Chapter 21 – Business Organization
It arises once a person carries on business on their own (i.e. cutting lawn for money)
There’s no separation between the business and proprietor (owner).
Proprietor cannot be employee of the business.
Proprietor is entitled to all income.
Proprietor is liable for all obligations.
Proprietor’s assets available for business debts.
Sole proprietor is responsible for performing all contacts.
Business’ income or loss is included with the owner’s personal income.
Proprietor is responsible for all torts committed personally in connection with the
business. Also vicariously liable for torts committed by employees.
Advantages are that it is simple to start, simple to administer and that there’s possible tax
Disadvantages include unlimited personal liability, only being able to raise money by personal
borrowing, and that as the business grown, these will continue to grow.
Unlimited personal liability means that 3 parties may take all owners’ personal assets
to satisfy business obligations.
The conclusion is that a sole proprietor is best suited for small businesses.
Legal Requirements for Sole Proprietorships
The name must be registered if it’s something other than the owner’s personal name.
It must be done in every province/territory business wants to be conducted.
A business license is necessary for some types of activities.
It exists when 2 or more people carry on business together with a view to profit.
There’s no formal requirements for creating one. The creation is automatic when 2 or more
people carry on business with a view to profit, without need of further formality.
A person can become part of a partnership without necessarily realizing it.
Profit = Gross Revenues - Costs
Factor Indicating Partnerships
Sharing profits (not just revenues) or losses.
Jointly owning property or jointly contributing capital.
Involvement in business (especially management).
Joint authority for contracts and bank accounts.
Equal access to business info.
Holding each other out as partners or acquiescing.
Engaging in ongoing activity rather than one project. LAW 122
Characteristics of General Partnerships
There’s no separation between the partner and the partnership.
Partners have unlimited personal liability.
Income to partnership is personal income to partners.
Each partner can commit the partnership to obligations.
A partner cannot be employed by the partnership.
Ontario Partnership Act – Provides default rules, which can be supplemented/modified.
Partnership Legislation and Partnership Agreements
Partners use a partnership agreement to add or modify rules in their relationship.
Legal issues concerning the partnership are resolved on the legislation and agreement.
Creating a Partnership
It exists when 2 or more people carry on business with the intent to make profit.
If you’re compensated only out of revenues, you have a stake only in how much the
business can sell.
If you are sharing profits on the other hand, you must be concerned with the entire
business operation, including the management of expenses.
People may share profit without carry on business together, such as the following:
A loan is repaid out of profits of the borrower’s business.
An employee’s payment varies with the employer’s profits.
The purchaser of a nosiness agrees to pay some of the business’s profits to the selling
as part of the purchase price.
Since profit sharing is not conclusive, other things are measured to define partnership:
Carrying on business together usually suggests an enduring relationship.
Partnership’s less likely to be found if people involved are only passive investors.
Someone who describes themselves as a partner or allows someone else to do so is
likely to be found to be a partner.
RISK AND LIABILITY IN GENERAL PARTNERSHIPS
How Partnership Liabilities Arise
Provincial partnership statutes determine when a partnership incurs liabilities.
The rule is that each partner is an agent of the partnership when acting in the usual course of
the partnership business.
Exception exists if a partner didn’t have authority to act in a particular way and the
other party either knew with that the partner lacked authority or did not know that
they were dealing with the partner.
Managing the Risk That a Business Relationship Will Be Found to Be a Partnership (Front End
Be careful to avoid creating the impression that you are in a partnership. LAW 122
Insist that the contract governing the relationship state that the relationship is not a
partnership if you don’t want to enter one.
If you don’t want one, negotiate to reform the business organization so that it’s not one.
Get compensated for the risk that you may be held to be as a partner.
Don’t enter the relationship without seeking advice from a lawyer.
Managing Liability Risk If You Are a Partner (Partnership Structure)
Each partner owes a fiduciary duty to the others.
This requires a partner to act honestly and with view to the best interests of the
partnership, which reduces the risk of unwanted liability.
Partners must never put personal interests ahead of those of the partnership.
Enter into partnership agreements that protect your interests (i.e. ensures it provides for a
right to indemnification)
Right to indemnification is when liability is created by a breach of partnership
agreement, the offending partner may be required to compensate the others for the
amount that they must pay the third party.
Each partner’s authority can be limited and subject to control and monitoring, however
the firm may still be liable when a partner ignores rules.
For example, who can write cheques or sign contacts.
A natural relationship of trust and confidence reduces the risk of liability.
Consider incorporation as an alternative to a partnership.
Consider creating a limited partnership (LP) or limited liability partnership (LLP).
LPs vs. LLPS
Limited Liability Partnerships (LLPs)
Aimed at certain professions that can’t carry on business as corporations.
Partner’s risk of liability for professional negligence of fellow partner is limited to the
non-negligent partner’s investment in the partnership.
Limited Partnerships (LPs)
Form of partnership where the liability of at least one partner is limited to that
partner’s investment in the partnership. LPs must be registers.
An LP must have at least one general partner whose liability isn’t limited.
Limited partners have very limited rights to manage the business.
There’s 3 distinctions between limited partnership and general partnership:
1. In GPs, all partners have unlimited personal liability. In LPs, the general partner has
unlimited liability, the other has liability limited.
2. LP must be registered, whereas a GP exists as soon as partners start carrying on
business with a view to make profit.
3. Limited partners can be employees of the limited partnership. LAW 122
They will lose the limit on their liability if they participate in controlling the
business or if they allow their names to be used.
Managing Liability Risk When You Are Not a Partner
You’re not liable for liabilities that arose before/after you joined.
You may be liable for partnership obligation, if you hold yourself out as a partner or allow
someone to do so.
You can’t be liable unless you actually hold yourself out as a partner or know that your
name was being associated with the partnership and did nothing about it.
Two groups of clients should concern you after you leave firm:
1. Clients who dealt with the firm before your departure as they may still rely on your
creditworthiness when dealing with the firm. You will still be liable.
2. Clients who deal with the firm for the first time after your departure or never knew you
were a member of the firm.
Ensure clients who dealt with the firm before you left get notice of you leaving and your name
is deleted from the partnership agreement filed with the provincial government