in question: “a corporation’s ability to derive a tangible benefit from it”. This resulted in the court’s conclusion that since corporations could face cruel treatment or punishment through harsh or severe fines, s. 12 could apply to them. However, the dissenting judge was of the view that s. 12 is concerned with human dignity, a concept inapplicable to corporations, stating: “[i]t would completely distort the ordinary meaning of the words . . . to say that it is possible to be cruel to a corporate entity”.

The Attorney General of Quebec and Director of Criminal and Penal Prosecutions appealed the Quebec Court of Appeal’s decision to the Supreme Court of Canada.

Supreme Court of Canada Rules Against Corporation’s Claim

The Supreme Court of Canada unanimously held that s. 12 of the Charter does not apply to corporations. With regard to the proper approach to the question, the majority of the court stated:

“To claim protection under the Charter, a corporation – indeed, any claimant – must establish that “it has an interest falling within the scope of the guarantee, and one which accords with the purpose of that provision” […] In order to make that determination, the court must seek to discern the scope and purpose of the right by way of a purposive interpretation, that is, “by reference to the character and the larger objects of the Charter itself, to the language chosen to articulate the specific right or freedom, to the historical origins of the concepts enshrined, and where applicable, to the meaning and purpose of the other specific rights and freedoms with which it is associated within the text of the Charter” […]. The approach is “generous, purposive and contextual” and should be done in a “large and liberal manner”.”

The majority of the court ultimately found that s. 12 of the Charter does not protect corporations from cruel and unusual treatment or punishment because the phrase “cruel and unusual” denotes protection that only human beings can enjoy. It reviewed prior case law on s. 12 and found that it was marked by the concept of human dignity, and the existence of human beings behind the corporate veil is insufficient to ground a s. 12 claim of right on behalf of a corporate entity, in light of the corporation’s separate legal personality.

The court, therefore, held that the protective scope of s. 12 is limited to human beings. As a result, the appeal was allowed and the corporation’s claim was dismissed.

Get Advice

The business law team at Bader Law has decades of experience in helping businesses grow and expand. We are thorough, efficient, and focused on delivering the best possible outcome for every single client. Contact us online or at (289) 652-9092 to discuss your matter with a member of our team. 

Categories
Organizing Your Business

Notable Recent Changes in Quebec’s Cannabis Laws

Recently, several important changes relating to cannabis use and its sale have occurred in Quebec, including changes to the legal age of purchase and use, where cannabis can be used and how much may be grown by an individual at home.

Changes in Quebec Laws on Cannabis

Legal Age of Purchase and Use

When cannabis first became legal in Quebec, the government had set the legal age of purchase and use at 18, which is the same age required to purchase tobacco and alcohol.

However, the Quebec legislature passed the Act to tighten the regulation of cannabis (the “Act”) on November 1st, 2019, which amends the Cannabis Regulation Act. 

As a result, as of January 1st, 2020, the minimum legal age to possess or purchase cannabis and to be admitted to the premises of the Société québécoise du cannabis (SQDC), among other things, will be raised to 21 years of age.

Where Cannabis Can be Used 

Additionally, the Act also changes where cannabis can be used.

Prior to the Act, smoking and vaping were allowed in public, except wherever tobacco smoking was prohibited. They were also prohibited in a long list of other places, including bars, restaurants, educational institutions, hospitals, bus shelters and play areas intended for children.

However, under the changes to the Act, it will forbidden to smoke or vape cannabis in any public place, whether indoor or outdoor.

Changes in Growing Cannabis for Personal Use

Originally, the Quebec provincial government banned the cultivation of cannabis at home.

However, a recent Superior Court decision overturned those provisions, finding them unconstitutional. The court concluded that they infringed upon the jurisdiction of the federal government, which has sole responsibility for legislating on criminal matters. The decision means that homegrown cannabis in Quebec would be instead regulated by Canadian law, which allows citizens to grow up to four cannabis plants.

The Quebec government has indicated that it is likely to appeal the decision.

Current Ontario Laws on Cannabis

Legal Age of Purchase and Use

Currently in Ontario, a person must be 19 and older to buy, use, possess and grow recreational cannabis, which is the same as the minimum age for the sale of tobacco and alcohol in Ontario.

Where Cannabis Can be Used

As set out on the Ontario government’s website (https://www.ontario.ca/page/cannabis-laws), there are a complex set of rules on where cannabis may be consumed.

Where a person can smoke and vape cannabis

  • Private residences – this does not include residences that are also workplaces (for example, long-term care and/or retirement homes)
  • Many outdoor public places (for example, sidewalks and parks)
  • Designated smoking guest rooms in hotels, motels and inns
  • Residential vehicles and boats that meet certain criteria (for example, if they have permanent sleeping accommodations and cooking facilities, and are parked or anchored)
  • Scientific research and testing facilities(if the cannabis use is for scientific research and testing purposes)
  • Controlled areas in:
    • long-term care homes
    • certain retirement homes
    • residential hospices
    • provincially-funded supportive housing
    • designated psychiatric facilities or veterans’ facilities

However, a person cannot smoke or vape cannabis in:

  • indoor common areas in condos, apartment buildings and university/college residences
  • enclosed public places and enclosed work places
  • non-designated guest rooms in hotels, motels and inns
  • at school, on school grounds, and all public areas within 20 metres of these grounds
  • on children’s playgrounds and public areas within 20 metres of playgrounds
  • in child care centres, or where an early years program is provided
  • in places where home child care is provided — even if children aren’t present
  • within 9 metres from the entrance or exit of hospitals (public/private), psychiatric facilities, long-term care homes, independent health facilities
  • on outdoor grounds of hospitals (public/private) and psychiatric facilities
  • in non-controlled areas in long-term care homes, certain retirement homes, provincially-funded supportive housing, designated psychiatric or veterans’ facilities, and residential hospices
  • in restaurants and on bar patios and public areas within 9 metres of a patio
  • on outdoor grounds of specified Ontario government office buildings
  • in reserved seating areas at outdoor sports and entertainment locations
  • on grounds of community recreational facilities and public areas within 20 metres of those grounds
  • in sheltered outdoor areas with a roof and more than two walls which the public or employees frequent, or are invited to (for example, a bus shelter)
  • in publicly-owned sport fields (not including golf courses), nearby spectator areas and public areas within 20 metres of these areas
  • in a vehicle or boat that is being driven or will be driven.

Growing Cannabis for Personal Use

A person maygrow up to four cannabis plants per residence (not per person) if they are 19 years of age and older, it is only for personal use and the starting material was purchased from the Ontario Cannabis Store or an authorized retail store.

Get Advice

At Campbell Bader LLP, we have experience helping new businesses and business owners successfully navigate the provincial regulatory framework for authorized cannabis retailers. We will work with you to develop a course of action, and keep you well informed throughout the process and ensure you make the best strategic decisions at every stage. If you need guidance with respect to becoming an authorized cannabis retail operator, contact the Mississauga business lawyers at Campbell Bader LLP. We regularly advise clients on a wide variety of business concerns, including regulatory and licencing issues. Contact us online or by phone at 905-828-2247 to schedule a consultation.

Additionally, at Campbell Bader LLP, we have a team of exceptional Mississauga criminal defence lawyers who have been representing clients charged with criminal offences since 1999. We are highly skilled litigators and have conducted trials in the Superior Court and Ontario Court of Justice. We have the knowledge, experience, and skill-set to effectively defend clients charged with even the most serious of offences. We will listen, consider, and provide you with practical options. Contact us online or at 905-828-2247.