Choosing the Right Business Structure

1. There are three options available to Jon, Josh and Peter with regards to their online retail business of hobby products, ‘JJP Model Aircraft and Boats’; first, they could continue to function as a regular partnership; second, they could opt for a limited partnership form; third, they could incorporate their business as a company. A limited liability partnership is not an option available to the friends because this option is for professional persons like accountants and lawyers. This brief essay advises Jon, Josh and Peter to incorporate their business as a company based on their objectives of raising more capital via additional investors so that they can buy a larger office and upgrade their IT infrastructure and also upscaling their business further by borrowing money from the bank. For those who are seeking business dissertation help, this strategic move is going to offer potential insights into corporate structures.

At present, the friends have a partnership and they may choose to continue as per this form of business. Under the common law, partnership allows partners to carry on any business allowed by law for the purpose of making profits. It is the least formal kind of agreement because there are no formal requirements for establishing a partnership. However, as opposed to the simplicity of its formation and working, there are also some drawbacks of having this kind of form of business. The first is that partners are liable for the debts and liabilities of the partnership. Indeed, the principles of liability are fairly broad in partnership as compared to incorporated businesses, which may make it more advisable to form a business as an incorporated one. Partners are considered to be agents and are therefore bound as agents. They also have joint liability so that each partner is liable for full amount of debts and liabilities. As the business grows, it is not advisable for Jon, Josh and Peter to continue with this form of business because it will make them personally liable and jointly liable for the debts of the business and for any other liabilities arising out of contract or tort.

Another option for the friends could be limited partnership, because this will provide some benefits particularly in the limiting of the partner’s liability as compared to a general partnership discussed above. A limited partnership can be formed with some of the partners being able to limit their liability to the amount of their capital contributions. However, the problem would be that at least one partner would be a single general partner with unlimited liability and he would also be entitled to a larger share of the earnings as well as unlimited liability for the partnership’s debts and liabilities. Moreover, the other partners would not be involved in the management of the company. Irrespective of whether the partnership is general, limited or limited liability, it is not considered to be a separate legal entity.

Incorporated business is considered to have the capacity, rights, powers and privileged of a natural person. The incorporated business will be a separate legal entity, while partnership is not so. Jon, Josh and Peter will not have personal liability as owners for the debts of the company which is the case if they continue to be partners because of the principle of limited liability. The Canadian Business Corporations Act 1975, Section 45 (1) provides that shareholders of a corporation are not liable for any liability, act or default of the corporation except under given circumstances. They will also be considered to not be agents of the incorporated business, which they are (and consequently have agent duties and liabilities) as a partnership. This protects the members because their personal liability for the acts of the corporation is excluded. As their business continues to grow, as an incorporated business, they will also ensure continuity of business. Furthermore, as a company, they will be able to raise capital through new investors. The separate legal personality of the company is a significant aspect that also benefits the members of the company because unless there is a flagrant miscarriage of justice by upholding the corporate veil, the courts will consider the members of the company to be not liable for the actions of the company.

AE Le Page Ltd v Kamex Developments Ltd (1977) Ont CA.
Mark Gillen, Corporations and Partnerships in Canada (Wolters Kluwer 2018).
Canadian Business Corporations Act 1975, s.15(1).
Salomon v. Salomon & Co. (1897) HL.

As an incorporated business, the members can opt for a private corporation which means that there is a restricted number of shareholders in the corporation and the members are also prohibited from issuing their shares to the general public. This can ensure that the friends keep the company within themselves. At the same time, as an incorporated business, they can continue to raise money through investors and borrowings.

The disadvantages of the incorporation can also be considered here. The biggest disadvantage as compared to partnership is the high setup and administrative costs while general partnership and limited partnership have lower administrative costs. However, this can be contrasted with the high level of liability in partnership because the concept of limited liability is not recognised for partnership, whereas there is a low level of liability for incorporation. Another disadvantage is that incorporation is very complicated business structure as compared to partnership as there is a need to define and allocate classes of shares, questions of control and voting, and management. However, if the friends choose limited partnership, then two of them may be not having any management powers and say in the running of the business. While incorporation may be complex, it would also be more democratic for the running of the business and the management of the same.

