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LAW 603 (121)
Lecture 6

LAW603.Ch21.docx

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Department
Law and Business
Course
LAW 603
Professor
Andre Serero
Semester
Winter

Description
LAW603 Notes C HAPTER 21: BASIC FORMS OF B USINESS ORGANIZATION Sole Proprietorships (pg 521-522) • When a person carries on business on their own, without adopting any other form of business organization • Enter into a contract to employ someone else to perform job but you remain sole owner and responsible for obligation • Gets all benefits and all burdens of business o Exclusively responsible for all torts committed – personally and vicariously o Income/loss recorded on sole proprietor’s personal tax liability • Easy to set up and easy to dissolve – still may be liable for obligations that arose during business if dissolving; problems: o Unlimited personal liability: third parties may take all of the sole proprietor’s personal assets to satisfy the business’s obligations o Limited funds – only method of financing is to borrow money directly Legal Requirements for Sole Proprietorships • Register name – if name is something other than/more than personal name o Doesn’t create any ownership interest in business name o Interest may be protected under provincial passing-odd laws and federal trademarks • Business licence: government permission to operate a certain kind of business o Ex. Real estate, car dealers, securities brokers General Partnerships (pg 522-529) • Comes into existence/criteria when two or more persons carry on business together with a view to a profit o Can automatically arise in the eyes of the law once that criteria is met, even without formalities Characteristics of General Partnerships • Carry on business on their own behalf, can do some things in name of partnership (ex. Hold title to land/be sued), partnership isn’t separate from partners o Partner cannot be employed by partnership o Benefits accrue directly to partners o All partners are personally liable for all obligations of business including torts committed by partner/employee – even without consent • Each partner is liable to full extent of obligation – all personal assets may be seized; unlimited personal liability • Creditworthiness is partially based on creditworthiness of individual partners o Ex. Can collect $50 000 from each partner or $100 000 from one partner o Risk that you won’t be able to recover what you are owed is reduced • Income/loss is calculated by adding up revenue and deducting expenses and allocated to each partner according to partner’s entitlement to share and included on their personal income Partnership Legislation and Partnership Agreements • English Partnership Act of 1890 helped establish partnership legislation for provinces o Short acts don’t provide satisfactory set of rules of organizing a partnership today • Partnership Agreement: contract between partners regarding the operation of the partnership o Supplement/modify the rules governing their relationship Creating a Partnership (pg 524) • “Two or more persons carry on business together with view to profit” Risk and Liability in General Partnerships How Partnership Liabilities Arise • Each partner is agent of partnership when acting in the usual course of partnership business • Exception exists if partner didn’t have authority to act in a particular way and other party knew that partner lacked authority LAW603 Notes o Rule places risk of unauthorized behaviour by one partner on all of the partners Managing the Risk that a Business Relationship Will be found to be a Partnership • Do – insist contract governing relationship state that relationship isn’t a partnership • Do – negotiate to restructure business so it’s not a partnership • Do – insist on sufficient compensation to reflect any risk that you will be found to be a partner • Don’t – enter relationship without seeking advice from lawyer Managing Liability Risk if you are a Partner • Fiduciary duty: requires a partner to act honestly and in good faith with a view to the best interests of the partnership o Partner must never put their person interests ahead of those of partnership o Partner who breaches must pay any resulting profits to partnership • Partnership agreement can be used to manage risk of liability – authority can be limited and subject to formal control and monitoring mechanisms o If partner fails to follow, firm may still be liable o Agreement may require the offending partner to compensate the others for any amount that they must pay to a third party – right to indemnification (see bottom of pg 526 footnote 14) • Formal monitoring mechanisms therefore must be established through increasingly elaborate partnership agreements • Limited Liability Partnership: individual partners are not personally liable for the professional negligence of their partners and some other obligations if certain requirements are met o As a result of informal protections in large partnerships w/an explosion in the number and size of professional liability claim Managing Liability Risk when you are not a Partner • Generally not liable before you joined/after you left firm • May be liable for a partnership obligation if Holding yourself out: occurs when you represent yourself as a partner or allow someone else to do so o You can be responsible if it relied on your apparent membership/allow use of your name o Cannot be held liable unless you actually hold yourself out as partner/know that name is being associated with partnership and do nothing about it (see footnote 18, pg 527) o Problems w/holding out arise s when partner leaves firm; you want to avoid responsibility for any debts that arise after that time; two groups of clients:  Clients who dealt with firms prior to departure  Clients who deal with firm for first time after departure/never knew that you were a member of the firm (see footnote 19, pg 527) Internal Organization of the Partnership • Default Rules: kind of standard form agreement in partnership statutes for the internal organization of a partnership that apply unless the partners agree to some other arrangement; provided by partnership legislation o Gives partners flexibility to customize partnership’s structure in a partnership agreement o Assumes all partners are equal in financial interest and rights to participate in management o Most important default rules in provincial statues:  Sharing equally in capital and profits or in any losses  Each partner is entitled to b
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