Based on the above discussion, it is advised that Jon, Josh and Peter should choose to incorporate their business as it is a growing business and they are looking to develop it further through investments and borrowings. This also increases the risks that are involved in the business. Any kind of partnership that they choose will not allow them to limit their liability completely and will make them agents of the firm. On the other hand, incorporated business will allow them to develop their business further by taking more risks but limiting their liability for the debts of the company.

Clarkson Co. v. Zhelka (1967) ONHC.
Kosmopoulos v. Constitution Insurance Co. of Canada (1987) SCC.

2. This essay discusses whether it can be said that the oppression remedy can be described as the most comprehensive and most open-ended shareholder remedy in the common law world considering the ways in which the Courts evaluate these claims.

An oppression remedy is provided to the minority shareholders of the corporation and can be seen as a way for balancing the rights of the minority shareholders when the majority rule gives the a majority of shareholders certain control over the company. The oppression remedy is a statutory procedure under Section 241 that allows individual and minority shareholders remedy against unfair treatment. At the outset, it may be noted that the law recognises in Section 122 that the paramount consideration is to be given to the best interests of the Corporation. However, if the actions lead to unfair treatment of the minority or individual shareholder, then the law may provide remedy to the shareholder. Indeed, the caselaw of the Canadian Supreme Court, particularly its decision in BCE Inc. v. 1976 Debentureholders (discussed below), has led to what has been called as a significant evolution in the jurisprudence that challenges the application of shareholder primacy and stakeholder theory and instead the ascendancy of principle of fair treatment.

It is said that oppression remedy is the broadest and most flexible remedy available to shareholders because it is available to any complainant that is approved by the court (Section 238) and not just to shareholders. Even the Supreme Court of Canada has noted that Section 241(2)(c) grants the broadest rights to creditors of any common law jurisdiction. Thus, even individual creditors can seek the oppression remedy from the court on the ground of unfair treatment. Moreover, bad faith is not required to be established by the complainant as what it central to the issue is whether there is unfair treatment or oppressive disregard of the reasonable expectations of the complainant. Furthermore, courts can make any just and appropriate orders to provide a remedy to the complainant.

In the BCE case, the test of establishing unfair treatment is provided. Two things have to be established by the complainant: first, that there are reasonable expectations of the complainant; second, that these reasonable expectations have been disregarded oppressively or unfairly with an emphasis on unfair conduct and prejudicial consequences. How the courts have interpreted these conditions is also important to understanding how these can be said to make oppression remedy broad and flexible. For example, in one case it was held that the expectation of the shareholder was not reasonable when the public company had made clear the controlling and blocking position of the majority shareholder. However, in a case involving officer of a subsidiary of the parent corporation to whom representations were made about the terms of a stock option plan, the court held that these representations created reasonable expectations. This exemplifies the broad scope of this remedy as even the officers of subsidiary can raise claims if they can establish reasonable expectations and the unfairness of the conduct of the company as well as its officers.

Claudio R. Rojas, ‘An Indeterminate Theory of Canadian Corporate Law’ (2014) 47 (1) University of British Columbia Law Review 59.
Stanley M. Beck, ‘Minority Shareholders' Rights in the 1980s’ in Corporate Law in the 80s, Special Lectures of the Law Society of Upper Canada (Don Mills: Richard De Boo1982) p. 312.
Peoples Department Stores Inc (Trustee of) v Wise (2004) SCC 68.
BCE Inc v 1976 Debenture holders [2008] 3 SCR 560.
Penty Investments (1998) ONCA.

In 2017, the Supreme Court of Canada held that even corporate directors can be held personally liable for oppressive conduct, thus extending the scope of the oppressive conduct beyond the conduct of the corporations to the conduct of the directors. This is another reason why the oppression remedy can be considered to be fairly broad and flexible in Canada because it does not limit itself to the conduct of the corporation. Furthermore, in the same case, the Supreme Court also held that the directors can be held personally liable for oppression remedy, if this would be a fair way of dealing with the situation, would go no further than necessary to rectify the oppression, and vindicate the reasonable expectations of the complainant. This could be interpreted to mean that while the court has sought to ensure that the oppression remedy does not go beyond what is fair and necessary, it still remains broad enough to allow the courts to assess whether the remedy is a fair way of dealing with the situation. Being a subjective criterion, fairness can be assessed by the courts broadly thus making the remedy broad and flexible.

Examples of the case law under this law suggests that the courts in Canada have a broad view of the remedy and its application can be seen in a variety of scenarios and with respect to a diverse group of stakeholders, thus exhibiting that the remedy is indeed among the broadest if not the broadest in the common law jurisdictions. For example, the remedy has been used to allow any stakeholder to deal with any type of unfair conduct by affiliates not incorporated under the same Act. It has been used in a case where other remedies were also available and were used in conjunction with oppression remedy including winding up of a company by the court. In one case, the oppression remedy was applied where the Crown was considered to be a creditor under the Income Tax Act, which led to the setting aside of the dividend payments so that the corporation could pay its tax liability to the Crown. In another case, excessive salary payments to a controlling shareholder attracted oppression remedy and a judgment creditor was allowed to use the remedy as a complainant. An employee was allows to establish a right to this remedy when they were wrongfully dismissed and the corporation was conducting asset stripping for making itself judgment proof.

The cases discussed in the essay exemplify the broad operation of the oppression remedy. The broadness is reflected in both the use of the principle of fairness as well as the stakeholders who come within the scope of oppression remedy. The broadness is also reflected in the extension of the scope of the remedy to the conduct of the directors and officers of the corporation and not just the corporation.

Continue your journey with our comprehensive guide to Case Study of Geranium Gate.

Premier Tech ltée c. Dollo, 2015 QCCA 1159.
Wilson v Alharayeri (2017) SCC 39.
Ibid.
Manufacturers Life Insurance Company v. AFG Industries Ltd., 2008 CanLII 873.
Safarik v. Ocean Fisheries Ltd., 1995 CanLII 6269.
R. v. Sands Motor Hotel Ltd, (1984) 36 Sask. R. 45 (Q.B.).
Prime Computer of Canada Ltd. v. Jeffrey, 1991 CanLII 7157.
Tavares v. Deskin Inc., [1993] O.J. No. 195 (Gen. Div.).

List of cases

AE Le Page Ltd v Kamex Developments Ltd (1977) Ont CA.

BCE Inc v 1976 Debenture holders [2008] 3 SCR 560.

Clarkson Co. v. Zhelka (1967) ONHC.

Kosmopoulos v. Constitution Insurance Co. of Canada (1987) SCC.

Manufacturers Life Insurance Company v. AFG Industries Ltd., 2008 CanLII 873.

Penty Investments (1998) ONCA.

Peoples Department Stores Inc (Trustee of) v Wise (2004) SCC 68.

Premier Tech ltée c. Dollo, 2015 QCCA 1159.

Prime Computer of Canada Ltd. v. Jeffrey, 1991 CanLII 7157.

R. v. Sands Motor Hotel Ltd, (1984) 36 Sask. R. 45 (Q.B.).

Safarik v. Ocean Fisheries Ltd., 1995 CanLII 6269.

Salomon v. Salomon & Co. (1897) HL.

Tavares v. Deskin Inc., [1993] O.J. No. 195 (Gen. Div.).

Wilson v Alharayeri (2017) SCC 39.

Books

Beck SM, ‘Minority Shareholders' Rights in the 1980s’ in Corporate Law in the 80s, Special Lectures of the Law Society of Upper Canada (Don Mills: Richard De Boo1982).

Gillen M, Corporations and Partnerships in Canada (Wolters Kluwer 2018).